Dear Quentin,
My sister is two years older than me.
We both are married and have incomes in the low six figures, and our husbands have similar earnings.
When she was in her 20s, my sister and her husband accumulated a lot of credit-card debt, which my parents paid off (twice). I think it was around $50,000 each time. I have always been fiscally responsible and never needed my parents to bail me out.
My father, may his memory be a blessing, invested in oil and gas partnerships around that time, and created a corporation with me and my sister as shareholders. In consideration of the fact that they had paid off my sister’s credit-card debt, my parents set up the company so that I had a slight majority of the shares.
We get hundreds of thousands of dollars in royalties. So, the slight difference in our percentages of the company means that I have received more dividends than her. I have not done the math, but I imagine it’s in the tens of thousands of dollars ($100,000 or more).
“‘I am the president of the company with the majority of shares. I can make all of the decisions for the entity. I oversee a bookkeeper and keep abreast of necessary correspondence.”
My father passed away several years ago and my mom no longer wanted to be involved in the company. At this point, I am the president of the company with the majority of shares. I can make all of the decisions for the entity.
I oversee a bookkeeper and keep abreast of necessary correspondence with the producers and generally make sure everything is in order. I don’t charge the company for my time, though my billing rate as an attorney is over $400 per hour. It takes five to 10 hours each month to deal with all of this.
My sister and I both want to buy a vacation property and have thought about using some of the assets of the company to pay for this.
Recently, my sister asked if we could change the setup so that the company is 50/50, reasoning that whatever difference there originally was, to account for the debt my parents paid off, has long since been accounted for by the accumulated difference in dividends that we have each received.
I told her I am happy the way things are, and she said she didn’t want to upset me, but she does not consider it fair or equitable. I don’t plan to make any changes. Do you think I should split the partnership 50/50?
Thanks in advance.
More Money, More Problems
Dear More Money, More Problems,
No.
Here’s why: Your father gave you controlling interest for a reason. He knew you would take care of the partnership, manage it and make sure that no one made any hasty decisions that would jeopardize your future. It’s a gift that — thus far — keeps on giving. This is the way that he wanted it. You are putting in time and effort making sure your tax commitments are met, and the income is distributed fairly. Fair, for better or for worse, does not always mean equal.
If your sister had racked up $50,000 in credit-card debt once, she would be more likely to do it twice. But she went into significant debt twice, so it stands to reason that it could happen a third time. In a worst-case scenario, any future debts and/or financial dire straits could lead her to push you to sell shares in the partnership, even if you did not believe it was a wise move. Your father made allowances for such a scenario. By virtue of your legal expertise and level head, you have earned your majority share.
“Your father gave you controlling interest for a reason. He knew you would take care of the partnership, manage it and make sure that no one made any hasty decisions that would jeopardize your future. ”
If your sister receives 40% or 45% of the income from these investments, by all means bump her up to 49%, but make clear that there is a price to be paid for the time you invest, and pay yourself a market rate. If your sister expects to sit back and receive an income while you do all the work, that is a sign that the poor fiscal planning that got her into debt in the first place remains. You don’t want to tie your financial future to another person, whether it’s your sister or someone else.
The same goes for your vacation home. If you wish to use some of the income from your inheritance for a vacation home, great. But I urge you to think twice before buying a home with your sister. Once again, past behavior is the best predictor of future behavior. You don’t want to end up paying all the maintenance and taxes, and dealing with the paperwork and covering any mortgage you may have, while your sister takes a break and a Kit Kat in back seat.
Your father made sure you had a controlling interest. He did that in order to protect you and your sister. He was a smart man.
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Source: finance.yahoo.com