Where there is a family owned business it is often difficult to achieve equality between a person’s children in estate planning.
If a person owns a business and also has substantial assets outside of the business equality can often be achieved by simply leaving one child the business and the other children the non-business assets. This can also probably be done by obtaining life insurance in an amount equal to the value of the business and designating one child the beneficiary of the life insurance.
If there are not significant non-business assets or if life insurance is not available, creating an estate freeze may be the best option. In an estate freeze the owner of a business exchanges his or her common shares for preferred shares having a fixed value equal to the fair market value of the common shares at that time.
All of the future growth in the value of the company is reported in the new common shares which can be given to the children or can be settled in a family trust where the children are beneficiaries.
The preferred shares held by the original owner typically would have all of the voting rights thereby allowing the person to retain control of the company. The trust can also provide a mechanism to distribute income to the children as the trustee/owner determines.
The owner’s preferred voting shares then have a fixed value and can be gifted to one or more of the children in a will. That child will retain control of the company by owning the voting shares on the owner’s death while the other children will own non-voting shares and thereby will share in the value of the business but they will not have control over the operation of the business.
Deborah A. Todd
