Building a successful business of any size or scale often entails years of sacrifice, commitment, and hard work. If you have children of your own or plan to start a family someday, you may have already considered passing the reins to another generation.
However, incorporating a business into your estate isn’t always easy—especially when one of your children is much more involved in day-to-day operations than the others. Splitting shares between uninterested heirs could imperil your enterprise, whereas passing on all your assets to a single child could trigger discontent among those who feel they should have received a larger inheritance.
Accommodating all of your children may necessitate some advanced planning, but it doesn’t have to be problematic. Here, the experienced estate planning lawyers at Landskind & Ricaforte Law Group, P.C. discuss how you can reward an enterprising heir without having to risk your other children’s inheritance.
Estate Planning Considerations for Your Family Business
Your estate plan is a set of written instructions detailing your preferences for end-of-life medical care and the eventual redistribution of your assets. Estate plans can take many forms, from a simple last will and testament to more complex strategies involving trusts, insurance policies, and financial accounts.
Since your family is unique, your estate plan needs to reflect your reality. If you’re expecting to bequeath a business to a child or divide shares among multiple children, you need to account for the following factors:
The Risk of Conflict
If you own your own business and feel it would be better off in the hands of a particularly committed child, your estate plan needs to anticipate complications that could arise during probate or trust administration. Unless disputes can be resolved amicably, they’re often escalated to court.
Your Business’s Characteristics
If you own a profitable business that employs workers or controls property, you’ll most likely need to spend some time talking with your estate planning lawyer about your business’s characteristics. These can include, but are not limited to, the following:
- The overall value of your business
- The legal requirements to transfer, sell, or gift business assets
- The exact role and responsibilities of your successor, as well as any children you choose to nominate as shareholders
Your business’s characteristics can and often should influence the contents of your estate plan, as large inheritances can be threatened by creditor claims or subject to unexpected taxation.
Your Remaining Assets
Your estate is most everything you own that hasn’t been placed in a trust and which isn’t automatically exempt from probate. Since your business holdings constitute only a portion of your estate, you’ll need a plan to manage your other assets. These could include the following:
- Your home
- Your commercial real property
- Your motor vehicles
- Business assets titled in your name or under your control
- Investment accounts and retirement funds
Some assets, like life insurance policies, aren’t typically considered a part of your estate—but they can still play a critical role in succession and should never be excluded from an estate plan.
5 Strategies to Equalize Your Heirs’ Inheritances
Your estate plan lets you decide how your personal assets and business interests are divided upon your death. Here are five common and time-tested strategies to provide an equitable inheritance for heirs who won’t be taking a leading role in your family business:
1. Leverage Life Insurance
Life insurance comes in different shapes and sizes. Often, policies that pay larger death benefits are used to offset discrepancies in the size of inheritances. If you think it’s best to leave your business to a single heir—without dividing shares or interest among others—you may be able to leverage your coverage to provide a significant cash-based inheritance for children you don’t expect to take a leading role in business management.
2. Negotiate an Agreement
You can use your estate plan to condition the transfer of your business assets. For example:
- A buy-sell agreement permits the sale of a shareholder’s interest if certain conditions have been met, such as the death of the business’s sole owner. Once these conditions have been fulfilled, your shareholders and members will have the opportunity to sell their interest at a fair price.
- A shareholder agreement can be used to either leave equal amounts of money for each child, or it can provide an opportunity for less-invested siblings to sell their stock to another sibling. Some shareholder agreements can be further conditioned to prevent non-participating children from purchasing additional stock before participating heirs.
Buy-sell and shareholder agreements can often be refined and adjusted to better reflect your succession preferences. This could mean permitting your non-participating children to cash out their interest upon your death, or it could mean granting a preferred heir the exclusive right to purchase additional stock.
3. Leave a Cash-Equivalent for Your Children
You may also wish to consider simply leaving an equivalent inheritance in non-business assets. This can be accomplished by:
- Designating your non-participating children as the direct beneficiaries of your life insurance policy, bank accounts, or other financial investments
- Leaving a greater cash-equivalent share of your estate assets to children who won’t be participating in your business
- Making recurring lifetime gifts to your children
4. Establish a Trust
A trust is a type of legal arrangement. Every trust has its own terms and conditions, but they all have the same basic structure. In general, a grantor establishes a trust and funds it with assets. If the trust is revocable, they may nominate themselves as a trustee, retaining full access to their assets for the remainder of their lifetime. Upon the grantor’s death, an appointed successor trustee will manage the trust’s assets in accordance with the terms of the trust and in the best interest of the trust’s named beneficiaries.
You can use trusts to strengthen your estate in several significant ways. You could, for instance, structure your trust in a way that grants your non-participating children interest from business shares without giving them any control over operations. Similarly, you can also condition your trust to only make distributions once your heirs have reached a certain age or fulfilled other criteria—preventing younger heirs from having too much access to too much money at too early an age.
5. Speak to a New York City Estate Planning Lawyer
You don’t have to choose between your business’s longevity and your children’s prosperity.
The Landskind & Ricaforte Law Group, P.C. has spent years helping families in Brooklyn and throughout New York City protect their legacies for the next generation. If you’re not sure how to resolve an impending inheritance dilemma, our experienced team of estate planning lawyers could work with you to:
- Create an estate plan that protects your physical health, your financial wealth, and your business’s future
- Discuss and enact strategies to keep your assets out of probate and minimize the possibility of heirs and creditors filing frivolous claims against your estate
- Assess your business characteristics and personal estate assets to determine how best to allocate assets without leaving some children feeling overlooked