Dividing a Family Company Among Three Heirs

Brent O’Mara’s October piece on Blogger takes up a couple whose company is run by one child of three while the other two work elsewhere, and who want all three to inherit it without a quarrel. The author’s answer is that they are facing two separate questions and have been trying to settle them in reverse.

Management, in the piece’s framing, is who operates the company day to day; ownership is who holds the stock, votes it and receives what the company pays out. The founder held both roles, so the family never had reason to pull them apart. They separate on their own once the next generation contains one operator and a pair of outsiders, and a plan that failed to distinguish them forces the family to learn the difference under pressure. A University of Missouri extension guide treats farm succession as two goals, readying the next generation for management and for ownership, and warns that a transition plan silent on the handoff of management gives a farm little chance.¹ An Iowa State guide tells of a son doing more of the farm work each year while the father kept every decision, until the son nearly quit.³

The piece then examines the default. Equal thirds are simple to write into a will, and what they produce is a business held by three people and directed by one. The operator sets pay, hours, debt and reinvestment; the siblings outside hold a stake with no market and no vote while remaining taxable on any distribution. Disagreements over reinvestment against payout follow, surfacing when a sibling’s own life calls for cash. The New York Times reported the same pattern from the children’s side, founders who did not consider what their adult children wanted.⁴

Figure

One operator, two outsiders, and what the sources add

	What the piece says	What an outside source adds
Two questions	Management is whoever operates the business day to day; ownership is who holds and votes the stock	Farm succession readies the next generation for management and for ownership as separate goals
The default	Equal thirds create a business held by three people and directed by one	Of farm owners planning to retire, a majority had no succession plan at all
A funded exit	Outsiders can hold a nonvoting stake, backed by a buyout contract and funds set aside	A child on the farm can agree to buy what is not inherited and fund it with life insurance on the parent

The constructive section is about order. Decide whether the two outside the business will own any of it before anyone discusses percentages, the piece says, and families usually find more options than they feared. It offers three shapes: the operator receives the company and the other two are compensated from other assets; the outsiders hold a nonvoting stake under a buy sell arrangement, put in writing, with money set aside for an exit; or all three remain owners under a rule, agreed in advance, for deciding distributions. Nebraska Extension illustrates the second shape with a parent, a child on the farm and siblings off it, where the child agrees in a buy sell arrangement to purchase whatever is not inherited and funds the purchase with life insurance on the parent.² A business coach quoted by USA Today named family alignment, finances and timing as the chief issues.⁵

Tax sits beneath everything, since transfers during life and at death leave the family different amounts. The American College of Trust and Estate Counsel explains that the federal gift and estate tax applies to transfers during life and upon death, with an exemption each person may apply.⁶

The limit the author names is arithmetic: few owners hold sufficient assets apart from the business to balance the shares, so the cleanest version is rarely available, and no document can make three adults content. Since the outcome depends on the family’s circumstances, the piece leaves the structure to qualified professionals engaged before papers are drawn.

The piece, Passing On a Family Business When One Child Runs It, is on his Blogger site.