What are some commonly used ways to transfer the business when there are both active and non-active children?
Minneapolis attorney Sally Grossman discusses ways that are often used to transfer the family business to children that are active and non-active.
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There are a number of ways to transfer the business when you have children who are both involved in the business and those who are not involved in the business, and I couldn’t go through all of them now, but I’ll give you a couple of examples. One would be, I alluded to earlier, you could recapitalize stock, so you could take your stock, create voting common, non-voting common. You could even do this in an S corp, it’s not considered two classes of stock, then you could give the voting common to the active child, so they’ll eventually have control, and you can give the non-voting common to the inactive children.
Another way to do it is distribute the stock equally, but then have either a mandatory redemption where the company buys out the inactive children’s stock, or perhaps you have a call so that the inactive kids have to give to their stock – not give – sell their stock to the active child if the active child decides that he or she wants it.
Another thing you can do in theory, I’ve never really seen it work, but you could divide your business if you could find either discrete geographic units or product lines or something you could divide your business, give part of it to the active child, part of it to the inactives, and you have to know that the inactives are probably going to sell their portion. That’s not the greatest idea.
Another idea is you just give the business to the active child, all of it, and then you have to find other assets to equalize with. You might use home, cabin, non-business investments. Perhaps you purchased some life insurance as a way to equalize.