Selling your RIA practice to a son, daughter, or other family member might feel like a natural, low-stress transition, because there’s trust and familiarity. Many advisors assume they don’t need the same level of formality required of an outside RIA sale transaction. As a result they may skip a formal valuation, because they aren’t aiming for full value, or considering gifting equity. But this relaxed approach can open the door to tax exposure, compliance pitfalls, and long-term misunderstandings. In fact, intra-family sales demand more structure and care—not less—from both a practical and technical perspective.
Here are five details and considerations to keep in mind that make these deals uniquely complex and why they deserve extra attention:
1. Third-Party Opinion of Value Is Non-Negotiable
Family transactions are subject to close IRS scrutiny, especially when there are gifts involved or the sale price appears below fair market value.
A credible, independent valuation is critical for:
- Establishing a supportable value of the business.
Reporting a defensible value for gift tax purposes
Supporting installment sale terms
Reporting a defensible value for gift tax purposes
Managing the optics with non-involved heirs or business partners
Using a third-party valuation firm ensures the agreed-upon price holds up under audit and provides a solid foundation for tax planning strategies. There are still tools at one’s disposal to influence or control the value, but doing so with an objective starting place—and with the correct strategy—will help ensure the RIA for sale is not recharacterized post-transition.
Even if valuation isn’t the founder’s focus, it is still advisable to receive a formal valuation to avoid common post-sale pitfalls. Occasionally, advisors operating under an independent broker-dealer (IBD), inquire about simply ‘putting’ the business in the name of their son or daughter for no additional compensation to avoid formally “selling” or gifting. While it is possible to do at the IBD level, transferring an advisory business that has produced hundreds of thousands or millions of dollars of taxable income over the past decades, especially in an industry with a very active and well-known M&A market, is simply asking to be audited.
2. Alternative Financing Solutions
For family business sales, there are unique financing options that can and should be considered. Self-Cancelling Installment Notes (SCINs) can be a powerful estate planning tool when selling to a family member. These notes are similar to a traditional promissory note, with the buyer/family member making payments of principal and interest out of cash flow, over some agreed-upon period. But, SCINs have a unique feature – the note can automatically terminate upon the seller’s death, potentially removing any unpaid balance from the seller’s taxable estate, without creating a tax liability for the buyer (the remaining debt outstanding at the seller’s passing isn’t forgiven, it simply terminates and ‘goes away’).
SCINs can be a useful tool for family succession, but their structure must be airtight:
SCINs need to include a “mortality risk premium” to offset the note’s cancelable feature – for example, a slight premium on the interest rate
The valuation of the premium must be actuarially sound and based on health-adjusted life expectancy
The term of the SCIN should be within the actuarial life expectancy of the seller – for example, a note shouldn’t be 20-years for a seller that is 85 years old
The SCIN should be properly documented in value. The IRS will challenge and recharacterize notes that lack documentation or are undervalued
For sellers with impaired health or shorter life expectancy, this can be an efficient way to reduce estate tax exposure, but it must be coordinated with a valuation professional and tax counsel.
3. Gifting Equity to a Family Member - Employee
Gifting the business, partial or full, to a child who is also a key employee raises serious issues under both the gift tax rules and compensation regulations. To qualify as a gift by the IRS, the gift should be detached and disinterested generosity – a tough argument to make when the family member is on payroll. If an owner gave equity to anyone else on payroll, it would clearly be treated as a grant, thus making the argument that a grant to an employee related to the owner should in fact qualify as a “gift” is problematic/risky.
Key considerations for gifting:
Is the equity truly a gift, deferred compensation, or a grant of non-cash compensation?
Is the employee/family member receiving equity for “less than adequate consideration?”
Can the gift be split with your spouse?
Can a minority interest be applied?
Many family businesses are surprised by the gifting/granting considerations and thus get blindsided. Even well-intentioned, informal transfers can trigger unintended tax consequences if not properly documented.
4. Formal Governance Protects Relationships and the Business
A key mistake in family transitions is letting relational trust substitute formal governance.
When sharing ownership, with ANYONE (especially family), you need:
A detailed Partnership Agreement, Operating Agreement, or Shareholder Agreement
A buy-sell agreement with clear terms
Defined roles and responsibilities for both generations
- A succession plan that survives death, disability, or divorce
- Mechanisms for resolving disputes (especially if other siblings are involved)
Even if the culture is close-knit, legacy issues, entitlement perceptions, and money create a combustible mix. The hope is that you will never need to consult any of these agreements, whether selling to a family member or anyone else, but it is advisable to have well-thought-out governance documents you don’t need, than the inverse. Clear documentation avoids family blowups later.
5. Don’t Assume One Buyer = One Option
In some cases, it may be advantageous to split ownership. For example, gifting minority interests over time while selling controlling interest later or using a grantor retained annuity trust (GRAT) or family limited partnership (FLP) structure to transition wealth gradually while maintaining control. Each of these has technical hurdles but can open up estate planning advantages that a straight sale misses.
Bottom Line: Treat a Family Sale Like the High-Stakes Business Deal It Is
Selling an RIA to a family member is not a shortcut—it’s a high-wire act, with an audience that will likely have input. Closely watching these transactions amongst family members include:
- Other team members in the business
- Family members not involved in the business
- The IRS.
The goal of bringing formality to the process isn’t to over-engineer a solution or stir up conflict where there is none—it’s to ensure there is a clear meeting of the minds while everyone is getting along, and to document each step, showing everything has been done ‘above board’ to avoid surprises later. An intra-family sale can be easier and smoother than an outright sale to a peer or competitor. But where a sale to a third-party is generally viewed as arms-length by default, that isn’t the case with family. Regardless of the value you want or need from the business, you’ll need formal valuation, tax strategy, proper legal structure, and governance mechanisms just as robust (if not more so) than in any third-party transaction. The fact that you trust the buyer makes it even more important to get the sale right, because when an intra-family sale goes sideways, it rarely stays just about the business.
