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A Family Divided by Equal Love Part II

A Family Divided by Equal Love Part II

Last month, I illustrated the effects of the per capita (meaning equally to each person) and per stirpes (meaning equally by family line) approaches to gifts and bequests. Whether you intend it to or not, the way you handle this issue can significantly affect ownership and create family tensions.
What Does This Mean?
To summarize, the per capita approach (usually used in lifetime gifts to grandchildren) means equal individual ownership (e.g., “I love my grandchildren equally, so they each receive the same amount of stock”). However, it causes immediate disparity in family-line ownership when family sizes vary. The most prolific offspring’s family winds up owning more stock. The per capita approach generates the earliest concerns because the disparity begins immediately with annual gifts to grandkids. The children’s relationships can be put at risk as they question why their families wind up with differing business ownership interests.
Per stirpes tends to create concerns later, usually when the children die. At that point, the grandchildren are old enough to understand and assert their concerns about ownership differences within their “peer” group. Grandchildren in more prolific family branches individually receive less stock, so they may feel they must band together so that their cumulative individual votes equal that of their cousins in less populous branches. A branch psychology of “us versus them” can develop in the grandchildren’s generation.
What Is the Best Approach?
Unfortunately, neither approach is “right” in a vacuum. At some point, both approaches raise fairness issues. Here are some suggestions:
  1. Focus on your children. That is the generation over which you have the most influence and which has the most immediate potential impact on the business. Family harmony must occur generation by generation. Per stirpes is less likely to raise concerns in your children’s generation, although it admittedly may create problems many years down the road. But if the kids don’t get along, the grandchildren’s relationships may be irrelevant.
  2. Don’t try to be the great equalizer. Grandparents should not use business ownership to offset the financial effects of their children’s procreative differences. Think twice about using stock as a wealth redistribution mechanism within the family. The per capita approach “takes” from the less populous family lines to “give” to the more populous family lines. Since grandparents are not responsible for family-line size differences, a Robin Hood approach can breed resentment.
  3. Accomplish grandchildren-related gift objectives with other property. Love, satisfying educational needs, tax savings, and the like are very valid reasons to make gifts to grandchildren, both during life and at death. Use cash or other property, not family business stock. Family members understand and accept that grandparents’ equal love for grandchildren translates into equal financial treatment. However, the effects on family business ownership and control are not so readily accepted.
  4. Consider stock transfers based on business involvement, not birth. Perhaps stock should be owned only by family members actively involved in the business. Per stirpes and per capita become irrelevant under this philosophy. Of course, creative planning may be necessary to create nonbusiness wealth for gifts/bequests to inactive descendants.
  5. Openly discuss the issue with your descendants. They are most likely to accept and support your decision if you involve them in it. You face a problem with no clear-cut answer because both the per stirpes and per capita approaches present dilemmas. You want them to understand that your decision is made with love, not unintentional favoritism.
There is one other surefire solution to all this. Simply require your kids to have the same number of children. Those who are behind should get busy! And make sure that they pass this requirement on to future generations too.
Ross Nager is senior managing director of Sentinel Trust Company of Houston, Texas.



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