Equally Dividing Up Your Business At Death Is A Terrible Idea | #RichLifeLawyer Show 81
Equal does not always mean fair.
That’s what we’re here to talk about today, to think about your family dynamics when you are thinking about how you are going to pass down your assets so everyone in the family has the best chance to succeed.
When it comes to dividing up your business at death, it’s important to think about who is invested in the business, who is interested in the business, and who is most likely to do with the business what you want them to do.
There are other ways of taking care of those that don’t participate in the business that leaves everyone feeling good.
If you want those strategies, you’ve got to listen to the video!
Christopher Small wants to help you live a rich life now and leave a rich legacy when you are gone. He wants you to have your cake and eat it too. That’s what the #RichLifeLawyer Show is all about. It’s his way of helping you protect your family, create wealth right now, and establish generational wealth, for free. You’ll find information here on estate planning, financial planning, productivity, finance, self-improvement, family protection, tax avoidance, and anything else that will help improve your quality of life (and after-life). Christopher is the owner of CMS Law Firm LLC, a Seattle estate planning law firm. CMS Law Firm does three things really well: (1) estate planning; (2) probate; and (3) trust administration.
Transcript of Equally Dividing Up Your Business At Death Is A Terrible Idea
In this episode of the show we are going to talk about why dividing your business among your heirs equally is a terrible idea.
Hey everybody this is Christopher Small, and this is episode 81 of The Rich Life Lawyer Show. I am your host. I am the owner of CMS Law firm. I’m an estate planning attorney. I’m a business owner. I’m an entrepreneur.
And I’m here today to talk to you about something that is really interesting to me from a whole bunch of different perspectives, but is really probably even more interesting to you, and that is, why it’s a terrible idea to divide your business up equally among your heirs.
There are a few different reasons why this is a problem. But the main problem is that when you divide your business up equally…
Let’s say you have 3 kids and you have 9 shares of stock, to make this math super easy. So you’ve passed away, you give 3 shares to kid A, 3 shares to kid B, 3 shares to kid C. They are all equal owners, right?
Here’s the problem: imagine this scenario is probably true, if your kids are like mine.
You have kid A, kid A loves the business. He’s been working in the business since he was 4. He’s been sweeping floors, he’s been in the office with Mom or Dad. He loves the business. He knows the business inside and out. He’s great at the business and he understands the value that is within the business.
Kid B, he is a little bit more of the California Surfer type. He just wants to go along and get along. He loves hanging out with friends. He loves being social. He loves surfing. He loves the outdoors. The last thing he wants to do is be cooped up in an office for the rest of his life selling widgets,right? Whatever your thing is.
Kid C. Now Kid C — let’s just throw this out there. Kid C is a chef. She is magnificent. She owns her own restaurant. She has a cook book. She is on the Food Network. She’s out there slicing and dicing and cutting everything up, and just crushing it. Kid C is out there doing her own thing.
Now, you divide this business up equally between everyone.
Can you see how the problems are already beginning?
You’re going to have all the weight and the burden of running the business and maintaining the business is going to be on Kid A. Kid B and C though, are going to benefit from all that hard work.
And in a worst case scenario, kid B and kid C, who know nothing about the business, who know nothing about the way it operates, who know nothing about the culture, who know nothing about the people, have the ability and the authority to overrule kid A; to change the business completely if they want; to sell the business if they want; and do all the stuff that probably isn’t what kid A would want to do, or what you would want to do as the business owner.
So, it’s important to remember that equal is not always fair in these situations.
These are the conversations that we have all the time with business owners because it can be difficult to really come to grips with that and this example I gave kind of helps and helps you see the forest for the trees.
But it could also be tough because you think there’s no other way to do it, but that’s not true.
What you could do is, for example, you can give B — you could do a couple of things.
A) first of all, you could take out a life insurance policy for yourself for let’s say a million bucks. The business is worth a million bucks and you take out a life insurance policy for 2 million bucks, again I’m just trying to make the math easy for all of us, for me too because I’m on camera.
When you die, kid A who loves the business, wants to run the business, knows the business, would make the business grow and really continue on with that legacy. He gets the whole business.
Kid B, he gets a million bucks in life insurance and kid C, she gets a million bucks in life insurance. That way everything is fair. Everybody gets what they want. Everybody has the opportunity to grow and succeed in their life and your business also, which many would call the fourth child, I think I would probably call it that, also gets to grow and continue on and live after you’re gone.
Remember, fair does not always mean equal when you’re thinking about business succession planning.
If you want to talk about this more, if you want to talk about how to put a plan in place to make sure these things happen, please call me 206-659-1512. You can e-mail me firstname.lastname@example.org. And if you want to learn more about this whole process, if you want to learn about some things that you may not have thought about, some red flags, some landmines that you haven’t considered, I offer a free webinar, a free training for you that you can go to anytime and you can find that and learn more about that and register at cmslawfirm.com/business.
Thank you for your time, look forward to talking to you again soon.