How to pass on the family ranch or farm to the next generation requires some careful consideration and professional help.
The terms “fair” and “equal” are often used interchangeably. However, according to Scott Heintzelman, CPA with McKonly and Asbury LLP in Camp Hill, PA, the two aren’t synonymous, especially when it comes to passing the family ranch or farm to the next generation.
“Equality means everything is the same in a given situation. Fairness, on the other hand, implies that just treatment is given to everyone. This can vary depending on a person’s needs and contributions,” he says.
This can become a flashpoint in family relations when dividing up family business assets. For instance, Heintzelman recalls one example where a business owner wanted to treat his three children equally while developing a plan for transitioning his business. The problem is that two of his three sons had worked hard and diligently in the family business, growing and nurturing it for 20 years. The third son never showed any interest in the business.
“This discussion became very easy as we simply split the business among the two sons working the business and then split the remaining family asset values evenly among his three children.”
For many, however, splitting family assets is not so clear-cut. “Often the only real asset is the family farm and one of the children is a daughter who has chosen a career path of raising her children and not to be active in the family business. What then?”
It is these circumstances that become more difficult to reconcile. “However, I have found that when people see themselves only as a ‘family business,’ they struggle with the desire to treat everyone equally – this despite varying contributions to the business,”
Heintzelman says. “These families tend to focus only on equality as the deciding factor when setting salaries, paying bonuses and passing assets on to the next generation.”
When people see themselves as a “business family,” however, they tend to focus on good governance (including a family charter), sound business principles and a reward system based on performance, therefore attempting to reduce nepotism and entitlement, Heintzelman says.
“These families usually have an advisory board and a family involvement policy in place to help manage the family, and often have family meetings with all family members, explaining the difference between being fair and being equal,” he says. “These families tend to focus on the qualitative and not simply the quantitative variables. With family, this is the only way to truly achieve balance and, hopefully, harmony.”