Napolitano looks at money.

Over the years, I’ve heard many special requests in estate planning conversations. For the most part, many people attempt to equalize their estate among their living, healthy children. While this plan may work for equality’s sake, it may be hard to manage if there is a family business involved.

Simply stated, when a business owner has the next generation as the heir apparent to the ownership side, that founder should consider the fairness of their estate distribution and then the reality of dividing a business among children with different talents, abilities and interests.

For example, let’s say that your entire estate is worth $3 million and it’s all in the family business. Hopefully that’s not the case, but I’m trying to make a simple point. If your estate plan directs that each child then receive 1/3 of that family business, you’ll need other plans to be sure that a family feud doesn’t eventually break out.

The typical situation has some children working in the business and others not. Your estate plan should have clear direction as to who is running the show. Include a job description, salary, bonus and benefits package clearly spelled out. The last thing that the child who has invested years into the family business needs is a disinterested sibling looking for money or trying to tell the operating sibling how to do things.

Your next generation owner will also need a succession plan. Just because they’re younger than you doesn’t mean that they’ll outlive you. Making a contingent succession plan for your next generation of owners should happen as soon as possible.

Other alternatives exist, even for the family that doesn’t have other assets to equalize their children’s inheritances. One is to force a mandatory sale of the business from the non-working owners to the sibling who is running the show. That price should be at fair market value, presumably $3 million in this example. This sale in most cases would have to be an installment sale where the sibling owning and then operating the business would sign a promissory note to the other two siblings and make payments with a fair rate of interest over a reasonable time period.

Another option is to buy life insurance on the founder so that there is money to fund the buyout of the other two children. In the end however, that means children 2 and 3 each get $1 million and child number 1 walks away with the $3 million dollar business.

If you insist that all children own the business as it will hopefully grow in value and then be sold someday, consider making the inheritance into two classes of stock, voting and nonvoting. This also falls under the subject of letting the child with the experience and knowledge run the business. This child must be fair to all shareholders as he/she is the fiduciary for all owners, both voting and nonvoting and must act responsibly as it relates to work and financial matters.