Treating family members equally is not always the same as treating them fairly, and vice versa. To address this tricky "political" issue as it affects wealth transfer and control is an expert from Cresset, the US wealth management business.
A theme that arises frequently in this industry is whether
treating family members equally in financial terms is actually
fair or not. What, for example, happens with the member who
doesn’t want to help run the family business and pursue his/her
own career, but who also expects to receive a regular dividend
from the firm, while another is prepared to shoulder the burden?
That is only one such wrinkle to contend with. Fairness raises
questions of desert and justice, based on considering particular
circumstances. This is potentially very difficult for the
“politics” of family life, as history gives eloquent
To wrestle with these issues is Jill Shipley, senior managing director, family governance and education, Cresset, the US wealth management house. The editors here are pleased to share these views; the usual editorial disclaimers apply. To respond, email firstname.lastname@example.org and email@example.com
It may seem counterintuitive, but treating someone fairly is not always the same as treating someone equally.
Particularly with families of wealth, what is fair is not necessarily what is equal. Families typically strive for equality and work to avoid favoritism by treating all individuals the same. However, this approach can cause problems when it comes to passing down wealth or operating a family business.
With wealth transfer, the objective should be for there to be no surprises and to set reasonable expectations. To accomplish that and help maintain family harmony, the following are some key concepts and questions that should be addressed openly and honestly:
Education – What are the family’s expectations around higher education expenses and how those will be funded? Will each member of the rising generation get an equal amount to pay for college? Should they? What if one member of the family wants to go to medical school, and another wants to attend vocational school? What if one receives a full scholarship and another takes eight years to earn a degree?
Healthcare – Healthcare can be a sizeable expense for any family, particularly when funding multiple generations. But, as with education, should everyone in the family receive an equal amount to spend on healthcare, or should it be based on need? If someone has a chronic condition that requires long-term, expensive treatment, should that person receive more than the family member who is in excellent health?
Income – As a family grows and the members pursue different careers, inevitably disparities in income will arise. How does a family account for that when planning to pass down wealth? Does everyone still receive the same amount? Does the family member who is a CEO earning a seven-figure salary receive the same as the social worker? Should they?
Size of family – Successive generations of a family can come in all sizes. One family might have two dependents another might have eight. Do those families receive equal inheritances, where smaller families receive potentially significantly larger inheritances per person? Should it be calculated based on the number of family members for a more equitable approach?
Tracking gifts – Many parents, grandparents and other family members help fund major life events of the younger generations, such as paying for a wedding, down payment on a home, international travel, or expensive hobbies. What about those younger families who don’t make those types of requests for funds? Should they receive a larger inheritance in the end? Who should track these expenses, and should they be shared with the broader family?
For families with operating businesses, there is the added
complexity that comes with assessing who in the family should be
involved in the business and at what capacity, and how should
everyone in the family benefit from the business’ success. Again,
what is fair is not necessarily what is equal. One family member
may be the CEO of the business, while another might be a
part-time receptionist. Should they have equal compensation and
ownership? How about those family members who have no interest in
working in the business at all? Without transparent and open
conversation, it can be challenging for the family to maintain
strong relationships and for the business enterprise to thrive.