BY PROF. ENRIQUE SORIANO
DUE TO the insistence of some readers to learn how to transfer their wealth the right way, I am writing Part 2 of my article.
With the valuation in place, we suggested to the founders that instead of splitting the entire estate 50/50, they should consider giving the business to the dedicated Son B and the other non-core properties to the non-active Son A.
Was this estate transfer a fair split? The 50/50 scheme was not really the exact value. In order to remedy the slight difference, we factored in cash by way of insurance to even out the slight discrepancy.
The rationale of our recommendation
For B, assigning him the business was the right thing to do. Before the founder decided to assign him ownership of the family business, the father was set on giving his two children equal ownership of all his assets.
I felt that the founder acted the part of a father rather than a business owner. His decision was irrational and emotional and lacked the logic of a smart deal-making business leader that expanded the family business to where it is now.
It also seemed to my team that giving Son A shares created a system meant to undermine growth and disrupt the business rather than ensure his legacy.
As we continue to present the variations of the 50/50 scheme, the wife of the founder raised some issues. She said that she understood this seemingly equal solution, but it struck her as unfair for Son A, “If we are giving Son B shares in the family business, it is like advancing his inheritance, right? What about for my other son? Shouldn’t we do the same for him? The non-core properties are still under our names. The non-real estate assets were insignificant.”
“The assets were primarily a mix of residential and agricultural properties and giving these land to Son A was not providing him with any wealth or income unless he is allowed to sell it, of which my husband is not in favor for as long as he is alive,” she further explained. “Should we transfer the title to him now?”
After a series of sessions, the father finally acknowledged that estate planning is indeed a process, “I am more convinced that as we age and contemplate on succession planning, we should not just focus on who will take over the business but also on how ownership is meticulously transferred. I should have planned this many years ago, not when we are slowly stepping back.”
It is a fact that the family business gets a little more complicated as it goes through a generational transition where sensitive topics related to wealth transfer, tax management, and the concept of fairness get prominent attention.
He added, “One thing is clear, the interest of any family member NOT working in the business differs fundamentally from the best interests of those that WORK in the business.”
The actual case presented here is supposed to be easy and effortless: You have two children here, one who’s involved in the business while the other who’s not active. Meanwhile, the founding generation has two main assets: A thriving family business and real estate, both objectively appraised and equalized from a market value standpoint by way of insurance. Yet, for all this situation’s simplicity, it highlights a remarkably sensitive challenge. It puts to the test the parent owners’ fairness to everybody in formulating and implementing a solid exit plan meant to benefit the family business while also initiating the transfer of leadership and ownership from the founder to the offspring at the same time.
But I can tell you now that many real-world situations are more complex, complicated and challenging than what this client faced. So if you are still in a dilemma but craving to perpetuate your business and ensure your legacy, it is high time you consider these overarching fundamental pieces of advice when you make critical decisions:
• Focus on the Greater Good
• Focus on Fairness rather than Equality
• Focus on whatever available Time you have/PN
