Insurance

FAMILY BUSINESS: Warning: Inevitable conflicts ahead for siblings

April 30, 2007

If you have at least one child working with you in the family business, it is virtually inevitable that conflicts among your children will arise at your incapacity or death.

You may have a "business child" and a "non-business child." So long as you are alive and well, you can resolve any conflicts between them. But what happens when you become incapacitated or die?

Sibling rivalry can not only destroy what you have worked so hard to build, but it also can devastate your family.

Don't get complacent just because no problems are obvious today. No one enjoys conflict, and your children's different expectations may lie hidden below the surface of family harmony. When you're not there to make the peace, however, conflicts could surface.

The non-business child may believe the compensation paid to the business child is too high. He or she may feel plans for business expansion are not warranted. Hiring and firing decisions could be questioned. If the non-business child owns stock in the company, the business child's decision to pay no dividends will be severely criticized.

And the non-business child's lack of accurate information about the business will not stop the questioning.

The business child, on the other hand, may feel that it is inappropriate for your other child to share in the appreciation in the company's stock, which may be attributable solely to his or her own efforts. Eventually, the business child may simply become tired of the endless harping from his or her sibling.

This is not a matter of the "good" child and the "bad" child. Rather, this conflict is the result of different goals and objectives. This conflict is not only inevitable-it is normal.

Nevertheless, steps can and should be taken now to minimize the polarizing impact of this conflict. Letting the children work it out after you are dead or incapacitated puts both the business and your family at risk.

In a perfect world, you will have sufficient other assets to give the non-business child to compensate for your gift of the business to your business child. Life insurance may be an effective way to equalize the two gifts.

Some clients want to treat their children fairly, but not necessarily equally.

If the non-business child receives an inheritance in the form of life insurance proceeds and securities, while the busi ness child receives an illiquid family business, some parents feel that the child receiving the liquid resources is getting more than an equal share.

If you do not have sufficient other assets and buying more life insurance is not realistic (the cost is prohibitive or you are no longer insurable), the child who works in the business should be put in control of it after you have died. This can be done by giving a majority of the stock to him or her or giving to the business child all the voting stock in the company. A minority interest or the non-voting shares can be given to the non-business child.

If some equity in the business must be given to the non-business child because there are insufficient other assets, I recommend that you plan for ways for one child to become the sole owner.

By using so-called puts and calls, for example, the non-business child has the power (a "put") to force the business child to buy out his equity over time, with interest. The business child likewise has the power (a "call") to force the non-business child to sell his ownership stake.

Each child would have the power to divorce the relationship, to permit the business child to run the company with no interference and to permit the non-business child to convert an illiquid asset into cash over time.

Conflict may be inevitable, but you have the power in your hands to provide a reasonable way for the children to resolve the issues between them.



Manterfield, a partner in the law firm Krieg DeVault LLP, assists family businesses with succession planning. The information in this column is not intended to be legal advice.
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