Clients often express a desire to leave their estate to their children in equal shares. But when the estate includes a family business, that might not work.
For example, consider a situation where the father, Frank, has spent the last several decades creating and building a family business. Now as Frank ponders retirement, he wants to leave the business to his three children, Amy, Brian, and Colleen.
Amy is intensely interested in the business and has been working in it for the last several years. She knows the systems, processes, products, and clients. In fact, as Frank wanted to step back, Amy picked up the slack. She is ready to go immediately, so that the business keeps making money.
Brian is totally uninterested. He is an outdoorsman at heart, and hates the idea of being behind a desk of any kind.
Colleen has the aptitude for the business, but has a consulting job that has her working long hours. She is often out of town at client locations, and does not have the time to put into the family business.
Dividing everything equally would be unfair and impractical. Amy would be putting in all of the work for only a third of the profit. That is a recipe for disputes among the three children. It also may create other problems that arise in operating a business with absentee owners, from morale problems to governance issues. Worse yet, it would be possible for Brian and Colleen to out-vote Amy in any significant business decisions, even though they do not have any experience with the business or its operations, employees, culture, or products.
In other words, this is a case where an equal division would be unfair to Amy – and potentially also harmful to the business itself and to its employees.
Instead, Frank might think about other allocations of assets. One possible way is to designate the business to Amy and other assets for Brian and Colleen. A different strategy may be for Frank to purchase life insurance for benefit of Brian and Colleen to give them reasonably equivalent value. And there may be other possible solutions.
Estate planning fortunately allows a lot of flexibility to tailor a solution, and to avoid the kinds of situations that can impose stress on both the business and the family. If a small business is in the family, it pays to make sure that it will not fall apart because of – or due to – an unsuitable allocation among beneficiaries or a succession plan that does not consider the interests, pursuits, or strengths of those that will be involved.