A strong estate and succession plan is an important part of family and enterprise long-term success. However, the process of planning can create a deep source of discord among family members with potentially serious implications for the health of the business.
The power of fair
For many parents, splitting the inheritance equally among heirs and/or successors seems the most logical and trouble-free course of action. This idea is even widely shared among future heirs. In 2017 the BMO Wealth Institute survey of individuals expecting to receive an inheritance found that 60% felt assets should be divided equally between children, while only 15% felt that an unequal distribution could be considered “fair.”
While the notion of equal distribution is widely accepted by both generations at first, it often turns out to be a source of conflict when family members realize that performance and contribution to the success of the business makes a difference. For example, in the 2013 research paper titled “How One Bad Family Member Can Undermine a Family Firm; Preventing the Fredo Effect,” Roland Kidwell and his co-authors argue that underperforming or incompetent family members in the business are often treated equally, and sometimes even more favorably than other members. Higher performing members may resent this equal treatment given their greater performance and contributions to the enterprise.
It’s helpful to look at an example in a family business context to see just how issues of equality and fairness can impact family harmony. First consider the difference between equal and fair.
What is the difference between equal and fair?
Equal is simple to quantify. In estate planning it’s an equal division and distribution of assets. Once you determine the value of your assets it’s a relatively straightforward process to portion those out equally among your heirs. It’s hard to misinterpret a mathematical formula.
Fair is a more difficult concept to pin down. It’s subjective and there is no formula. By definition it means marked by impartiality and honesty; free from prejudice, favoritism, or self-interest. That seems simple enough, but family members may define fair differently in any particular situation. Consensus is more difficult to reach.
When is equal not enough?
Imagine a fictional family manufacturing enterprise. Let’s call it “General Gadget.” Ron and Carla founded the business 30 years ago and have overseen regular growth and profitability. They have two adult children, Maria and Larry. Maria has worked in the business all her adult life and holds a high-level management position in the firm. She hopes to one day assume leadership of the firm. Larry went to law school and became a successful corporate attorney. He harbors no negativity towards the family enterprise, but he also has no interest in being an active part of the business.
One option might be to split the assets and ownership of the business 50/50 and give each child an equal share. The siblings will find themselves in business together. Maria might want to reinvest all profits back into the business to promote growth and expand into new international markets. Larry might feel the business is doing just fine as is and prefer to receive a regular dividend rather than reinvesting.
Even in this simple example it’s clear to see how family discord could quickly develop. Maria thinks it’s unfair that her brother, who has never contributed to the family business, should get an equal ownership share. Larry finds it unfair that he can’t easily realize any financial benefit from his inheritance. The equal distribution that Ron and Carla though would be “enough” created a new set of conflict issues among their children.
There are many possible alternatives to this scenario that could be more “fair” to all involved. Perhaps Maria receives full ownership of the business while Larry receives the real estate assets (of course long term agreements will be needed to ensure continued harmony between the siblings). Or Maria receives ownership of the business while Larry is compensated with revenue from his parents’ life insurance policy and other non-business assets. A trusted team of advisors can help a family structure any type of estate and succession plan they desire, assuming the family can provide clear direction.
More important to the continued success of the enterprise, and to good relations among family members, is how the family communicates and resolves disputes during the planning process. How are issues of fairness raised and addressed? Here are six questions to consider to help uncover questions of asset distribution issues and promote harmony during the planning process.
Questions to ask as you begin
What are the goals of the estate/succession plans?
To provide for the continued success of the business, to provide for the wellbeing of family members, or a combination? Clearly understanding your goals will help keep planning on track and provide a common understanding for all family members.
What are all of the assets available in our estate plan?
Identifying and including the nonbusiness asset gifts in an estate plan may help improve perceptions of fairness among the inheritors. Leaving the children who are active in the business with necessary assets but honoring the inactive children with family heirlooms, vacation properties or life insurance payouts lowers the financial and succession risk to the business. This fair, but not equal distribution respects the inactive children with meaningful gifts of financial value but protects the legacy business by concentrating the assets with the more engaged and better prepared sibling(s).
Does your family have a good understanding their roles within the family system?
In the classic family business system three-circle model roles overlap in differing degrees; Business owner, employee, and family member. As family members assume different roles in the system their involvement and contributions to the success of the business will change. An understanding of these roles can add context around why some family members may receive unequal distributions.
Are the expectations of the parents and other family members clearly understood?
Making assumptions about what other family members want is a mistake and fairness can mean something different to each person When expectations are out in the open, important questions can be answered by the parents and effective planning can take place early in the process, making it easier for all members to “buy-in” to the plan. The reading of the will should not be the first place that the family members learn the contents of the estate plan.
Are your planning procedures fair and are all stakeholders treated with respect?
In “Managing the Family Business,” Thomas Zellweger explains that family members are just as concerned with how the planning process is conducted as they are with how distributions are allocated. If the process is seen as open and free from bias, consistently applied to all family members, using factual data to make decisions, and treating all members with dignity and respect, then members are more likely to view eventual outcomes as just and fair.
Does your family need outside assistance to facilitate difficult conversations?
When communication and planning reach an impasse, it often takes an outside observer to help get the conversation moving again in the right direction. An impartial facilitator, whether a mediator, business consultant, or other trusted advisor, can bring all parties together and ensure everyone has the opportunity to provide input and be heard.
While equal treatment in estate and succession planning can seem the most preferable option, it can often be viewed as “unfair” by family members and wind up doing long-term harm to the family and business. It is crucial to address these issues openly and early, with buy-in from all affected family members and input from trusted advisors. Different from equal, fair alternatives will go far to protect the business and preserve family harmony.
Estate Planning for Complex Family Dynamics (March 2017), BMO Wealth Institute, http://bmogamviewpoints.com/wp-content/uploads/2017/03/Wealth-Institute-...
How One Bad Family Member Can Undermine a Family Firm: Preventing the Fredo Effect (2013), Roland Kidwell, Kimberly Eddleston, et al., Business Horizons, 56 (1): 5-12
Fair vs. Equal in Estate Planning (2014), Family Business 360 Podcast, June Wiyrick Flores, https://media.oregonstate.edu/media/t/0_c954ko29
Managing the Family Business (2017), Thomas Zellweger, Edward Elger Publishing, pp 458-468
 Merriam-Webster online defines fair as “a : marked by impartiality and honesty : free from self-interest, prejudice, or favoritism, and,
b (1) : conforming with the established rules : allowed (2) : consonant with merit or importance : “due a fair share”