A house divided cannot stand. And a barbecue pit divided cannot smoke.

A few years back, a famous restaurant called Kreuz Market in Lockhart, Texas, 25 miles south of Austin, became an object lesson for business heirs and financial advisors. Kreuz (pronounced "Krites"), which came into existence around the turn of the last century, became embroiled in an internecine family squabble after the restaurant's longtime owner had died and passed on the assets to his children. He left the business to his sons, but left the building it was housed in to his daughter.

It would seem to have been an equitable way to split up the assets between the children. Instead, the arrangement left two of the children with a bone to pick. One brother had retired when the daughter asked the other for a rent increase. The feud became public-even hitting the national news-and the brother eventually moved Kreuz up the highway while the daughter opened a new barbecue place, Smitty's Market, as a competing franchise under the old shingle.

The fracture in the family spawned two kinds of barbecue from the house divided. Good for barbecue fans, maybe, but not for family values.
It's a common occurrence in family planning: A road to hell paved with good intentions-usually the desire of parents to leave behind an equal legacy for all their children. But nothing looks the same after it's been through the sausage grinder of estate planning.

The problem is, say advisors, that it's not always easy or even desirable for a paterfamilias to carve up a business 50/50 (or in thirds). For one thing, one of the children might have been working in the business all his life and might feel more entitled to it when the parents die, even if another child feels he or she is getting short shrift. Another child might be cash poor and need to liquidate things like businesses, land, houses, jewelry, etc. Or the business might be left to more than one sibling, and the child who labored in the salt mines all those years suddenly finds himself with partners among his own family-people imposing their will on a business they know nothing about. In fact, planners say, it's that very moment when parents say everyone will get an equal amount that the trouble always starts.

"The formula for disaster is to let the children inherit the business equally when one's working on it and another is not," says Stewart Welch III, an advisor with the Welch Group LLC in Birmingham, Ala. "That is almost guaranteed where you're going to create conflict in the generations."
But there are many ways to skin the cat-the most obvious one being to use life insurance, which would give the child who is not in the business an immediate cash stream tantamount to a stake in the business. This is usually the first plan.

"Say [the estate] is worth $3 million, and $2 million or $2.5 million of that is life insurance," says Welch. "So it's cash. The one child inherits the business worth a million and that is verified by a third party, and the other two children get a million in cash and everybody is free to do their own thing. The child with the business might do better than the children who inherited the cash or might do much worse. But everybody takes their chances."

Besides paying off the children, life insurance can also give the child who inherits the business some cash flow to tackle thorny estate taxes.
But what is demanded in every case is lots and lots of talking beforehand to understand what the parents really want, and to do it before they die.         Welch calls these meetings "family councils," in which issues of jealousy and questions about what is really equitable or fair come out long before the matter becomes an all-out war between siblings over longtime slights both perceived and real. He holds them every two or three years.

"We often see resentment where a child inherited the business," he says. "'Oh, he was the favorite child and look how much he's worth.' ... So he got a business that was valued at a million. Ten years later it's worth $6 million, and they're worth $1.3 million. And they think [the child in the business] got the charity of the estate. And the reality is that he's the one who took the risk."

Norm Mindel, a financial advisor and lawyer with Genworth Financial in Schaumburg, Ill., says that disputes like the Kreuz barbecue feud are almost predictable. "You've got to have the deal cut while everybody is still alive and somewhat rational," says Mindel. "And when you look at this, you've got to figure out now not only what is reasonable for the rent, but what is also going to placate the non-working children." The rent must be reasonable to the family as well as the IRS, and an agreement should provide for the rent to go up with inflation so that both parties feel reasonably compensated, he says.

"Usually the problem comes," says Jim Budros of financial advisory firm Budros, Ruhlin & Roe Wealth Management in Columbus, Ohio, "because an estate owner, when making a legacy policy statement, says I want to treat all my kids equally. And the question is, 'What's equal?' And then we quickly launch into this question of fair or equal. Does fair have to be equal and vice versa? Equitable and equality and evenness are not always the same thing."

That means, says Budros, he must interrogate his own clients and pepper them with anecdotes about what fate has befallen other families. After all, many businesses, say planners, do not survive a first-generation transfer, and much much fewer get to the second generation without imploding or being sold. So treating kids equally has to take a back seat to what the long-term goal is.

"Because the minute you do that," Budros says about an even split, "you have to say 'What is the value of this thing?' And if this thing isn't going to be valued in a fair market way for sale-willing buyer, willing seller-then ... issues of alternative valuations come into play. Comparable valuations are very difficult. Valuations for gifts and family partnerships and so forth are so very different than fair-market valuations for sale. It's one of the most knotty problems."

