Estate Fairness for Children In and Out of the Business
The advice is fairly standard: despite your desire to leave equal parts of your estate to your children, beware of leaving your business in equal shares to those active in the business and those pursuing other interests. Motivations and perspectives differ between actives and non-actives. Conflict often follows, especially after the parents are deceased.
Consider some other options. For example, by planning in advance you can create assets in your estate other than your business. In such cases, your business can go to those children active in it and like-value assets can go to the others.
If you are like most business owners, however, most of your wealth is represented by your business -- and since your business represents your best investment vehicle, you haven't significantly diversified your holdings. Consequently, proportionate assets may not be available to leave to children not engaged in the family business.
So --how can you give equal share of your estate to children not in your business without giving them a share of your business? Here are some ideas.
Leave cash derived from:
borrowing against business assets;
creating an ESOP;
obligating children in the business to purchase restricted stock owned by inactive children over time at a price set by a predetermined formula (in effect, creating a shareholders agreement triggered by your death); or
buying appropriate insurance products to produce appropriate amounts of cash at appropriate times.
Leave other non-stock assets:
Certain assets like real estate or equipment, can be separated from the business, then leased back. These assets can create value and cash flow for non-active children.
Patents or royalty arrangements can be used in similar ways.
Another alternative is to develop two categories of stock, leaving non-active children non-voting preferred or non-voting common stock.
Whatever approach you take, don't count on legal and financial mechanisms to maintain harmony in your family. Lawyers, trust officers and estate planners cannot provide to your family that which only you can achieve through communication, understanding and attention to family values.
We recommend thorough family discussion of estate issues as a part of the estate planning process. Your family should understand your goals in establishing your estate and you should have an understanding of your children's goals. They should understand and support each others' aspirations and commit to sustaining strength of family and business for the generation to come.
Fairness, equality, opportunity, achievement, harmony, quality of life...these are the noble and typical goals of the estate plans of someone who has successfully built or sustained a family business. Those are achieved, however, through plans in life -- not in death.
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