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The Idea of Family Wealth
Preparing Heirs by Bill High
What is it about our kids that prompt such great emotion – from elation to depression? Certainly, there is no greater joy than to see our children flourish and no greater agony than to see them wander from our values and our beliefs.
Irony: neglecting the “soft” side
The greatest irony in family estate planning: spending countless hours on the “hard” side of assets while giving lip service to the “soft” side of people development.
The tendency in estate planning is to prepare legal documents that transfer financial wealth without preparing our children for true legacy. What does preparing our children for true legacy mean?
Preparing children for true legacy
Life is often a blur in the child-raising years. In the same timeframe that we are raising kids, we are building our careers. And frankly, some of us tend to do a better job of building financial wealth than “family wealth.” Much of what our children learn is left to chance: whatever they observe along the way.
When things finally settle down a bit, the children are graduated, off to college, or even absorbed with starting their own careers and families.
What is family wealth?
In his book, Family Wealth, James Hughes discusses the importance of human capital that includes the following outcomes – ideally for all family members:
- They are thriving
- They have a strong sense of purpose, passion, and calling
- They have a strong sense of work ethic and character qualities like integrity, honesty, and compassion
- They have interpersonal relationships both within the family and externally
- They understand that life does not revolve around them but that instead they are part of a greater whole, a greater cause
- They have spiritual grounding
- They are generous.
These are big ideas, which go way beyond transferring financial capital. They go to transferring intellectual capital, social capital, emotional capital, and spiritual capital as well.
Good relationships require intentionality
It’s time spent with children with intentionality – making sure they understand our story and that we understand theirs. It is time spent repairing relational damage that is unintentional but inevitable. It is making sure they are healthy, thriving, and feeling fulfilled.
Giving together creates unity
One of the best tools I’ve found to bring families together is giving together. Structurally, that may take the form of creating a foundation or a donor advised fund. But practically, it simply means doing some giving together.
Giving is the great equalizer. Suffice it to say that giving prompts conversations that everyone can participate in regardless of age or experience.
Investing in legacy
So what do you want when you think about your heirs – great joy or great agony? It will take great effort to achieve the former. It must go beyond estate documents. Estate documents are a part, but they really should be guided with the influence of all forms of capital – intellectual, social, emotional, spiritual, and financial.
WHY YOU SHOULD LISTEN TO BILL?
William F. High is the Chief Executive Officer of National Christian Foundation Heartland.
He works with families, individual givers, and financial advisors to help facilitate God’s call to generosity. Much of that work includes advising on issues of income tax planning, business sale planning, and estate planning. Bill is a visionary leader energized by people and ideas. He loves to learn, innovate, and strategize on how new ideas or new approaches to current methods might escalate growth. As a former lawyer, the law taught him how to ask great questions to find the truth.
Bill is also the founder of iDonate.com, a fundraising software company serving the nonprofit community. iDonate.com provides an online marketing solution for nonprofits to market and receive gifts of all kinds, including cash, text, credit card, and non-cash gifts. Bill is also the President of Generous Life, a legacy consulting organization with the aim of making generosity generational. A published author and conference speaker, he is the general editor of Grants and More for Christian Ministries, and a contributing author to Why the Conservative Mind Matters. He recently authored Stories of the Generous Life and is currently working on the follow up to that book.
Bill has been married to his wife, Brooke, for 25 years. They have four children: Ashley, Jessica, Nathan, and Joseph.
Change to an Elder Culture | Rich Grehalva
In this short talk, Rich Grehalva shares an idea drawn from his Native American heritage about how our society needs to transform from an “elderly” culture to an “elder” one.
Rich Grehalva, is an experienced sales & marketing executive, author, speaker and coach.
Family Farm succession planning – equal or fair? by John Mill
The recent appeal decision in Mountain v. TD Canada Trust is a classic example of how badly things end up without proper business succession planning. The case involved a farm that had been in Mountain family for five generations since 1830. Gary the son had been working on the farm for 24 years since high school and had received less than average wages so money could be used to build up the farm. Gary said that his father Jack had promised to pass the farm onto him. Gary’s sister Louanne never worked on the farm.
