Owning a small business is a meaningful point of pride for many families in Oklahoma City. You pour your time, energy, effort, and capital into building an enterprise from the ground up, hoping it will secure your family’s financial future.
However, when it comes time to think about the next generation, your business can introduce a major estate planning headache. The core issue is simple: your business is likely your most valuable asset, but you cannot easily split it down the middle like a bank account.
If you have multiple children, but only one of them wants to take over the family business, you face a tough puzzle. Giving the business entirely to the interested child leaves the others with nothing.
On the other hand, forcing all of your children to own the business together can trigger toxic family feuds and ruin the company. This is where inheritance balancing becomes a critical strategy.
The Problem With Equal Distribution
The instinctive reaction for most parents is to leave everything equally to their children. If you have three kids, a standard will or trust might state that all your assets should be split one-third, one-third, and one-third.
When your primary asset is a local manufacturing company, a construction firm, or a retail shop, this equal split can be a recipe for disaster.
- The Active Child’s Frustration: The child who works fifty hours a week to grow the company will quickly resent their siblings, who get an equal share of the profits without doing any of the heavy lifting.
- The Inactive Children’s Frustration: The siblings who are outside the business might feel trapped. They own a slice of a company they do not understand or control, and they cannot easily turn their ownership shares into cash.
- Gridlock and Loss of Value: If a major business decision requires a vote among all three siblings, personal disagreements can paralyze the company, threatening its survival and destroying its value.
Inheritance balancing is the art of leaving an equal value to your children without giving them equal pieces of the same asset. It allows you to pass the operational control to the child who earned it while providing equivalent financial security to your other loved ones.
Real-World Strategies for Inheritance Balancing
Oklahoma City business owners have several flexible, practical tools available to achieve balance and maintain family harmony.
1.) Utilizing Life Insurance as an Equalizer
Life insurance is the most common and straightforward tool for balancing an estate. You can use your estate plan to leave the business entity itself to the child who works there, and buy a life insurance policy with a death benefit that matches the value of the business.
Upon your passing, the child running the company takes full ownership of the operations. Your other children receive the tax-free life insurance payouts. Everyone walks away with an inheritance of similar financial value, and the business continues to run smoothly without outside interference.
2.) Segregating Real Estate from Operations
Many small business owners own the commercial real estate where their business physically operates. You can split these assets to create a fair balance.
You can place the physical building or land into a separate legal entity, like a limited liability company, and leave that real estate to your inactive children. You then leave the business operations, equipment, and client accounts to the participating child.
The child running the company continues to operate in the building but pays a fair market rent to their siblings. The participating child gets the business they love, while the inactive children receive a steady, reliable stream of passive rental income.
3.) Giving Voting vs. Non-Voting Shares
If your estate lacks external assets like real estate or cash to balance the scales, you can restructure your business equity. You can create two classes of ownership shares: voting shares and non-voting shares.
The child who actively manages the daily operations receives the voting shares, giving them total managerial control to make quick business decisions.
Your other children receive non-voting shares. These non-voting shares do not give them a say in how the company is run, but they do entitle them to a fair share of the financial distributions and profits generated by the business.
4.) Structuring a Buy-Sell Agreement
A buy-sell agreement is a legally binding contract that outlines how a partner’s or owner’s share of a business will be reassigned if they pass away or retire. You can design this agreement so that your business automatically goes to the active child upon your death.
In exchange, the agreement requires the active child to buy out their siblings’ shares over a set period, using a predetermined valuation formula.
The active child can fund this buyout using business revenues, a specialized loan, or an insurance policy, ensuring the siblings receive their cash inheritance over time.
Steps to Take Right Now
Balancing an inheritance requires active preparation while you are still healthy and running your company. Waiting too long can take these choices out of your hands and control.
- Get a Professional Valuation: You cannot balance an estate if you do not know what your business is actually worth. Hire a certified appraiser to get a clear, realistic dollar figure for your company.
- Have the Hard Conversations: Sit down with your children individually and as a group. Do not assume you know who wants the business. You might discover that the child you thought wanted to take over actually wants to pursue a different career path.
- Coordinate with Your Advisors: Inheritance balancing sits at the intersection of law, tax, and corporate structure. Your estate planning attorney must work in tandem with your accountant and financial planner to avoid triggering unexpected tax liabilities or structural legal hurdles.
Take Action Today!
We can help create a personalized plan that provides for everyone on your inheritance list in the manner you intend. To set the wheels in motion, send us a message or call our Oklahoma City estate planning office at 405-843-6100.
And if you are in the Tulsa area, we have an office there as well that can be reached at 918-615-2700.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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