Planning Berwyn and Main Line Business Succession When Only One Child Takes Over

Key Takeaways:

• Treating children fairly doesn't always mean giving them equal shares of the business.
• Control of the company can go to the child who runs it while other assets balance the inheritance.
• A strong succession plan covers retirement, incapacity, and sudden departure, not just a planned handoff.
• Business succession works best when it's built into your personal estate plan.

A Berwyn business owner with three adult children often runs into the same quiet problem. One daughter has worked in the company for 15 years and now runs daily operations. Her brother is a physician in Pittsburgh, and the youngest has never shown interest in the business. The owner wants all three treated fairly, but the company is the family's largest asset, and splitting it three ways would hand two-thirds of the vote to people who have never run it.

That tension sits at the center of family business succession planning for many Main Line owners. At Ruggiero Law Offices, a Pennsylvania business law attorney can help you decide who will lead the company, how ownership will pass, and how the plan fits with your will, trusts, and retirement. 

How Can You Treat Children Fairly When Only One Works in the Business?

Most owners eventually conclude that fair and equal aren't the same thing. A child who has spent years building the company has a different stake in its future than a sibling with a separate career. Three approaches to transferring a family business to the next generation can respect that difference without shortchanging anyone.

Separate Control From Economic Value

Depending on its legal structure, a company can establish voting and nonvoting ownership interests, allowing the child who runs the business to retain control while other children share in its value. A family LLC or partnership can also separate management and economic rights through carefully drafted governing agreements.

The trade-off is that inactive children remain co-owners of a company they don't control, which can lead to disagreements over salaries and distributions later.

Balance the Inheritance With Other Assets

Often the cleaner solution is to leave the business to the child who runs it and leave other assets to everyone else. Investment accounts and real estate can help balance the inheritance. 

When those assets aren't enough, life insurance may provide additional funds for children who won't inherit the business. An irrevocable life insurance trust may offer additional estate planning benefits when properly structured.

Some business owners also give the active child an option to buy siblings' inherited shares at an appraised price, so no one ends up as a reluctant passive owner.

Put Expectations in Writing

Most family disputes start with a surprise. A buy-sell agreement can limit who may own shares and set the price formula for future buyouts. A personal letter explaining why you chose an unequal division won't bind anyone legally, but it can keep children from assuming the worst about each other after you're gone.

When Should You Sell, and How Should the Sale Be Structured?

Not every family business should pass to a child. If no one is ready or interested, a sale to key employees or an outside buyer may serve the family better. When the buyer is a child, an installment sale may allow the successor to pay over time while providing you with retirement income. 

The sale should reflect a fair market value, adequate interest, and appropriate payment security. Special IRS rules for related-party sales can affect how the transaction is taxed.

Real Property 

Owners who also own the building the company operates from have another decision to make. Under current federal law, a Section 1031 like-kind exchange applies only to real property held for business or investment, according to IRS guidance on like-kind exchanges. The company's stock, equipment, and goodwill don't qualify. 

If you sell qualifying business or investment real estate and acquire replacement property through a properly structured 1031 exchange, you may defer federal tax on some or all of the gain. Strict deadlines apply, including generally identifying replacement property within 45 days and completing the exchange within 180 days or by the applicable tax return deadline, whichever comes first.

If you keep the building and lease it to the business, the rent may provide retirement income. Holding the property through a family limited partnership may also help separate real estate ownership from business operations and create an asset for children who aren't involved in the company.

Timing the Sale

Timing matters as much as structure. Starting the sale process a few years before you want to step away gives you time to compare offers, clean up financial records, and train whoever takes over.

What If You Retire, Become Incapacitated, or Leave Unexpectedly?

A plan that only covers a scheduled retirement leaves the business exposed to the events families least expect. Each of these three exits needs its own answer.

Retirement

Your retirement income shouldn't depend entirely on how well your successor runs the company. If installment payments or consulting fees are your main source of income, a slow year for the business becomes a slow year for you. Building savings and investments outside the company before the transfer reduces that risk.

Incapacity

If you can't manage your affairs, someone needs authority to vote your shares, sign contracts, and keep payroll running. A durable financial power of attorney should address business interests specifically, and the company's operating or shareholder agreement should say who steps in. 

Death or Sudden Departure

A properly structured buy-sell agreement funded with life insurance can provide money to purchase your ownership interest from your estate or heirs, helping your family receive its value without forcing the company to sell assets. Without an agreement, your shares may pass to someone with no interest in running the business, or remain tied up in estate administration while the company faces uncertainty.

How Do You Choose a Successor and Value the Business?

Choose a successor by readiness, not birth order. Many owners give the likely successor more responsibility over several years, and some bring in a nonfamily manager to bridge the gap while a child gains experience. 

A qualified, independent appraisal matters for nearly every piece of family business succession planning. It sets the price in a buy-sell agreement, measures gifts for tax purposes, and tells you how much other property you need to treat inactive children fairly. An outdated or informal number can unravel an otherwise careful plan.

Why Family Business Succession Planning Belongs in Your Estate Plan

When the business is your largest asset, family business succession planning and estate planning are the same project. Your will, revocable trust, beneficiary designations, and powers of attorney all need to reflect who receives the company and how your other children will be compensated. Taxes are part of the picture, too. 

Pennsylvania imposes inheritance tax on many transfers at death, but certain family-owned businesses may qualify for an exemption. Key requirements include fewer than 50 full-time equivalent employees, a net book value under $5 million, at least five years in business, and continued ownership by qualifying family members for seven years after the owner's death. Additional restrictions and filing requirements apply.

Whether the company is a manufacturer in Glen Mills or a professional practice on Lancaster Avenue in Berwyn, the strongest succession plans are built while the owner is healthy and still running the business. That leaves time to test the arrangement, adjust it, and make sure every child understands why it was set up the way it was.