Beyond inheritance equalization- from Sibling Rivalry and Favoritism to Family Harmony
The words “fair” and “equal” may sometimes be used interchangeably. When it comes to estate planning, however, the definitions become more distinct, where fairness often falls into more of a subjective or situational realm, and equal is qualified more objectively and concretely. Potential challenges in focusing on fairness as the priority in estate planning may rest in the fact that what is deemed to be fair by an individual may not necessarily translate to equal, and the giver’s interpretation of what’s fair may not be in sync with the beneficiaries’ point of view or expectations. These inconsistencies may be the source of significant issues down the road, ranging from resentment and family conflict to even legal challenges to the validity of a will or trust.
It is important for families to focus on dividing assets equitably while at the same time being conscious of the fact that there may be certain situations where fair doesn’t have to mean equal. At the end of the day, it’s about finding the solutions to strike the right balance, depending on your individual circumstances, and ensuring family communication and understanding are consistent throughout the process.
Why fair may not always be equal
Decisions around dividing an estate and passing down wealth are often closely tied to what individuals perceive to be fair. Those perceptions may be based on a broad range of considerations and assumptions, such as the circumstances of their intended beneficiaries, family dynamics, current situations, financial needs of younger family members, relationships, and the list goes on. Any combination of these factors may push an individual to make certain decisions that they may justify as fair from their perspective, but the actual financial outcomes of those decisions may not translate to an equalization of assets and wealth among the beneficiaries.
Understandably, every individual and family situation is unique and there are certain instances when fair doesn’t necessarily have to mean equal (which will be discussed later in this section of the report). An underlying theme or driving force within estate planning, however, with the exception of the few special circumstances, should be on dividing assets in an equitable fashion to limit the likelihood of any future resentment among children or other heirs and to keep the family united.
Fair vs. equal for family businesses
The topic of family businesses is one that generates a great deal of questions around what’s fair and what’s equal in succession planning, and this represents a main situation where fair doesn’t necessarily have to mean equal. Challenges may often arise in a climate of meritocracy and when there are strong viewpoints that a certain child or children may have a bigger right to inherit a business over another or others. More specifically, there’s often one child who’s more involved than others and has put the sweat, time and hard work in. Or, there may be multiple children involved, but one stands out for making the business more profitable or for growing it and thus increasing family wealth.
Succession planning process
One of the first steps in family business succession planning is understanding your goals through inclusive intergenerational discussions. An effective medium to conduct these discussions is through family meetings. These meetings provide an environment and forum to talk about overall family values and provides an opportunity to gain better insight into the next generation’s interests and viewpoints regarding the business.
From there, the next step is to use clear and defined goals to act as your compass to what you (your family) hope to achieve with the family business. Goals start as general statements and evolve as you better understand your personal, family and business circumstances.
When it comes to the business, every member of the family may have his or her personal agenda depending on individual circumstances. For example, the person being involved in the family business creates very different needs than when that person was not involved. Likewise, having an ownership stake can change an individual’s view on what the business represents. This is where the three- circle model becomes a useful tool to map out differences in needs and views. The three circles represent the three groups family members (and non-family members) can fit into. The circles overlap to illustrate that individuals can be part of several groups. Once mapped, it should become clearer how different needs and views could exist depending on where a family member fits into the structure, as well as how and where individuals best fit into the structure. This information may then be used as a guiding principle for dividing the business in a way that promotes fairness and then seeking out alternate approaches to equalize where needed.
Options to consider to promote fairness
In accounting for all factors of a business, regardless of the situation or complex circumstances, there are succession planning tools and approaches that effectively address every potential need. These options help keep fairness at the forefront, and at the same time create an outcome where equality is still achieved through secondary means.
Using non-business assets to equalize for other child(ren)
Using life insurance as an equalizer for children not involved or sharing in the value of the business
Leaving a child in the business, but without voting rights or shares
If there are no other usable assets, establish that one sibling has to buy other siblings out
Much like with personal estate planning, succession planning for family businesses also hinges very strongly on open communication with all family members. This holds especially true when the business itself is not being passed in an equal manner. Children need to understand the decisions and the structures behind them, and even more so the context and reasoning. If children are not receiving an interest in the business but are being equalized in another way, it’s crucial to explain how fairness has been preserved through other means that were more appropriate for their situation.