Law News and Tips

Even v. Fair

Fred Vilbig - Tuesday, August 11, 2015

It’s probably a huge understatement to say that Cornelius Vanderbilt was an ambitious businessman. He grew up in a struggling family. He quit school at 11 to work for his father’s ferry business in the New York Harbor. At 16, he started his own business, ferrying passengers between New York and Long Island. He built that small business into a major steamboat line, including ocean liners. After the Civil War, he switched to railroads and built that business into an empire.

Vanderbilt was also reportedly an unpleasant man. He married a relative (a common practice in those days), and they had 13 kids. Because of business, Cornelius was often away from home. His wife and children lived in a large house on Staten Island. He charged them rent. She had to take in borders to pay rent and buy food and clothing for the children. He called his “favorite” son, William (“Billy”), a “blockhead” and a “blatherskite” (someone who talked a lot of nonsense). He was a fierce business competitor, running other businesses into the ground on occasion.

When he died, he was reportedly worth $100 million, which would be worth more than $227 billion in today’s dollars. He didn’t trust his kids with his financial empire, but he was stuck with Billy. He left Billy, 95% of his estate. One of his other sons he left $5 million, while two other sons received $2 million apiece. His nine daughters received amounts ranging from $250,000 to $500,000 (about $350 million to $700 million in today’s dollars). He considered one son irresponsible, so he just got a trust fund worth about $200,000 (in today’s dollars, over $250 million). His surviving wife (his second) also received a sizable inheritance, plus their house, plus a large block of railroad stock.

It’s pretty clear to see, even though everyone received sizeable amounts, this was not an even distribution. Needless to say, litigation followed. But Billy prevailed. Billy then proceeded to pay off all his siblings’ legal fees and make substantial gifts to them. What a guy!

It turns out that Cornelius’s choice of Billy was a good one. Under his stewardship, the family empire continued to grow. Within 6 years, he had doubled it to $200 million. In addition, Billy was a good philanthropist. He made sizable gifts to the YMCA, the Metropolitan Opera, and Columbia University. He also further endowed Vanderbilt University, which his father originally started. So for all involved, Billy was a good choice.

So what is the point of this story? Especially in family-held businesses, equal is not always the best policy. For instance, one child may be actively involved in the business, and the others know little or nothing about it. If everyone received an equal share, then that would be a catastrophe for the family and the business.

Most parents who start a business want it to succeed down the generations. To do that, they need to give control and most of the profits to the person running the business. He or she needs to have adequate incentives to put the sweat and tears into the business to make it work, just like the parents did. That means that the other family members need to get something of equivalent value, typically cash. You can do that with life insurance if the parents are young enough, or you can give the operating child an option to buy the business over time on favorable terms.

In any event, planning for the succession and success of the family business takes some time and careful considerations, taking into account both fairness and capabilities. Although Vanderbilt was dealing with much larger numbers, the same idea applies. Equality in everything may not lead to the best result.
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