Aristotle is reported to have said: “The worst form of inequality is to try to make unequal things equal.” Most parents, however, want to treat their children fairly in their estate planning, and many assume that this means having their children inherit equally. While this may be possible and right in some circumstances, when it comes to planning for a family business, including a family farm or ranch, fair almost never means equal. With a family business, it is almost always more appropriate to leave the business to the child or children who will actually be taking over the business and who have contributed to its growth and success.
For a family business owner, the first question to be answered is: “Are you creating an estate plan to pass the family business to the next generation or are you creating an estate plan to treat all family members equally?” Depending on your answer, the planning process will move in one of two very different directions. If you are trying to treat everyone equally the simplest process would be to sell all of the assets and divide the proceeds equally. Unfortunately, the child who is to take over the business may lack the ability to buy out the other children and the business will not pass to that child.
Consider the story of Robert. Dad and Mom have asked Robert to return to the farm and eventually take over the farm family business. They have offered Robert an annual salary of $52,000 per year. Robert has one sister and two brothers. None are interested in taking over the farm family business. Dad and Mom have said that they want to treat all their children equally. So, instead of paying the whole salary to Robert, they have told him that he will receive $250 per week and that each of his siblings will receive $250 each week. Robert, his sister and his brothers have been treated equally. Does this sound fair to you? If it is not fair during the life of the owner why is it fair after the death of the owner?
Take this one step further and consider that Robert worked in the business as an “employee” for twenty years after Mom and Dad stopped participating in day to day operation. In those twenty years, through Robert’s efforts, the value of the operation increased from $1 million to $3 million by the time Mom and Dad had both passed on. What is fair? Does each child receive $750,000.00? Wouldn’t fairness really recognize the contribution of Robert to the tripling in value of the business?
Thankfully the answer does not need to be writing out the other children. Through careful planning an inheritance can be established for the other children as well. Life insurance is always one way of handling this. The key, as always, is to seriously consider your objectives and what really does constitute fair.
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Fair and Equal
Posted on: July 31st, 2012