From For Love or Money

Protecting Family and Wealth in Estate Planning
A New Approach Blending Law and Psychology

by John W. Ambrecht, Esq., Howard Berens, M.D., and
Richard Goldwater, M.D. with Tom Gorman

Introduction

Every year hundreds of thousands of families pass their businesses from one generation to the next—or at least try to. Indeed, the available research over the past two decades consistently shows that only about 30 percent of family businesses pass successfully to the second generation, while about 15 percent make it to the third.¹ In the process, thousands of families suffer emotional upheavals, intergenerational conflict and financial losses. Why should this be the case in a nation with no shortage of legal talent or business acumen?

We trace much of this problem to the limitations of current approaches to succession and estate planning. Planning generally aims to avoid probate, minimize taxes, and ensure beneficiaries’ financial security. The typical estate plan comprises documents that will achieve those ends. Yet a five-year study of family businesses revealed that three factors explain 95 percent of cases of breakdown in the succession process: problems in relationships among family members (cited as the key factor in 60 percent of the cases), heirs not being sufficiently prepared (25 percent), and issues related to planning and control activities (10 percent).² Although problems in family relationships cause 60 percent of the breakdowns, little or no effort goes into addressing them in the planning process, which focuses almost solely on legal, tax, and financial issues.

Most estate planners either assume that a family’s dynamics are “okay” (or at least “normal”) or that difficult dynamics won’t disrupt the estate plan. Some see the dangers posed by difficult family dynamics and assume that legal provisions can neutralize them. Often those assumptions are valid. Most wills and trusts are not contested, and the assets pass smoothly from testators to beneficiaries. Even in difficult cases, families often deal with negative dynamics in positive ways that produce acceptable solutions.

This book will help when those assumptions are not valid and acceptable solutions remain elusive. It will help when unruly emotions, bad behavior, and poor decisions threaten to overwhelm the estate planning process or the transfer of assets. It will help when family arguments, changes of intention, and threats of disinheritance burn up time and energy or freeze the process.

A verbal battle broke out among family members in the office of an attorney we know. After thirty very confusing seconds, he threw up his hands and said, “Stop! Stop it! You’re all getting into an area that I can’t deal with.” Estate planners must be prepared for such situations. They can’t afford to ignore this kind of behavior, nor should they expect it to stop on command. Estate planners and families must know when they need help, what kind of help they need and, when possible, how they can help themselves. Above all they need an approach that works.

An Effective Approach
What would an effective approach to succession and estate planning amid poor family dynamics look like?

An effective approach would address the legal and financial and the emotional and family considerations. Of course, an effective approach would also generate a plan that meets the highest legal and fiduciary standards. In addition, an effective approach would:

1. Help testators and families address the question of whether to keep or sell the business. Families and advisors have no real framework for making this major decision amid poor family dynamics.
2. Promote an objective view, emotional distance, and a customized solution. We believe in educating the testator and family to enable them to develop their own solutions with professional guidance.
3. Preserve the value and earning power of the business or assets, and promote growth under the successors, or help the family to extract full value from a sale.
4. Help advisors and their clients to avoid potentially damaging, unprofitable, or hopeless situations.
5. Be sophisticated and flexible enough to cover the full range of family issues, yet simple enough for advisors and clients to understand and apply quickly.  

Our approach meets these criteria without superceding or compromising the estate plan or its administration. Our approach helps attorneys, trust officers, and other advisors explain difficult situations to testators, clients, and beneficiaries in objective language and it supports the planning process.

Advisors know how to reduce taxes, avoid probate, and so on. What they need are tools that help them explain why the intergenerational transfer of assets can be so difficult, and what to do when difficulties arise. The usual diagnoses accomplish little. Things don’t go awry just because Dad has unrealistic expectations, heirs don’t care, or siblings are at war. Those are not root causes. The root causes are the psychological forces at work in the family and the family business. When you identify those forces, you can address them, and deal with the estate plan and transfer of assets far more effectively.

The Rules Crisis
In an intergenerational transfer of a business, real estate, or other major assets, people must make a transition from family roles to business rules. They must learn to rely less on family roles, and more on business rules, to guide their decisions and behavior. Why? Because, people typically carry their family roles into a family business in ways that don’t occur in non-family enterprises.

Succession and estate planning—and the transfer of the business—represents what we call a Rules Crisis. Rules assert themselves in a situation that has been running on roles. It resembles a society moving from dictatorship to democracy. The Rules Crisis presents an opportunity for growth, development, and the evolution of the business, but also poses the danger of disorder, infighting, and destruction. In other words, the difficulties in succession and estate planning amount to developmental tasks. In this book we define those tasks and show how to deal with them productively.

Of course, family roles produce positive as well as negative effects. On the positive side, many family businesses thrive on pride in the family name, trust among family members, and shared economic fortunes. Many benefit from strong ties to employees, customers, suppliers, bankers, and the community. On the negative side, a powerful leader oversees most family enterprises. His power emanates from two roles—head of the family and head of the business. In those two powerful roles, the leader can dictate the way the business operates, rather than agree to what we call business rules.

Indeed sometimes the leader sees agreeing to business rules as submission or defeat. He may feel he has to “submit” to rules rather than simply agree to play by them. Like dethroned dictators, these folks perceive a loss of power when their authority gives way to infirmity, impending death, or legal realities. It is a loss of power: the loss of their status as leader and of control over the business. In our experience, heads of businesses have difficulty passing on the business to the extent that they have not prepared successors to “play by the rules.”

Broadly, business rules are the principles, policies, and procedures that guide and govern a business—job descriptions, quality standards, compensation plans, promotion criteria, cost controls, decision-making processes, and a chain of command. In a family business, these tend to be determined by the owner, sometimes on a whim. If the owner wants to take an interest-free loan or hire his inexperienced son-in-law, who can stop him? Managers, employees, and advisors can talk to him, but no one has the actual power to stop him.

Estate planning presages the inevitable demise of the “ruler,” which can destabilize the business and the family. Introducing rules to a family business can either disorient and threaten family members or help them get their bearings and move to more professional management methods. In fact, the more a business has been running on family roles, the more it will benefit from business rules—and the more difficult the transition to business rules will be. (Family members must also move into business roles, such as CEO, controller, and director of marketing, as well as to business rules, as we will explain.)

Just knowing about business rules won’t motivate people to adopt them. People don’t follow rules because they know about them. They follow rules because they perceive it to be in their interest to do so. We all agree to obey traffic signals and assume others will too, to avoid danger as well as tickets. Someone must work with or within the family and the business to facilitate the transition from roles to rules.

Neither Psychotherapy nor Counseling
None of this involves family or individual psychotherapy or psychological counseling, which lie outside the field of estate planning and the expertise of planners. Also, people approach psychotherapy with a desire, or at least a willingness, to change and with some openness to modes of behavior. In contrast, family conflicts over estate plans are fraught with hidden agendas, changing alliances, and even outright animosity. Our goal is not family harmony, but family business survival.

We’ve written this book for both estate planning professionals and their clients. Much of the material speaks to the needs of the attorney, accountant, trust officer, insurance professional, or other advisor to a family business. Yet we believe that anyone involved in a difficult succession and estate plan, keep-or-sell decision, or transfer of assets will find this book valuable. People armed with a knowledge of Roles and Rules are prepared to recognize negative family dynamics and either address them or find someone who can address them. Our goal in this book is to give advisors and families this knowledge.

1. Correlates of Success in Family Business Transitions, Michael Morris, et al., Journal of Business Venturing, vol. 12, pages 385-401, 1997, Elsevier Science, Inc.
2. Ibid.