Will Your Dealership Estate Plan of Equal Backfire?

Will your dealership estate plan of equal backfire? It probably feels good to tell your kids you are treating everyone equally. No one can say, “Mom and Dad loved my sibling more than me,” and everyone should be happy – right? Not necessarily! You are likely to create a whole set of problems today and tomorrow, especially when a family business is involved.

First, there are only two ways to be equal – have only one child or sell everything and distribute the cash equally. For most families, the one-child solution isn’t an option, and if the goal is to successfully continue the family business legacy, selling is not an option.

Dealership Estate Plan – When Equal Backfires

Assets and Expectations

SO WHY DOES DIVIDING EVERYTHING EQUALLY POSE A PROBLEM? If you have children involved working in your business and children who are not involved, there is a huge difference in the way they view the assets, and expectations can get everyone into trouble. In working with family business owners for over 40 years, my experience has been that parents have often communicated to their children that everything would be divided equally with the expectation locked in – ‘Mom and Dad always said we’d be treated equally!’

Family Business Matters

What happens after mom and dad are gone? I once told a business owner what was likely to happen if he followed through on his plan design that all three of his children would inherit the stock. Two of his children were actively working in the business, and one was not, so sometime after the parents had passed, there would likely be a conversation started by the non-active child.

“Hi guys, Mom and Dad would be so proud of the great job you are doing running the business! So, when do I get paid?

“You don’t.” “But I own 1/3rd of the business.” “Yes, but you don’t work here.” “So, what – my 1/3rd is worth millions! You two are getting paid a ton of money.” “That’s because we work here.” “We don’t distribute profits – we reinvest in the company, just like Dad did.”

“So, when do I get paid?” “When we sell.” “When are you selling?” “We aren’t!” “So, I get nothing, and you get millions – that’s not fair!”

“Oh, by the way – you owe estate tax on your 1/3rd of the stock.” “That’s really not fair!”

Parents don’t want to be viewed as favoring one child over another. But the truth is your children are not equal – in terms of talents, commitment, work ethic, attitude, education, and ability to impact your company. Even if all your children are working in your business, there is a strong possibility that they would have different jobs and pay plans if they weren’t your children, and whether they own stock would be based on merit. The obvious caveat to this statement involves family businesses in which more than one child is active, each making a significant contribution, albeit in different ways.

Recognize Different Perspectives

It has often been said, ‘EQUAL IS NOT FAIR, AND FAIR IS NOT EQUAL,’ and in my experience, this has been true. If you pay everyone the same, just because they are your children, someone is likely to be overpaid and someone underpaid. And it often leads to suppressed feelings – ‘why am I doing all the work and my brother gets a free ride!” OR “I own an equal share – why aren’t I getting paid the same?” But unfortunately, most people tend only to see things from their perspective, and therein lies the problem.

In succession planning, this situation is passed down from generation to generation all too often, and the cousins usually are less inclined to give each other the benefit of the doubt. Pay must be merit-based, and stock ownership needs to reflect a person’s contribution to the productivity and profitability of the company.

Clarify Expectations

Clarifying expectations among your heirs often involves difficult conversations correcting messages you have conveyed over many years. Of course, no parent likes having this type of tough conversation with their children! But business owners know the importance of making tough decisions, and addressing challenging issues is vital to the long-term success of your business.

Don’t kick the can down to the next generation to solve. You know equal is not fair, and fair is not equal. Make sure your estate and business succession plans are NOT based on EQUAL – your business’s continued success and family harmony are at stake!