Tips on passing the company reins to your children

You are finally ready to think about passing the baton to the next generation. One child shares your passion for growing the business. She has experienced positions both outside and inside the company, working her way up the ranks to understand the various facets of your industry.

She seems to be a natural fit for the next generation of leadership and is committed to carrying forward the family enterprise. But you have more than one child, and you have reservations about "favoring" one over the others.

As business owners consider succession planning and future retirement, this scenario is a common one. Estate and business succession planning advisers have a number of tools to assist business owners with considering what is the right legacy to leave to various family members, whether they are inside or outside the family entity.

First, release the notion that each child must receive an "equal" share of your estate. If the end game is to pass the business to less than all of your children, then equal distribution simply is not achievable. However, equitable distribution is possible. But it takes time and proper planning.

Alternative legacy options for children outside the family business

Second, confer with qualified professional advisers about the tools available to pass the family business to the involved child while providing a legacy that you deem appropriate to your other children. These options may include:

• Other assets. There may be meaningful non-business assets, such as real estate, investments, etc., that could pass to other children.

• Life insurance. Policy proceeds can provide cash as an offset to the value of business interests that transfer to one child. Life insurance also can provide a source of liquidity if transfer taxes at death are a concern.

• Non-voting interests. Making children who are not involved in the business "silent partners" might be the right option. Ownership can be reconstituted into voting and non-voting interests, and the voting control could pass to the child who will succeed to the leadership position. Non-voting shares allow the other children to benefit from cash distributions from the company (if available) and likewise to share in the proceeds if the company were sold in the future.

• Private financing. The senior generation might elect to sell the business to the involved child, providing favorable private financing over a period of time. Advisers could assist with setting terms that allow projected company cash flows to assist with funding the buyout. This plan could begin during lifetime or be included in the senior owner's estate plan. Either way, the proceeds from the sale could provide a deferred but valuable benefit to the entire family.

• Trusts or other structures. Passing a portion or all of the business to a long-term trust or certain charitable structures could ensure its continuation. The child involved in the business could continue to lead the company with appropriate compensation and incentives, but the ownership would be held separately.

This structure could provide multiple benefits, including a long-term legacy for future family generations, reduced future death taxes and furtherance of family values. As you would expect, careful selection of fiduciaries and other advisers is the key to successfully implementing these options.

As you go through the process it may be helpful to communicate your plans with your other children. Unnecessary tension can be a symptom of the next generation speculating about the future, rather than having an accurate understanding about your plans. With careful planning, that transition also can provide a meaningful benefit to family members who are not involved in the continuation of the family enterprise.

• Natalie Perry is a partner in Ice Miller's trusts and estates practice group where she concentrates her practice in estate, gift and income tax planning for high-net-worth families and owners of closely held businesses. natalie.perry@icemiller.com.

• Kristine Bouaichi is a partner who chairs Ice Miller's trusts and estates practice group. Her primary practice concentrations are in trust and estate planning and administration, wealth succession counseling and charitable giving. kristine.bouaichi@icemiller.com.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.