Another method of trying to make things equitable is by recapitalizing the company, says financial advisor Barry Rabinowitz a CFP licensee in Plantation, Fla. "The ones that aren't managing the business, all they're interested in is 'Show me the money,'" he says. "In a recapitalization, the parents say, 'OK, I got the business growth and I recapitalize the voting stock, preferred stock and the kids that don't care about the business get a fixed rate of return, and the child gets the common stock and the growth. The other kids just want income, they want no voice in the business.     Everybody is different. It may be that after five or ten years they have to be bought out or given a lump sum or they're just going to get an income. There are a lot of variations you can do."

Sometimes the non-working kids want voting shares too, and the parents could give them some, but not enough to control the company-maybe one child gets 51% and the other two split 49%. Budros, however, sees this as another point of conflict.

"That creates sort of the classic inside-outside problem and puts the kids who are not on the inside without voting control at an extraordinary disadvantage. I just gave them two to three percentage points less, but caused them not to have any control, therefore no ability to help secure his own self-interest." Budros refers to this idea that as the "idiot's idea of fairness."

C. Zach Ivey, a planner with Lincoln Financial Advisors in Mountain Brook, Ala., says that in a perfect world you can buy life insurance to give the non-working siblings a fair shake, but sometimes with really pricey assets buying the insurance may be too expensive. In June, he was working with a family farm that had a value of $11 million. One son worked in the business while two daughters did not.

"The main thing is that from this day forward we have what I like to call opportunity shifting," Ivey says. "Any new business ventures or new growth from the business from this day forward [will] be in the son's name." In this case, he says, if the farm needs to acquire new land that requires a new company name, the son's name will be on it. Such shifting allows the active heir to receive some of the benefit today. Because it's an asset-rich business and the land has a tangible value, Ivey says that the family can put a buy-sell agreement in place that's triggered upon the death of both parents.

"The active child gets a first refusal of buying those land assets," Ivey says. "And he can go out and borrow the money and purchase them from his two sisters, and if he doesn't want to do that then they can sell the land and create cash that way."

First A Blueprint, Then The Tools

Budros distrusts life insurance as a first-rank solution to problems of legacy planning. The hard part of this subject, he says, is drafting the mission statement and making sure that everyone is on the same page and that everybody values the business the same way. When those problems are solved, picking the tools should be easy, he says, and life insurance isn't always the No. 1 choice.

"Life insurance is often considered as the solution of first rank rather than last rank," he says. "I think it should be somewhere in between. I mean, the life insurance guy wants to say how simple it is to the business owner or farm owner: 'Just buy the life insurance. It's easy, and pay me $50,000 a year or $100,000 a year or whatever it is to equalize and you're home free. I think that's a solution that's not in the best interest of the family. Because net worth is spent buying life insurance that may not affect the actual goals and objectives of the estate owner."
There are many tools that come to play, he says. You can also use things like GRATs and low-interest loans. Basically you are sculpting a plan.

He takes, as an example, a pair of hypothetical married clients who are 65 or 70 with a business, and they want their kids to get "x" amount at death. The first job, Budros says, is to make an assumption about when they are going to die. If mom is assumed to be the second to die at age 90-in about 25 years-then the objective is to get something worth "x" into the kids' hands in 25 years. After that is established, Budros goes about the easiest way to do that.

"For example," he says, "you start at Chapter 1 of gift giving and you effectively use the annual exclusion gifts and then you use up your million-dollar lifetime exemption, and then you begin to think about other strategies like GRATs and defective trusts and partnerships and discounting and leases or low-interest loans. And depending on the balance sheet of the client, the kinds of assets they have might dictate [what they do]. I mean, some clients just have a business and a retirement plan and a home and that's about it. And that's a situation in which there very well may be no other values to satisfy the goals and objectives but life insurance."

Real estate can be a neat way to solve the problems, Mindel says. "So let's set up a limited partnership while [the parents] are alive," he explains. "We'll sign a lease between the business and the limited partnership that's fair and reasonable and we'll come up with a number on the business for the kid that's working in it, and the non-working kid will get the real estate or get the rental income. And the reason we sign the lease now is we'll take away most of the things that cause friction. Now if the business isn't worth as much, the working child can be a partner in the limited partnership."

But that also means it's important to explain to the kids who aren't in the business that it is just a job, not a presumption of favor, he says. 

"The business is really a job," he says. "That's what it is. You work hard and you get a paycheck every week."