An equal distribution of wealth is usually considered a fair distribution. When each of your children receives an equal share of your wealth, it is difficult to argue that any child has been treated unfairly. An equal distribution eliminates hurt feelings, jealousy, bitterness, and family discord.

What are the primary planning solutions?

If you plan to sell your business, then you do not have an equalization problem. Cash proceeds are easily divisible. If, however, one or more of your children will succeed you in the family business and you have few nonbusiness assets, then you may be facing an equalization problem.

If you decide you want to achieve a more equal distribution between your participating and nonparticipating children, you should consider the following planning solutions. Two or more of these plans can be combined or modified to help you achieve your goals.

Joint ownership

Joint ownership, also known as joint tenancy, is one of the ways two or more people, called joint tenants, can own something together. As joint tenants, each owns the whole property and is entitled to use it as he or she sees fit. Joint tenancy allows you to avoid probate, which can be time consuming and costly. If one joint tenant dies, the property automatically passes to the surviving joint tenant.

You can equalize distributions to your participating and nonparticipating children by granting them joint ownership of your closely held business. As joint owners, they each own an undivided and equal interest in the entire business.

Example(s): Hal owns a home heating oil business worth $200,000 and nonbusiness assets worth $120,000. He has two children, Bob and Ken. Assuming that Bob and Ken want to be involved in the business, Hal can divide his nonbusiness assets equally between them and leave his business to them as joint owners. As joint owners, they share ownership of the company. Each will possess an undivided one-half interest in the entire company and have an equal distribution of the company.

CAUTION: Granting joint ownership of your closely held business may be a taxable gift, subject to gift tax.

Nonvoting stock

Nonvoting stock is stock that is issued without voting rights. It allows your nonparticipating children to share ownership of the business without having any control over business decisions and operations.

Example(s): Ken works in the family business. Nellie-Mae does not. Ted can create voting stock that will be left to Ken and nonvoting stock that will be left to Nellie-Mae. Ken will have control of the business, free from any interference from Nellie-Mae. Nellie-Mae can sell her stock back to the company for cash or keep it and collect dividends, assuming dividends are generated.

Minority position with buy-sell over time

A minority position with a buy-sell over time is a way to pass control of the business to your participating children and draw cash out of the business for distribution to your nonparticipating children. The cash is generated by forcing the company to repurchase your shares of stock upon your death using a buy-sell agreement.

Example(s): Ted transfers stock to Ken to make him a minority shareholder. Ted, Ken, and the company agree that, upon Ted’s death, the company will repurchase Ted’s remaining stock by making payments over a period of time. The payments will go to Nellie-Mae.

Spin-off

A spin-off is a way to leave a portion of your business to your participating children and sell off the remaining portion. Proceeds from the sale will provide cash for your nonparticipating children.

Example(s): Ken works in the installation and service department of the family business. Ted can create a new company by spinning off his installation and service department. He can then transfer the new company to Ken and sell the remaining portion of the original business. The proceeds from the sale will be available for distribution to Nellie-Mae.

Life insurance

This is a way to leave the family business to your participating children and leave life insurance proceeds of equal value to your nonparticipating children.

Example(s): Ted’s business purchases a life insurance policy that will pay Nellie-Mae $80,000 upon Ted’s death. Ted will also leave $120,000 of nonbusiness assets to Nellie-Mae. Ted will leave the business, valued at $200,000, to Ken. Each child will receive assets worth $200,000.

Shareholder agreement

A shareholder agreement can be used to leave equal amounts of stock to each child, ensure that the stock remains in the family, and allow children an option with respect to their inheritance. Participating children have the opportunity to buy their siblings’ stock, while nonparticipating children have the option to sell their stock, but only after offering the participating children the first option to buy.

Example(s): Ted arranges to have appropriate rules and restrictions regarding future transfers placed on the stock. He will leave equal shares of stock to both Ken and Nellie-Mae. If Ken chooses, he can repurchase Nellie-Mae’s stock according to the rules. Similarly, Nellie-Mae can sell her stock but must give Ken the first option to buy.

Will or trust with equalization clauses

A will or trust with an equalization clause directs your executor to equalize treatment among children before making final distributions of your wealth. This works only if you have sufficient nonbusiness assets to distribute to the nonparticipating child.

Example(s): Ted adds an equalization clause to his will or trust, instructing his executor to ensure that Nellie-Mae receives a distribution that is equal in value to the value of the business received by Ken.