Last month, we discussed the need for every business family to have their Wills, Powers of Attorney and Succession Plans in place. As a follow-up, this column addresses the need for business families to hold discussions to finalize retirement, estate and succession planning issues.
When meeting with clients about their Wills, clients often say “everything I own goes first to my spouse and then equally divided between my kids”. If a client’s estate is comprised of the family home, investments, and money in the bank, these instructions are completely reasonable as all of these assets can be converted into cash and then distributed in an equal manner resulting in everyone feeling that they have been treated fairly.
However, in the case of a business family, the concept of being fair and equal presents some very difficult challenges for the family.
To outline the issues, let’s use an example of a ranching family where there is a father, mother, son and daughter. The father and son run the ranching business, the mother supports the father and son as required and the daughter has a life that is unrelated to the ranch. The family owns a section of land worth $12M, the family home worth $1M, machinery worth $2M, cattle worth $1M, and they have cash/investments totaling $2K (for an estate worth $16,200,000).
If the father is the first to die, the entire estate would naturally pass to the mother. The mother might be in a position to continue the operation of the ranch but undoubtedly needs the son to help her with that. If the mother is not in a position to take over the duties of the father, does she get her son to perform those duties on top of his existing duties? Does he get a raise for doing double duty or does she decide to hire someone? If she needs someone else to perform her husband’s duties and then hires someone else, will the son then feel snubbed? Perhaps she decides it is all too much for her to handle and decides to sell the ranch. While that might be the simplest answer, as on her passing, she could divide her estate in half and give each child 50% of everything she leaves behind BUT is she also prepared to give her son the corresponding ‘lay-off’ notice?
If the father and mother both die and leave each of their son and daughter a 50% interest in their estate that would be equal. But is it fair?
If the parents wish for their daughter to share in half of the estate, how does that happen? With only $200,000 in cash and investments in the estate, she is still $7.9M short on her entitlement (not to mention that the son has no cash to operate the ranching business). The estate might be able to sell the family home to get her some more money, but that might be impossible if the home parcel has not been subdivided from the title of the rest of the ranch. If the house is saleable, chances are the barn and the rest of the outbuildings would be on the house title so how would the son be able to use them to operate the ranch if the house is sold?
Leaving everything in the estate to the son and daughter equally and letting them figure it out between them is a recipe for destroying the family. Think about it. If the son and daughter each own half of everything, does the son need to pay his sister rent for use of the ranch and the barn? Can the son give himself a raise for doing all of the work? Do the two of them have to agree in order to buy or sell some cattle or buy and sell feed? And how do the two of them each own half a tractor?
While creating a Will and a Succession Plan is important, failing to consider the division of the business and electing to avoid the necessary conversations is irresponsible.
But again, how can you have those conversations without dividing the family now? Fortunately there are FAMILY ENTERPRISE ADVISORS™ that have the experience to facilitate the discussions that every family business needs to have to maintain harmony in the family, capture each family member’s goals and develop plans that everyone can agree upon.
For more information about FEA’s, or to find a FEA to work with your family, go to https://family-enterprise-xchange.com.
If you have a question or issue that you would like to read about in future columns, please feel free to email me at firstname.lastname@example.org.
Until next time,