Equality vs fairness vs business need: Dividing family business wealth and assets among blended families

Blended families face unique succession challenges. Balancing equality, fairness, and business needs requires clear planning.

The concept of a “blended family” is now familiar in the UK. Data from Census 2021 revealed that an estimated one in three families in the UK were described as blended. 

Perhaps unsurprisingly, therefore, many of the country’s family businesses are managed by families that do not fit neatly into the traditional nuclear family structure.

The vast majority (if not all) of family managed businesses face a number of challenges when making decisions about business continuity, succession, and inheritance planning. It is not uncommon, though, for many of these challenges to present differently for blended families who must often navigate even more complex family dynamics than those faced by a “nuclear family”, which may impact day-to-day business operations as well as future succession planning. 

A long-term business strategy for any family business, and especially a blended family’s business should, therefore, be prepared with the benefit of professional legal advice to align the family’s interests and intentions with their business’ objectives, to ensure stability, prosperity and harmonisation for both the family personally and the business.

Understanding the family tree

The term “blended family” refers to a family that includes one or more children born to either party to the current relationship resulting from a previous marriage or relationship. In today’s society, it is common for blended families to come about after multiple previous marriages and children born to a number of previous relationships. 

In these circumstances, there may be children and stepchildren (and their own descendants) of either partner, all of whom are treated as part of one big family, irrespective of whether or not they meet the legal definition of child and stepchild.

It is increasingly common for clients’ circumstances not to fit the once “traditional” mould of one marriage with two or more children born only to this marriage. In blended families, succession planning can involve additional complexities, requiring inclusive strategies that consider all family members, so a thorough understanding of the family tree is critical.

Communicate for success

Succession planning strategies and the division of family and business assets—both in life and on death—most often result in conflict when a number of family members consider themselves to have been “kept in the dark” in terms of their family’s assets and their own future inheritance, especially if they perceive for any reason that they have been misled blended family-owned business clients who manage this potential risk most successfully are those who deploy clear communication strategies early on, including in respect of the future development plan and the interests and assets each family member is due to inherit.

Of course, any family business plan can (and arguably should) be a work in progress that changes over time as the business and family’s circumstances change. Nevertheless, a clear plan enables business owners to ensure that all of their family members know where they stand with the intention of extinguishing any tensions during their lifetime and especially tensions that can arise following an individual’s death. 

A clear strategy for the long-term that is communicated to all family members is, therefore, often essential to avoid any differing expectations or perceptions of unfairness that might otherwise arise. Often a Family Charter in which the family can agree the future direction and guidance for their business, together with the roles, responsibilities ,and rights of all family members, can be a vital tool for a family, allowing them to head off any disagreements before they are given an opportunity to arise.

A plan, or Family Charter, not only sets boundaries and puts agreed rules in place for a family but also minimises the risk of disappointed children or dependents bringing a claim against an individual’s estate and challenging their will upon death – which is not only stressful and expensive (potentially threatening the financial position of a business) but can also cause irreparable damage to family relations.

Determining levels of involvement 

In most cases, some children or family members are more involved in the day-to-day running of a family business than others. Determining whether the family is generally content with the status quo and in agreement with regards to who is most likely and best placed to take over the running of the business upon death or any succession of the business during lifetime is, therefore, vital.

Sometimes, a client may identify one child—who may or may not be a blood relative—as the most suitable to take the business’ reins, perhaps due to their business acumen or operational understanding. This decision may essentially be self-evident and generally acknowledged and accepted in the family. 

In other circumstances, however, this decision can be a bone of contention and create resentment, especially if other family members may have been actively involved in the business and, from their point of view, been led to expect they may take over the management one day and/or receive an equal interest in the business.

This is when questions of equality vs fairness vs business need come into play. Clients whose overwhelming priority is equality tend to be more focused on ensuring that their family members inheritance is all of the same value regardless of each individual’s level of involvement in the family business and irrespective of whether this causes disappointment in those who are more invested in the business personally. 

Other clients focus less on equality when making decisions for the future about their family business and are motivated by securing the company’s future and ensuring it can continue to run successfully. In these cases, a majority stakehold in the business is often left to those with the most involvement on a day-to-day basis. There may be other assets that families can turn to outside of the business to try to provide an element of equality overall. 

For example, life insurance policies, pensions, and trusts may all be valuable vehicles for making provision for family members who are not necessarily involved in the business to ensure they benefit from the family wealth overall. As is commonly the case, where and on whom the burden of future tax liabilities will fall, including inheritance tax, will be another very relevant consideration for any successful succession plan and particularly when trying to provide for equality or fairness.

Of course, the arrangements to be put in place by family businesses when deciding their succession planning are multifaceted. More often than not, decisions about the future management and control of the business are separate to decisions about who should inherit and in what shares. 

In all circumstances, therefore, it is essential to ensure that complimentary arrangements are put in place in terms of a company’s Articles of Association, Shareholders’ Agreements, individual’s Wills, and any pre-emption and or cross-option agreements. It is vital for there to be appropriate professional oversight of the family business’ legal arrangements and the family’s personal legal affairs, with a joined-up approach that ensures that all of these documents “speak to each other”.

It is important to remember that with the complexities of blended families, it is often impossible to achieve absolute equality whilst maintaining business viability. This increases the relevance and importance of putting in place a succession plan that provides for continued effective governance structures and open dialogue amongst the family. 

Whilst blended families may present additional complexities for family managed businesses, the diversity of perspectives and large family size can foster innovation and resilience for the family’s business that should be celebrated.

This article was first published in eprivateclient.

If you have any questions or we can assist, please contact any member of Individuals, Families and Trustees team on 0113 244 6100.

You can also keep up to date by following Wrigleys Solicitors on LinkedIn.

The information in this article is necessarily of a general nature. The law stated is correct at the date (stated above) this article was first posted to our website.

Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.