When estate planning, business owners often get mired in dividing a business fairly and what it means for the next generation, particularly when multiple children are involved. Often there are both active and inactive children in the business, which makes the planning even more complex. There are solutions though that can lead to a fair division of the business for the estate. As well, “fairly” passing on the business also means providing for mentoring to that next generation. Having the time to ensure a smooth transition to the next generation, including the mentoring needed to complete this, is an important part of any business owner’s estate planning process.
Video transcript: Dividing a business fairly for your children
What do I need to be thinking of when passing my business to the next generation?
I’m George Dube, saving the world from tax, one bow tie at a time.
What happens when there are multiple children involved but not everyone is involved in the business, or the real estate empire, or investments, or whatever the nature of the activities are? How can we treat them fairly? And, again, remembering fair does not mean equal.
One thing that surprises a lot of people is that we can still, for example, divide a business amongst children, giving them equal value but not necessarily equal votes. Perhaps one, or more, of the children are in charge of running the business on behalf of the others and they receive extra remuneration to reward them for that activity. The business that existed before can still carry on but now, under new management and perhaps new ownership, hopefully there was a period of mentorship that was involved but there’s not necessarily a requirement to lock out the children that were not directly involved in the business.
Perhaps other liquid assets, or insurance planning, or other items may create alternative plans.
Let’s not default to the position that only the active children in the business have to stay in the business.
As well, maybe the inactive children will, over a period of time, say five years for a number, be bought out by the active children, but the active children may not have the financial capacity or resources from the estate, or their own resources, to do this on day one, so fair solutions and creative solutions still exist.
Mentoring: Crucial to dividing a business fairly
Why is mentoring so important in the estate plan for a business owner or investor?
Beyond the technical parts of creating that estate plan or succession plan, give some serious thought to an actual mentoring plan. You’ve accumulated a lot of knowledge and skillsets over the years, and it’s not just the technical things of your business, your investing. It’s also the thought process, the spiritual, religious, moral beliefs that you have. Not that you’re going to force those on the next generation, but there are some ways you want your next generation to be considering as they operate your portfolio or your business because at some point, you’re not going to be able to, and that mentoring process is not something you’re going to be able to do overnight. It takes some time. So give it some time. Allow yourself with your family to ramp up that mentoring process. And keep in mind, that mentoring process may not just be the next generation of your family, it may be somebody completely outside of your family.
But without that mentoring process, that ultimate plan is going to have a little bit of a rougher ride as compared to a plan that has had time to percolate and time for what if, back-and-forth questions, and that next generation, or whomever, to observe and play question and answer with you.
If you want to learn more about this topic, please check out our estate planning playlist and please go to our website, georgeedube.com.
Have more questions? Please subscribe, follow, and even share. I want all of us to have the tax information we need to do wonderful things.
-End transcript-
Resources
For additional resources related to estate planning and dividing assets fairly, see:
More questions?
Still have questions? I want to help you Do Wonderful Things™ with your real estate investments, so please contact me today.
Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
