Posted on March 10th, 2016 by Paul Stringer in Business Transition & Family Enterprise Advisory, General Business

Family Matters: Fair vs. Equal – are they the same?

Family Matters: Fair vs. Equal - are they the same?

Many parents believe that assets should be equally divided among their children.  This includes real estate, securities, artwork and even household items.  Of course this also includes the family business.  The idea that some of the children — or even one child —would inherit the family business to the exclusion of others can be unthinkably “unfair.”

But consider the reality of many family businesses.  Often, not all of the children work in the business.  For those who do work in the business, their efforts are directly contributing to the company’s success and value.  They share their parents’ entrepreneurial spirit and ambition.  It would make sense that they be rewarded for their efforts and control the future of the company.

For children who are not active in the company, even partial business ownership may not make sense.  They can’t make controlling decisions, their ownership is generally illiquid, and their interest in the company is probably minimal.

A Different Division of Assets

Instead of equality, aim for fairness.

A fair distribution of assets may mean that different assets are given to different children based on their needs and desires. In other words, the transfer becomes more about the children’s concept of fairness than the parents’ concept of equality.  For example, perhaps the business is indeed passed along to the child who is actively working in it, and the other siblings receive other assets of equal value.

Of course this is often easier said than done because the business is often substantially more valuable than all the other assets combined.  If this is the case, timing of the transfer is crucial because of the tax issues involved.  For example, owners may want to structure the transfer to minimize estate taxes.  Another consideration is the sweat equity of the child working in the business – is the business his or her “reward”?

This can be a complex undertaking, so it is wise to lay the groundwork for a “fair” transfer while the parents are still active, healthy and involved in the company.  To do so, take time and carefully consider a strategy that will result in equitable treatment of all the children.  Involving a trusted financial advisor in this plan is crucial so that estate and gift tax consequences can be incorporated into the plan.

Because the children may assume that equal distribution is what they have in store, a family meeting to explain the strategy and the thinking behind it can be helpful.

Recognize that it may take some time to get everyone used to the idea that equal isn’t necessarily fair.  For most families, “fair” is ultimately the intended outcome.

 

Article adapted 2/11/2016 by  Paul G. Stringer, CPA, CA, FEA, Partner from the BOP Fall 2009 article – purchased by DJB for our use.


About the Author

Paul StringerPartner | CPA, CA, FEA

Paul has over 40 years of consulting experience to family business. He specializes in reorgs and business succession, financial consulting on the purchase or sale of businesses and generational transfers.
More About Paul >