“But I love all my kids equally and I want to treat them fairly!” exclaimed Ted, the exasperated business owner who was trying to figure out his estate plan. This sentiment is voiced over and over by my dealer clients leading to many discussions on ‘why equal is not fair’! It’s easy to relate to this concern as most of us have experienced what I call ‘the Christmas/Hanukkah Syndrome’. “Let’s see, I have 3 gifts for John, but only 2 for Hannah, but the 2 for Hannah cost more than the 3 for John – how do I make this work?”
As you are evaluating your approach to your estate planning, it is important to remember when your children were growing up, you didn’t say, “I just paid $5,000 for braces for Ken, therefore I need to spend $5,000 on each of my other kids.” Clearly, you spent money for braces for Ken because they were needed and would do the same for your other children depending on their needs.
As a Succession Planner, most dealers hire my partners and I to help them keep the business in the family. Their goal is to perpetuate their family business legacy and address the myriad of interrelated and interconnected issues involved in making their dream come true. Often the dealer has multiple children and only one or two are active in their dealerships. The big question they face is how to make their business succession goal happen, while providing an estate distribution plan that treats all of their children equally or fairly (often defined by dealers and their spouses as one and the same).
So, in a perfect world, your estate plan would provide all the business stock and real estate to be designated for your children who are active in your business. Unfortunately, most dealers have built their net worth by reinvesting in their business, so their business represents the majority of their assets. If you have children who are not active in your business, this can present real problems.
Recently I met with the successor son of a dealer, where he has several non-active siblings and he said, “I just hope my father will take into consideration the large increase in the net worth of this business since I’ve been involved in running it.” He recognizes that his parents will want to provide for his siblings, but is worried about how much he will have to pay in order to make this happen. “Will it be fair?” is what he is asking.
The younger sister is also asking, “Will it be fair?” as she is concerned that her age will mean she doesn’t get the same opportunity as her older brother. “Why should I get less than him, just because he started a few years ahead of me? I am significantly contributing to the success of the dealership!” She is saying she wants the stock divided equally but her brother would respond, “that’s not fair – I’ve put in years more and should receive more stock – equal is not fair!”
So, what is the solution? There isn’t just one. First, recognize that the only way to be equal is to either have one child or to sell everything and turn it all into cash which can be divided equally. Obviously you’re not going to do that if you have dreams of next generation family members running the dealership. Start by looking at your assets in terms of answering the question, “is this asset meaningful to my child who will be receiving it?” Meaningful is usually defined as “income producing.” If I am running the business, then I can create income for myself. If I am a minority shareholder then I am at the mercy of the majority owner as to whether there will be any distributions (worst case, I have taxable income due to my minority interest, but no distributions are made for me to be able to pay my income taxes!). It has been my experience that when each of your children receive income producing assets which they can use to improve their lifestyle, they are not as concerned as to whether or not the shares they each receive are equal.
Is family harmony important? If yes, don’t put your children in a position of having to share the same assets! Not many people can share the same sandbox without fighting! Solutions probably won’t happen overnight as you may need to have those active in the business buying out those who aren’t over time, or buying life insurance to create some equality. If you decide to have inactive shareholders, you will need to establish detailed governance as to how this will work and what each family member can expect.
Setting expectations in advance is very important to prevent your children from being at odds with each other after you are gone. If your children hear your plan directly from you (possibly with the help of your advisors), they will be inclined to accept it, knowing it was your decision to make. The last thing you want is for your wonderful business to destroy your family! Equal is not fair – perspective is everything!
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