When engaged in estate planning, families of wealth are often faced with deciding how to treat the grandchildren or great-grandchildren when passing assets (often through generation-skipping or other trusts) to their grandchildren and beyond. The primary issue is whether each grandchild will receive the exact same amount as every other grandchild (this is identified as distributing on a per capita basis) or whether each family branch should receive the exact same amount of shares and then split those shares according to the number of grandchildren that that branch holds (this is called the per stirpes method).
Let’s consider an example of a per stirpes distribution in action. Tom and Katherine own 100 percent of the stock in their family business, and they have three adult children: Sam, John and Laura. Sam and John each have two children of their own, but Laura has five children. Tom and Katherine passed 1,500 shares of business stock via a generation-skipping trust as part of an estate planning maneuver and to pass on their business legacy to the grandchildren. They passed 500 shares each to Sam’s, John’s and Laura’s branches. When they did this, each of Sam’s and Johns two children received 250 shares, but Laura’s children only received 100 shares each.
Note that in the above example, had Tom and Katherine distributed on a per capita basis, the 1,500 shares would have simply been divided by the number of grandchildren, in this case, nine, and each grandchild would have received approximately 167 shares.
There is not generally a right or wrong way to handle this issue, and family preferences dictate the basis chosen. Families who see all grandchildren as equal will tend to favor giving assets on a per capita basis though there can be complications such as how to treat adopted children or stepchildren or what happens when a birth occurs that was not considered in the estate plan. Families seeking to distribute assets on a per capita basis believe that the feelings of each grandchild will be protected, as they all receive the exact same amount. This also soothes the feelings of adult children who have the most offspring, as those individuals often appreciate that all of the grandchildren are being looked at and treated as equals.
Families who prefer distributing on a per stirpes basis tend to favor equality in the second generation. A per stirpes treatment allows each of those children’s branches to receive the same amount of stock, which may have implications for voting on business issues in the future. These families often believe that because number of children is an individual decision and that decision by the G2s impacts the number of shares ultimately reaching their children (the G3s), it is most fair to treat the sibling group equally. This approach would seem to pay attention to the feelings of those G2s with the fewest children. In the earlier example, Sam and John (both members of the G2) would likely find it more palatable that their branches were not penalized because they had fewer children than Laura. One concern sometimes expressed is that those members of G3 with fewer siblings will have a larger number of shares and may unite with other larger shareholders, exerting more power than cousins from more prolific branches can wield.
Looking at this in a purely numerical manner, this seems to be a difficult choice. Either way, some members of the family may be hurt or, even worse, angry. Also, if just looking at the numbers, one can easily surmise many scenarios in which one group will come to gain power over the others.
However, a different tack is to think about the opportunity to develop the sibling team, as well as the eventual cousin team, into a strong unit that meets on a regular basis and learns how to support and trust each other. In thinking about this potential, negative concerns about either the per capita or per stirpes method are less powerful.
Many families are successful in resolving G2 issues and integrating the G3s, by allowing each member of G2, G3 and beyond to have a voice. These families are able to come together to build a common understanding of family values and vision and opportunities for participation in the management of the assets. They work hard to identify the value of the family to the business and to craft a common voice. In doing so, even those who are in the lower-power position of having just a few shares of stock are given an opportunity to achieve communication parity with those who have larger shares and seemingly would have all the power. Ownership decisions may still be determined according to the number of shares held, but the family creates an opportunity to build trust with each other, to hear each other, and ultimately to share in the decision making in family and ownership matters. They use family meetings, often dividing work between a family council and separate ownership meetings, to get the work of the family done and to reinforce membership by all owners regardless of actual numbers of shares owned.
Still, it is necessary when passing assets across generations to make a decision as to whether some of those assets will be passed on a per capita or per stirpes basis.
Some questions one may wish to explore when deciding whether to use per capita or per stirpes would include the following:
- Does the age range of our children increase the likelihood that there will be future grandchildren born at an unforeseen time in the future? How can we be fair to them?
- Do we seek equality among the children that we know over the grandchildren that we do not yet know?
- How will we communicate our decisions to our children so that, regardless of which method we choose, they will understand the philosophies that we hold and will be given time to accept those decisions and work out any issues they may have pertaining to them?
- What steps are we currently taking to build teamwork, not only among the sibling group, but among the grandchildren as well?
The decision to pass assets on a per capita basis or a per stirpes basis is a personal one, and the decision is a responsibility of asset owners. We have found, however, that the family that speaks its intentions, communicates those in advance so that siblings understand why the decisions were made in the manner they were and provides an outlet for team development among whatever groups will be formed, tends to experience more favorable results in the long run.