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.
Considering a “fair” distribution of assets in your family? The Business Transition & Family Enterprise Advisory Services team can help, contact DJB for assistance.
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.
Read more articles on topics related to business transition and family enterprise.
Paul G. Stringer, CPA, CA, FEA obtained his FAMILY ENTERPRISE ADVISOR™ certification through the Institute of Family Enterprise Advisors (www.ifea.ca) in 2013 after completion of the UBC Sauder School of Business Family Enterprise Advisor Program. This skill set, along with his extensive business and accounting experience, qualifies Paul to help leaders of family businesses manage the more complex and sensitive issues they face when making important decisions about the future of their business and their family legacies.