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Helping Family Businesses
Prosper Across Generations®

Dividing the Family's Assets

Dear Advisor: I’m thinking of avoiding problems among my children by leaving the business to those active in running it and the land and building to those not involved. What do you think?

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Your idea is used quite often. The strategy rewards those who work by your side to grow the business but seems fair to your other children as well. Those running the business won’t have to deal with inactive shareholders. Those not in the business have some protection from business risks; if the business fails, they can always find a new tenant or, sell the property.

However, this approach can still result in lots of very unhappy heirs, especially among the offspring of those parents who don’t share their estate plans with the kids before they die. Why? Simply put, you’re forcing the kids into business with one another and all too frequently one of three land mines may explode into a family crisis.

Fuse A: Those who receive the building and real estate conclude the rent is way below market. The rent is raised and those running the business are furious at their siblings for posing a threat to the company’s cash flow by dramatically increasing their overhead. “I always knew you didn’t care a hill of beans for the business that dad built!”

Fuse B: The company president (sibling) decides the business should be relocated to better location. The brother with the now empty building has to invest resources to modernize and rent or sell it. “I never planned to be in the real estate business. I was doing you and dad a favor by trying to be a good landlord and this is how you treat me!”

Fuse C: To avoid Fuses A&B above, Dad arranges for the creation of a long-term lease locking the kids into business together at an agreed upon and fair (well, at least Dad thought it was fair) price for the next 15 years. Now, no one is happy. The business operators are locked into a lease they can’t control or get out of. Operations are hampered because they may have to work from two separate facilities as company needs grow. The real estate owners can’t raise the rent even though business is booming and their siblings are buying new cars with the money that should be going to the new landlord.

The solution? The parent(s) can meet with the children as a group, explain the assets of the family and recommend a strategy for division of those assets among the next generation. Then, leave the room and assign your adult children the responsibility of recommending a gifting strategy that accomplishes your objectives (fairness and sensitivity to the needs of business and family). After all, it is your children who will have to live with these decisions. Explain that their recommendations will ultimately need to meet with your approval, then wait. We find that when given the opportunity to be masters of their fate, adult offspring will usually make good decisions and then willingly stick by those decisions.

 

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