Is Equal Always Fair? How Do I Divide My Assets Fairly Amongst My Children?

When it comes to planning your legacy as an affluent business family, few decisions carry as much weight, or potential for discord, as how to divide your assets amongst your children.

The desire for fairness is universal, but the path to achieving it is often fraught with complexity, emotion and unique family circumstances. For many, the instinct is to split everything equally. But is equal always fair? And how can you ensure your intentions foster unity, not resentment?

The Allure - and Limitations - of Equal Inheritance

For generations, the default approach to inheritance has been simple: divide the estate into equal shares for each child. This method is straightforward, easy to explain, and, on the surface, seems to avoid accusations of favouritism or bias.

Equal division may work well when the estate consists mainly of liquid assets, such as cash or publicly traded securities. But for business families, wealth is often tied up in illiquid assets such as family businesses, real estate and art or wine collections, which makes equal division more complicated.

Here are some other factors which might make equal division challenging:

· Assigning a fair value to assets like businesses, real estate or private investments is inherently challenging. Market fluctuations, differing appraisals and emotional attachments can all complicate the process.

· How do you split a business three ways if only one child is involved in its operations? If only one child is active in the family business, giving them an equal share alongside siblings who are not involved can create tension, or even jeopardize the business’s future. Conversely, excluding non-involved children from business assets without compensating them elsewhere can breed resentment.

· What if one child has already received significant support, such as help with a home purchase or business venture, while others have not? Lifetime gifts or support can create imbalances if not factored into the final inheritance. Equalizing these differences requires careful documentation and clear communication.

· Children with special needs, financial vulnerability or caregiving roles may require more support than others.

· Different assets may have different tax implications. A family business passed to one child may come with ongoing management responsibilities and tax burdens, while cash or securities may be more straightforward to inherit.

How do I Ensure that My Assets are Distributed as Fairly, and Equally, as Possible?

1. Equalize with different assets

If only one, or some, of your children will inherit the family business, consider using other assets to equalize the inheritance for your other children. For example, the business successor(s) receives the company, while siblings receive equivalent value in cash or investments.

Life insurance can be a particularly effective way to create liquidity for equalization. For example, if one child receives a business interest, a life insurance policy can provide cash for the other children, ensuring everyone receives an equivalent total value.

Alternatively, consider giving non-voting shares to children who are not involved in the business. This will allow all your children to share in the ownership of the companies without affecting the leadership and control of the family business.

You may also wish to consider engaging independent appraisers to value complex or illiquid assets in the process of planning your legacy. This ensures transparency and reduces the risk of disputes over perceived favouritism or undervaluation.

2. Use Trusts for flexibility

Trusts are powerful tools for business families. A family trust can hold various assets for the benefit of all children, with distributions made to provide for specific needs, or according to specific milestones.

Staggered or discretionary trusts can be used to distribute wealth over time, protecting heirs from poor financial decisions and shielding assets from external risks.

Provisions can also be made to take into account any special needs and circumstances of specific beneficiaries. 

3. Consider lifetime gifts and adjustments

If you’ve already provided significant support to one child, you can adjust the inheritance to reflect these earlier gifts. This may mean reducing that child’s share of the estate or providing additional assets to other children to balance the scales.

4. Family holding companies and buy-sell agreements

For families with significant business or real estate holdings, structuring ownership through family holding companies or similar entities may allow for more flexible division and management.

Using tools such as buy-sell agreements can provide mechanisms for siblings to buy out each other’s interests, reducing the risk of deadlock or forced sales, while ensuring that non-involved children are fairly compensated.

5. Consider tax implications 

It is crucial to consider tax implications in setting out inheritance plans. Take into account the location of various assets as well as the potential tax burden faced by family members residing in high-tax jurisdictions, as this may impact the type of assets which certain family members may be able to inherit without incurring significant taxes.

Work with professional advisors to craft a well-structured plan which can potentially minimize or mitigate tax burdens and maximize the amount of wealth passed on to your heirs.

Communication and Family Dynamics

However you choose to distribute your assets, transparency is critical. Many parents choose to explain their reasoning in advance, which, even if difficult, can preserve family unity in the long run.

Open, honest discussions about your intentions and values are crucial. Family meetings can be invaluable for sharing your vision, explaining your decisions and addressing concerns before they become grievances. Alternatively, consider sharing your intentions in writing, setting out your reasoning, values and vision for the family legacy.

Consider engaging professional advisors such as estate planning consultants, who can provide objective guidance and mediate difficult conversations.

In Conclusion

No matter how carefully you plan, the emotional side of inheritance cannot be overlooked. At its core, estate planning is an act of love and foresight. Inheritance decisions are about more than money - they are about recognition, legacy and family relationships.

By combining thoughtful planning, clear communication, and the right professional support, you can craft an inheritance strategy that honors your values, preserves your legacy, and, most importantly, keeps your family united for generations to come.