For the last several columns I have addressed critical steps for parents who desire to pass on the farm, ranch or other business to the next generation. Last column, I gave the example in which one child wants to own/operate the business but the others are not interested. How do you divide the estate? One way is to let all the children have a share of the profits but only one child makes the business decisions.
What if the business does not produce enough profit to divide things this way? First, remember that a “fair” division of the profits is not necessarily the same as an “equal” division. That is a very personal decision specific to each family.
Profits can also be divided after the child operating the business is paid a fair salary. Or the child running the business can potentially receive a greater share of the profits; but when the business is ultimately sold, the proceeds can be divided more evenly. Of course, that option means the other children may wait a long time to receive their share of the estate.
There are more options. For example, the other children can be required to sell their portion of the business to the child still operating the business. The sale could be set up so that the payout is low enough to protect the business, but still allow the other children a stream of income. Perhaps life insurance can be used to pay the other kids immediately for their share at your passing. This is a common strategy for co-owners to buy each other’s interest even if it is not a “family” business. If no single strategy works, we can combine strategies to accomplish your goals.
There are solutions to these issues. Don’t be hesitant to consult with a professional to find the right solution for your family. Your effort now can pay significant dividends for the generations to follow.
© 2016 Steven J Wright