Disputes With Children Not Involved in the Business

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It seems that most parents want to treat their children fairly and equitably. In the case of family businesses the simple division of the business into equal shares is usually neither fair nor equitable. Dealing with diverse needs and often-conflicting objectives of beneficiaries is always a challenge. Doing so is more complicated when the major financial asset is not easily divided or when there are adverse tax consequences or other factors ruling against liquidation.

Just as all people have different strengths and weaknesses, some family members can make more meaningful contributions to the family business than others can. In the case of those not making any contributions, who have decided to do something else with their life, parents are challenged to give them part of the family fortune even though they are not involved in the business.

If the transfer of the business is not handled properly, a rift can develop between the children. The child working in the business may feel a sense of entitlement while the other children may feel jealous that the child who works in the business received the bulk of the estate. The other children may also feel like the child who worked in the business is closer to the parent because they work together on a daily basis. The child who works in the business may feel that he or she is the one that helped make the business grow, and was the one who was there day in and day out contributing to its success.

For example, if there are three children, a division into thirds seems equal based on the numbers, but it fails to take into account the risk that comes with being the owner of a closely-held business. There is no ready market for the ownership interest. You can’t use it to buy groceries, pay the mortgage, or send the kids to college. It has value only to the extent it produces income for the owner. In addition, the children active in the business have often worked greater hours, had greater risk, or have been paid less than if they were working for another business. If that’s the case, then clearly the one-third division isn’t equitable or fair.

The children who are active in the business become responsible to create whatever value is to be received by all the owners. This generally requires a significant personal investment of time and energy and creativity by the active children in the business. They invariably believe they should be well compensated for that time and energy and the attendant risk.

It’s very common that the child who is not actively involved in the business feels that the business-active child or children are overcompensated. It’s also common that the business-active child will begin to resent the inactive owner child for anything they received from the business. Additionally, every dollar distributed from the company reduces the amount of capital available to be invested in the company to assist in its growth. These differences are part of why there are countless families that have been irreparably damaged by dividing the family-owned business equally between active and inactive children. Proper planning anticipates and prevents these common problems.

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