There are many ways for family businesses to approach the transfer of ownership in the business. One of the most challenging aspects of this process is determining whether next generation children should be allowed to own shares in the business if they do not work there. In our experience, most family companies correlate ownership of the operating business with working in it.
This can create further issues when it comes to the distribution of the parents’ other assets (besides the family business stock) to the children who don’t work in the business. How do you determine what is fair?
This situation is referred to as an estate rebalance, meaning that there is a disproportionate amount of other assets given to the non-working children to make up for the fact that they are not receiving any stock in the family business.
One of the most overlooked opportunities to achieve a portion of the estate rebalance is when there is real estate used by the family business that is owned in a different entity. Many associate ownership of the real estate with ownership of the business. While we believe that those children who will eventually own the family business should also have an ownership interest in the real estate, we don't believe the same "working in the business" rules need to apply to the ownership of the real estate because it is not an operating company.
Allowing non-working family members to own a portion of the real estate minimizes the estate rebalancing needs elsewhere within the parents’ estate. There is also another hidden advantage - it allows the siblings to maintain a business relationship apart from the operating company.
Has your family experienced issues as part of the transfer process? How did you resolve them? Share in the comments.