It’s better to aim for equitable treatment

Should you aim for equal treatment when you give your children their inheritances? Is equal treatment always fair?  The consensus amongst professional advisors from various disciplines is: yes, give your children inheritances of equal value. Unequal inheritances sow dissension amongst siblings and will likely be interpreted as a representation of unequal love. Those who receive less may well feel hurt and angry, both at you and the sibling who received more. The child who received more may feel guilty if their larger portion feels unmerited or is perceived as being unfair to the others.

But achieving equality is seldom a simple matter, unless you have a lump sum of money to be shared by children who are all “doing fine.” The catch is that few situations are straightforward enough to be solved by simple division. We have seen clients who want to pass along an asset like real estate or the family business.  Or, what about even something as seemingly simple as the family’s summer cabin? If you have three children, theoretically they could share the use, maintenance and carrying costs of the cabin. However, say one has moved to the East Coast, another travels too much to find time to use it, and the one who does use it frequently is emotionally invested in it but cannot afford to buy his siblings out.

Things become much more complicated if most of your assets are tied up in your family business. Selling the business to a third party would allow the estate to be split equally.  But what if one of your children has been working in the business with you and has the expectation that he or she will carry on the family business? This is an outcome that many founders dream about, but it raises all sorts of challenges, both in terms of the future success of the business and the equitable distribution of your assets to your other children. Is your child knowledgeable and talented enough to win the confidence of your employees, customers, suppliers and your other children? You might work out an arrangement where your other children have a share in the business profits, but they might dispute the business decisions of the child who remains in the business. For example, what if that child wants to plough a significant share of the profits back into the business to grow it? That would obviously adversely affect the income stream for the siblings.

Dividing farm assets in an equitable manner is particularly difficult if you want the farm to remain in the family, as farming is not highly profitable in relation to the value of the land. If you sell a portion of the land to compensate your non-farming children, it may make the farm a less viable business for the farming child. Financial professionals – accountants, estate lawyers, investment advisors – can help you find solutions; for example, if planning is started early enough, life insurance offers some interesting options which can provide for your other children.

But while professionals can find solutions that work on paper, the thorniest issues to work through are often emotional ones. Finding an equitable solution that everyone will perceive as fair takes time, patience and, most importantly, open and extensive communication to build empathy and awareness in all family members. An excellent resource for navigating family dynamics is the University of Vermont’s ‘Transferring the Farm Video Series’ (uvm.edu/farmtransfer).*  Each video presents the situation faced by a particular family in the midst of transferring their farm business to the next generation. The stories are told by the family members themselves and some are quite moving as they describe the complexities, both business and personal, that this process entails. For both the senior and junior generations, it is a process fraught with emotion. The senior generation is gradually handing over control of the business which has defined them and formed their identity. The next generation has their own ideas about how things should be done and often chafe at the resistance offered by the senior generation. The farming child is in the uncomfortable position where parent and boss are the same person. As the senior generation retires from farming, they still need an income stream, and the next generation often needs capital to make improvements necessary for the business to succeed in a rapidly evolving future. Providing for non-farming children adds another layer of complexity. Everyone emphasizes that this is a very long process – measured in years and even decades – and it takes a loving determination to make it work.

Planning for what’s going to happen when you are no longer here is difficult and uncomfortable, but the consequences of not planning are destructive to both assets and relationships. The first step is to sit down with your trusted professionals and take a detailed look at your situation. The earlier you start to plan, the better the outcome for everyone concerned.

 


* Note that the technical solutions talked about in the University of Vermont’s ‘Transferring the Farm Video Series’ are given in a US context (for example, Canadians cannot form Limited Liability Companies).

Jason Sirman is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above.  Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.