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June 06, 2010 at 08:00 PM
Antonin Scalia already had experience working with a group of nine when appointed to the Supreme Court in 1986. He was the father of five sons and four daughters.
Being a conservative on matters of law, he was questioned about his oldest offspring, whose opinions were more liberal than his own.
“In a big family, the first child is kind of like the first pancake,” the Justice replied. “If it’s not perfect, that’s okay. There are a lot more coming along.”
When children of a High Court justice fall far from the tree, the event makes good media copy. But when the offspring of an owner of a family business choose not to follow in the footsteps of their entrepreneurial parent, it can create significant planning problems.
Consider three common concerns when only some of a business owner’s offspring expect to become active in the business.
Playing Percentages In The Will
The most typical dispositive instruction for an estate left to children gives each an equal fraction of the property. This is fine, as long as the testator is confident the children will receive equal shares of every asset and can resolve their differences about particular items.
But when a business owner intends that certain children are to inherit the business and others are not, his or her intentions must be expressed by directing that the business go to the intended future owners. As obvious as this might sound, clients often need be told that instructions about who should inherit a business must be exact and unambiguous in a will or trust and understood by all before death.
Specifically designating who will get the business usually won’t alter a testator’s intention that all children be treated equally. This can be a problem, however, if the business accounts for much of the estate’s value. For example, two children may have difficulty dividing an estate if one is to inherit a business whose value is more than half the value of the estate.
One solution: If the parent is insurable, life insurance can be used to bring additional value (and liquidity) to the estate, thus allowing for equitable treatment of heirs without giving ownership in the business to disinterested children.
But this strategy presents other concerns. Among them: (1) Does the purchase of life insurance to enlarge the estate create financial underwriting issues that might give a carrier reason for pause? (2) Is the estate large enough that the insurance proceeds might create or aggravate estate or inheritance tax problems? If so, can the insurance be held outside the estate in a manner that still treats all children impartially and as intended?
