From an estate planning perspective, it may feel good to treat all your children equally, but it may not be the best solution; this is especially true when there is a family business involved. There are only two ways to be truly equal – having only one child or selling everything and distributing the cash equally – neither of which is a suitable solution for most families. Thus, while it may seem like a good idea to treat everyone equally, it may create more problems than it solves in the present and future.
How Dividing the Estate Equally Creates Family Business Problems
Division of assets and expectations poses a problem when family businesses involve children, both those working in the business and those who are not. Having worked in family businesses for over 40 years, parents often communicate the expectation of equal treatment, giving their children the expectation of equal division of assets. Unfortunately, this can lead to trouble, as children may feel wronged if they are not treated equally.
I once warned a business owner that if he followed through on his plan to have all three of his children inherit his stock equally, there would likely be a difficult conversation between them in the future. Specifically, two of the children were actively involved in the business, and the other was not, so when the parents eventually passed, the non-active child would likely initiate the conversation, which from experience has sounds something like this:
“Hi guys, Mom and Dad would be so proud of the great job you are doing running the business! So, when do I get paid?
“But I own 1/3rd of the business.”
“Yes, but you don’t work here.”
“So, what – my 1/3rd is worth millions! You two are getting paid a ton of money.”
“That’s because we work here.” “We don’t distribute profits – we reinvest in the company, just like Dad did.”
“So, when do I get paid?”
“When we sell.”
“When are you selling?”
“We aren’t!” “So, I get nothing, and you get millions – that’s not fair!”
“Oh, by the way – you owe estate tax on your 1/3rd of the stock.” “That’s really not fair!!!”
Although parents don’t want to be seen as favoring one child over another, the reality is that each child has different talents, commitment, work ethic, attitude, education, and ability to contribute to the family business. Even if all children are working in the business, there is a strong possibility that if they weren’t your children, each person would have a different pay plan and stock ownership opportunities based on merit rather than a relationship. However, this may not be the case for family businesses, especially for those family businesses that focus more on equal pay versus formal job descriptions and pay plans based on each person’s role and contribution to the organization.
The old adage “Equal is not fair and fair is not equal” holds true in many situations. Paying everyone the same, regardless of the amount of work they contribute, can lead to suppressed feelings of unfairness and resentment, as someone is likely to feel overpaid or underpaid. This is because people tend only to view things from their own perspective rather than objectively. Thus, true fairness often requires recognizing individual contributions and compensating accordingly.
Though it may be difficult and uncomfortable, it is important to have conversations with your heirs to clarify expectations. As a business owner, tough decisions and challenging issues must be addressed to ensure the long-term success of your business. Rather than leaving it up to the next generation to solve, make sure your estate and succession plan is not based on equality; the future of your business and family relationships are at stake. Nevertheless, no parent likes to have this type of conversation, but, it is a necessary one.
Contact Us, and we can help you with insights, other resources and see if it makes sense to work together. At the very least, in 30 minutes, you may get some ideas you can apply to your business right away.
The article was originally published on the Digital Dealer website: Will Your Equal Estate Plan Backfire?.