Passing on the family business can be one of the most challenging parts of succession planning. Unlike money or investments, a business is not easy to divide fairly. If you have more than one child, you may face difficult decisions about who should inherit the business and how to provide for those who do not. Careful planning and open conversations can help to reduce disputes and protect your legacy.
One business – more than one heir
If you have one business but more than one heir for example if you have two children, what do you do? Who does it go to after you die?
It is very often unviable to split the business into two if you have two children. The business might lose economies of scale and may just not be able to survive. In that case you are looking to leave it to one child but not the other.
If one child has been working in the business for years, while another pursues a different career, it may feel fair to pass the business to the first child while balancing the second with cash and investments.
You will have your own thoughts about which of the children want to take on the asset and which of the children could best take that business forward after you die. You will want to think through sources of income generation and who needs it. The other thing to think about is the effort needed by the child and if they have the time and energy required.
One child is heir
You can leave the business to one child. Disputes over wills after death are often a result of the element of surprise – the disappointed child simply did not know their sibling was getting the business. For example, there are cases where a child who expected to inherit the family business feels blindsided when they discover it has been left entirely to a sibling. Early conversations can prevent that shock and avoid disputes that might otherwise end up in court.
So, you want to leave the asset to one child and you expect the other to be unhappy about that – what can you do? You can:-
- Put aside assets outside the business for the other. You might have a pension, life policy or investments.
- If you leave the business to one child, the other child has legal rights to a claim on your estate. Legal rights do not include land and buildings. But if you add land and buildings to a partnership or a company they are included in legal rights because they are no longer seen as land and buildings but part of a business.
- As part of a conversation with the children, you can ask if the non-heir would give up their legal rights now. If they say no you could look to either:-
Give the asset away to the heir in your lifetime. When you die that asset is not yours and the non-heir cannot claim it but you need to think about whether you can afford to do that.
If you cannot afford to give the asset away to your heir in your lifetime, your other option is to give the asset to a trust for yourself.
Both these options have tax consequences.
Passing the business to two children
The other option here instead of leaving it all to one heir is to leave it to both children. For example:-
- Can you split the business into activities, one for each.
- Leave the asset to both children and leave them to run it together. This can work well if both children are already involved and have complimentary skills – for example, one might focus on operations while the other leads on finance and strategy. But if their visions for the business are very different, shared ownership can quickly become a source of tension.
- If that is really not likely to work then you could leave the asset to both children and one could buy the other out. One gets the business, the other gets cash to equalise them. You could add another layer to this. If one buys the business and later sells it, you can say that they have to give more cash to the other.
Succession planning: protecting your business and your family
Balancing the needs of your children while protecting the future of your family business is never easy. The key is to make your wishes clear, consider the legal and financial implications, and where possible, have open conversations with your family. By setting everything out properly in your will, you can reduce the risk of dispute and ensure your business continues in the way you intend. If you are starting to think about succession for your family business, our wills and estate planning experts can help you explore your options and put the right protections in place.
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