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Equality vs practicality – how to divide your estate

Colleen Lief is a freelance journalist based in the US.

When deciding how to divide up your estate it is vital to know where each part of your wealth is going. But how important is it to treat all your heirs fairly? Colleen Lief explains how to distribute your wealth and offers examples of those who have got it wrong

Estate planning can be a paperwork-intensive exercise. You may not even be completely clear on what exactly it is and what is involved. But few things can be as far-reaching in setting the ground rules for how the business conducts itself and the tone of family relationships for generations to come. This is because estate planning not only speaks to important wealth issues, but can also connote one's role and position in the family.
"Who gets what" is a loaded subject that, if done without sufficient care, may turn siblings, cousins and in-laws against each other and can affect parental relationships and the legacy of the outgoing generation.

It's true enough that tax and capital accessibility issues must be addressed in time to allow for the consideration of a full range of pragmatic inheritance options. But some family leaders put off these uncomfortable decisions as they can cause acrimony and jealousy.

The good news is that, while such emotional topics can instigate problems among family members, thinking and talking about them openly may actually bring the group closer. Avoidance never will. A key to success in estate planning, as in many areas central to life and business, is frequent, effective communication.

Equality is not always good
The historical approach of handing control of the company to the eldest son with a financial settlement going to his sisters seems to have given way in recent years to the more modern philosophy of equality. The shift away from agrarian economies and the trend toward gender equality have changed the context in which estate planning decisions are made.

Although equality seems to be an evolutionary improvement on the former way of doing things, it has not turned out to be so clear in practice. Even distribution of the business among heirs can be unfair and, on occasion, unwise. Individuals bring varying levels of education, experience, interest and involvement in the enterprise to the table. Giving shares to family members who are more interested in art than chemicals, for example, can result in a multitude of woes.
 
"Discrimination on gender grounds is fraught with problems, but equality has its own pitfalls," says Peter Leach, chairman of the BDO Centre for Family Business in London. "Some family members will be
commercially-minded, others will not. Everyone wins when family managers have the incentive for success and family shareholders can count on regular dividends and provide the checks and balances that make any organisation healthier."

But inheritance issues generally involve much more than money. A person's role and importance in the family can also be defined by how an estate is distributed. When the eldest son receives control of the family firm and siblings receive only cash, the message can be exclusionary. No one besides the sole male heir may play an active role in family, much less corporate, governance. With one person holding all the financial cards, the balance of power may be disrupted.

One possible solution to these problems could be to vest shares with those family members interested and active in the business and bestow financial assets and responsibility for the family foundation or family office with those whose interests and talents lie elsewhere. Concentrating ownership of the business, while distributing wealth broadly, acknowledges the skills, competencies and worth of each member of the family and could provide the best overall outcome for the business.
 
Perhaps considering business ownership and family leadership as separate, yet equal, realms of influence can help maintain balance in the group. An updated, customised view of equality, allowing each member to serve the family and business to their greatest potential, is the likely result. However shares and positions are actually distributed, the greatest tool in preserving family unity is a commitment to respectful, forthright discussion among the next generation.

Risk and opportunity
Family leaders at any stage have to ask themselves two important questions: Is what's good for the family good for the business – or vice versa? How can I best engage the next generation and allow them a voice in their own future?
 
The first question is not always easy to answer but deserves careful consideration. "Are we a family concerned foremost about the business or the family?" It seems paradoxical that when priority in planning is given to family harmony, the business seems to do fine. But we all know that relationships can be harder to manage than business problems. A business challenge may be surmounted by determined and committed shareholders. But the outcome is much less certain when ownership is fractured or disinterested.

The second question presents even more of a quandary. While dividing one's estate is often seen as a solitary task, involving heirs in deliberations on their future wealth, role and relationships makes sense. It is imperative to the success of the next generation that they help to establish the guiding vision and stated beliefs of the family as well as the governance structures that will help make them a reality.
 
"In the end, it doesn't matter as much how the estate is structured as long as the process is open and inclusive," says Leach of his experience in advising family businesses. "The only general rules I've observed are: play to people's strengths; empower family managers; and provide an exit mechanism for everyone."

Knowledge and understanding
Ideally, the next generation should be encouraged to select its leaders and begin building an effective team as soon as possible. That's one of the best gifts heirs can receive – timely knowledge of where they stand in the family and the business. Lack of transparency on this issue can cause enmity in the family. In this context, clarity translates into freedom of choice that, ironically, often leads to greater personal commitment to the family group and the enterprise.
 
We traditionally think of this challenge occurring as the founder passes the company to which he devoted his life to the next generation. But this difficult decision can confront the heads of family branches at any stage. Some multi-branch family governance structures provide overall succession and wealth distribution guidance, but leave decisions about specifics to each individual family group. Unless a family establishes a fundamental vision for maintaining equilibrium through the distribution of power and money, these issues may be faced by successive generations of family.
 
Establishing core values and a collective philosophy requires open, purposeful discussion. Only by encouraging frank dialogue can a family arrive at a set of core principles that accurately reflect its values. So while tension may occur during the course of this process of self-discovery, families should not shrink from sensitive discussions, but embrace them. It takes courage but, in the end, the payoff of emerging with a vision and governance structures that will lead the family and business far into the future far outweighs the discomfort. Talking about what brings the family together may build closer relationships, mitigating the effects of time, distance and divergent interests.

Thinking and debating the family's overall approach leads not only to resolution on how to divide the spoils, but also to installing family governance mechanisms, such as a family constitution and shareholders agreement, that will ensure this vision is carried out. And with family members of all generations getting to know each other better as people, rather than disrupting a fragile peace, a more authentic understanding and appreciation for each other and their common heritage may take its place.

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