Probate & Trust Law Section Conference Manual ... - Minnesota CLE

3. Problems with Allocation of Family Business Interests. It is unusual (but
not unheard of) for all of a business founder’s children to have the desire
and capability of taking over the family business after the founder’s
death, disability or retirement. More often, there is one child who is the
“heir-apparent” with respect to the business, and one or more other
children who would prefer not to be involved in the business (but do
expect to inherit their fair share of its value). In this situation, a simple
estate plan that directs for the distribution of assets equally among the
children can be problematic. A simple solution that occurs to many clients
is to make a specific gift of the business to the child who will run it, and to
leave other assets to the other children. This can be very problematic for a
variety of reasons:
a. Often the value of the business is much larger than one sibling’s
equal share of the estate. Most clients wish to treat their children
relatively equally. For example, if a client has three children and
the business is worth 90% of the entire estate, leaving the entire
business to one child is often unacceptable to the client.
b. Clients often fail to take into account that the assets they have now
will likely change significantly in value prior to their death. Even
if today a client’s business is worth 50% of the total value of his
estate (and therefore the client believes it would be fair to leave the
business to one of two children and to leave other assets to the
other child), at the time of the client’s death the business could be
worth 10% of the total value or 80% of the total value.
4. Allocation Formulas. In order to avoid the problems described above, it
may be appropriate to provide for an equal allocation of assets among the
children, but to provide that the share for the sibling(s) involved in the
business will be funded to the maximum extent possible with the business
interest (or to give that child(ren) the option to direct that the stock be
allocated to his, her or their share). The following issues should be
considered when using such a formula:
a. If there are voting and non-voting shares, the document can
provide that the voting shares will pass to the sibling who is
involved in the business.
b. If the other siblings are likely to receive interests in the business to
fund their shares, the sibling who runs the business can be given an
option to buy their shares, either directly from the trust or estate or
from the siblings over time.
c. It is important to specify how the shares will be valued for
allocation purposes and for purposes of any purchase option. See
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