Ask Paul: Can we leave our family business to just one child?
What happens when one child inherits the family business and the other misses out? Paul Clitheroe explains how to avoid resentment and keep things fair.
Reader question
Dear Paul,
Hoping you can help us come to a fair arrangement.
We have an adult daughter who has bought a unit with her fiancé, and her fiancé works with my husband.
Our other adult child is renting a house with their spouse, who doesn't work for the family business.
My husband is hoping to retire in the next year or so, and has had the business valued at approximately $500,000, which includes goodwill.
Our daughter and her fiancé are not in a position to buy us out, so we would be handing him the business.
We already have given them a monetary hand-up before.
How can we make this fair for our other child?
We also fear that if the relationship doesn't work out for our daughter, her fiancé would walk away with the business my husband has built over decades and not benefit either child. - Robyn
Paul's response
My money warning bells are running on high alert, Robyn. Good on you for recognising this and asking about a fair solution.
This has the potential to cause a major and permanent family split.
I can see so many ways this can, and in all likelihood may, become very messy.
You have one child who is on the way to homeownership, with her fiancé working in your family business, generating income from what is a family asset.
This you propose to give to him and your daughter, with a value of $500,000.
As you point out, this leaves your other child with no family financial support and, as you say, the prospect of the business going to your daughter's fiancé, if there is a relationship break-up.
What could possibly go wrong? I don't accept that the business with a value of $500,000 to an external buyer does not allow your daughter's fiancé to make any payment for it, if structured over time.
However, let's put that aside for the moment.
You could achieve fairness if you built into your estate planning, for example, a percentage of your home or other assets also valued at $500,000 today, that went to your other child, with everything above that split between your children, if that is your wish.
This of course leaves the risk that the business may not do well and your other child's share of the house grows strongly, but all you can do is to be fair now.
In terms of the business heading off with the fiancé if the relationship does not work out, that I am also worried about, but a good solicitor will not be.
I am certain a loan or some form of legal structure can keep that valuable asset inside the family, by which I mean your bloodline.
For me, your starting point is a meeting with you both and your solicitor.
The solicitor needs to speak frankly and, in my view, at this early stage, not in the presence of your children or their partners.
Then I suspect the solicitor will, once you have a strategy, suggest a family meeting.
But as you tell me, right now you need to take leadership and establish the way fairness can be achieved, which it can.
You've already done the most important bit and recognised the potential family drama that is most likely to happen if the issue is ignored.
Please make a time to meet an experienced business or estate planning solicitor as your starting point.
I wish you all the best with this tricky, but very common, family situation.
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