Selling your financial services 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 the same level of formality isn’t needed as with an outside buyer, sometimes skipping a formal valuation since they aren’t seeking to get full value, or possibly gifting equity informally. But this relaxed approach can open the door to major tax exposure, compliance pitfalls, and long-term misunderstandings. Intrafamily sales done right, demand more structure and care, not less, both from a practical perspective, but also from a technical one.
The following are few of the technical details and considerations to have on the radar 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, which is often a reasonable assumption in an intra-family deal. A credible, independent valuation is critical for:
- Establishing defensible pricing for gift tax calculations
- Supporting installment sale terms
- Avoiding IRS recharacterization of a disguised gift
- Managing the optics with non-involved heirs or business partners
Using a third-party valuation firm ensures that 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/control the value, but doing so with an objective starting place, and with the correct strategy, will ensure things are recharacterized post-transition. Even if getting the value out of the business isn’t the focus, or even matter to the founder/advisor, it is advisable to do things above board. Occasionally, advisors operating as a sole proprietor under an independent broker-dealer dealer (IBD) for example will inquire about simply ‘putting’ the business in the name of their son or daughter for no additional compensation as a way to avoid dealing with “selling” or gifting.
While possible to do at the IBD level, the transfer of a practice that has produced hundreds of thousands, or millions of dollars of taxable income over the past decades, in an industry that has a very active and known M&A market, is simply asking to be audited.
2. Alternative Financing Tools
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 for example 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 and sales, but their structure must be airtight:
- SCINs needs to include a “mortality risk premium” to offset the note’s cancelable feature – usually by way of a slight premium on the interest rate for example
- 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 – i.e., the note shouldn’t be a 20-year SCIN with a seller that is 85 years old
- The IRS has challenged improperly documented or undervalued SCINs, which can result in recharacterization as part gift
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 part of the business 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 to an employee?
- If the employee-child is receiving equity for “less than adequate consideration,” it could be reclassified as income, triggering unexpected payroll and income tax obligations for everyone involved
- Gift splitting between spouses may be available, but it must be properly documented and should start with a proper valuation to establish a defensible position
- When granting a fractional interest to a family member, qualifying the grant as a tax-free gift is unlikely an option, but it is possible to reduce the tax value though things like a minority discount
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 papered correctly.
4. Formal Governance Protects Relationships and the Business
A key mistake in family transitions is letting relational trust substitute for 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: e.g., 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 to a family member is not a shortcut—it’s a high-wire act, with an audience that will likely all have input. Closely watching these transactions amongst family members are the other team members in the business, siblings not involved in the business, and of course, the IRS.
The goal of bringing formality to the process isn’t to overengineer a solution or bring up conflict where there is none – it is 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 surpises later. Family business transfer 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/need from the business, you 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 it right. Because when deals go sideways in a family, they rarely stay just about the business.
