Mary and John (ages 65 and 64) are having a conversation about their estate and business. They have two grown children; David, 39, is married with a small family. He and his wife are both pharmacists and earning a comfortable income between the two of them. Living in San Diego, however, leaves them sometimes short of cash to meet expenses … “too much month left at the end of their incomes.”
Their daughter, Sally, 36, is divorced with one young child and working in the family business. She is presently the director of H/R, but John is grooming her to run the business someday.
How To Divide the Assets Between the Children?
John and Mary are uncertain how much to leave David and Sally – when and how should they receive their inheritance – who should receive what assets? With Sally in the business, dividing the estate and business interest is a sensitive matter … do they leave the business to Sally outright? Should she buy the business, and if so, at what price? What is “fair?” Will David feel he is being treated unfairly if the business is left outright to Sally? Will the business be sustainable, and will Sally be able to run the company after John and Mary are gone, if they leave the business equally to both her and David? How to divide the assets between the children?
The “Do Nothing” Approach Can Cause Delays And More Expenses
Faced with these difficult decisions, John and Mary unfortunately did nothing. They felt overwhelmed by having so much to process, with too many questions and not enough answers. They decided to “wait and see” what the future would bring. Tragically John and Mary ran out of time to process these decisions as a family when they were killed returning from an overseas trip.
Their will left everything equally to Sally and David, and they had no living trust to avoid the needless time and expense of probate. The only “bright spot” in an otherwise difficult situation is their deaths occurred in 2009 resulting in little to pay in Federal death tax on their business and estate.
The Siblings Wind Up in Litigation Due to the Parents’ “Do Nothing” Approach
John had no key person life insurance to help Sally sort through the debris left by his death. Several key suppliers and customers have left the company since they are unsure of Sally’s ability to effectively lead. David has remained uninvolved in the business, but expects to receive cash flow from his equal ownership. This difference in financial needs and direction has created an enormous barrier between the two siblings. The end result is that recently David has begun litigation against his sister for “excessive” compensation and poor management. Both the family and the business are in serious trouble, and it is unlikely that either will survive.
Most assuredly, this is not what Mary and John would have intended. While there is no perfect solution – there are not always “happy endings” in real life – there is one maxim that most often holds true: Doing nothing is an option, but rarely the correct or best one. Hope is decidedly not a strategy. So, how to divide the assets between the children? What could they have done differently?
Imagine instead that John and Mary had …
- Hired a family coach to help address and resolve the family conflicts and develop solutions to keep the family intact
- Determined in advance the interest level of their two children, surfaced the issues of “fairness” and “equal versus equitable”
- Implemented a living trust to avoid the costs and time delays of probate which emerged from their untimely deaths
- Purchased key person life insurance for the business to guarantee several years of profits and sufficient operating capital for Sally to withstand a loss of a key customer, supplier or credit source
- Introduced Sally to key suppliers, banker, and key customers early on to create a greater sense of confidence knowing that a succession plan was being implemented
Hoping that difficult situations will resolve themselves or that clear answers will materialize at some point in the future is not an effective strategy in most cases. Rather, what is necessary is to seek counsel and direction from those professionals who have advised others who similarly experienced these challenges before. Capture the best outcomes from those who have faced these same decisions. Study others who have faced the succession test and failed to understand what happened and how that failure could have been avoided.
There are solutions to be found. Even the thorniest challenges can be and must be addressed proactively to ensure that your family and business remain intact and thriving for generations to come.
Written by R. J. Kelly – March 2011