Goal 3: Treat all children equitably

Colin and Gillian’s Advisor highlighted an important distinction between treating children equally and treating them equitably when it comes to succession and estate planning. The couple wished to preserve a sense of fairness in their overall plan – neither over-compensating or penalizing daughters Robin and Zoe, who are not actively involved in the business. “To preserve long-term family unity in this situation, it may be best not to provide one set of children with the equivalent dollar amount in liquid assets versus the other family members who may never be able to sell the family business or gain liquidity,” Mr. George recommends.

Insurance can be an effective way to solve for a number of these issues, Mr. George suggests, depending on what the family wants to accomplish:

  1. Personal insurance can be used to equalize the ownership disparity between the siblings who have an active and passive role in the business.
  2. Insurance can also be considered as an effective way to ensure there is liquidity to pay for any taxes owing on Colin’s ownership in the business when he dies.
  3. Many family businesses look at key-person insurance to help the business continue in the event that one of the siblings who is active in the business dies.
  4. Colin could also use insurance as a way of creating some liquidity for the company in case one or more of the children want to be bought out of the family business.

In addition to insurance, some families also consider existing assets like pension assets, investment accounts and real estate, among others, to equalize the distribution among children – and help maintain unity. Conversely, other families are content with a situation in which siblings do not have equal ownership. “If they truly trust their siblings who are managing the business to generate strong returns for them, this can also work,” Mr. George notes. “However, this is where governance is so important to protect everyone’s interest and to continue to motivate the family to grow the business.”

Summing up the situation, Mr. George emphasizes that ensuring there is sufficient trust and communication is key to a successful and effective succession plan.