A universal problem in family farms and businesses is that there are usually children who do not work on the farm or in the business. The question becomes how do you treat these children fairly? A common misconception is that the child on the farm or in the business will be getting a very valuable asset; however if the farm or business is not to be sold then what the child really gets is a job.
The problem in this case was that Jack and Helen Mountain had identical wills. Each left all of his/her estate to the other absolutely, or if either spouse died first, the estate would go to Gary and Louanne to share and share alike. This is the default will pattern employed by most families. But in family business succession cases the default will pattern creates havoc as happened with the Mountains.
After Jack’s death Gary’s sister Louanne took the position that under the will she was entitled to half the farm. So Gary started a lawsuit to enforce what he claimed was an oral agreement that the farm was to go to him.
In the period between January 2000 and November 28, 2001 when he died, Jack had made a number of attempts to transfer the farm to Gary. First Jack saw Mr. Riley his bookkeeper and tax preparer. Mr. Riley had detailed notes of their discussions about how to transfer the farm to Gary. The Judge ignored these notes because Jack did not act on them.
In October 2001 Jack was hospitalized. He was first visited by retired lawyer Don Elliot who referred him to another lawyer Chris Moon. Mr. Moon prepared powers of attorney to be used if Jack was disabled but he did not recall discussing any land transfers. It seems odd that this lawyer would not have asked about Jack’s intentions for the farm.
In mid November Jack met with Mr. Riley again. Mr. Riley sent a letter addressed to Jack, dated November 13, 2001. The letter says:
This letter summarizes our discussion of the farm rollover from you and Helen to Gary. If I understand your desires correctly, the two farms, the 46 acre lot with the helper house and the trailer on the 97 acre farm are to be rolled over to Gary. The one-acre lot at Conc. 4, WHS Pt Lot 33, is to be rolled over to Louanne.
Jack asked his sister if he could meet with her lawyer and an appointment was made for November 15th. Unfortunately Jack was readmitted to hospital and died on November 28th.
Gary did not have luck in court, after an 11 day trial the trial judge made a factual inference that Jack intentionally did not transfer the property to Gary before his death and ordered Gary to pay $275,000 in costs to Louanne. As the trial judge put it:
While I am doubtful of Jack’s competence, if he was [competent] as Gary submits, Jack had thoughts about how to arrange his affairs, knew that they had not been put in place and did not put them in place. Since he did not do so, I can safely infer that that was intentional.
From a common sense perspective if Jack wanted the farm to stay in the family for the sixth generation then he had to give it to Gary. If it was split evenly then it would have to be sold. There were other assets that Louanne would have received including insurance. The appeal court allowed the appeal finding that the trial judge had made a palpable overriding error of fact as follows:
 The trial judge did not explain why this inference was safely drawn given the following evidence indicating that it was the swift deterioration in Jack’s health that prevented him from completing the farm transfer:
- Several witnesses, including Louanne, testified that while Jack was in the hospital, he indicated that he wanted to meet with a lawyer.
- The Monkmans offered Jack an appointment with their lawyer, Mr. MacDonald, for November 15, 2001. Mr. MacDonald would have met Jack were it not for Jack’s unanticipated hospitalization that same day.
- Reverend Lekx testified that on November 18 or 19, 2001, Jack told him that he had just “told Gary to take the farm and get a lawyer to have it settled.”
- Mr. Riley testified that Jack passed away before they were able to finalize the rollover of the farm to Gary, so he followed the will and transferred Jack’s half to Helen with the intention that it would then be rolled over to Gary.
- Mr. MacDonald testified that when he prepared his memo of November 27, 2001, he was expecting there to be an inter vivos transfer of the farm property, milk quota and vehicles.
 The trial judge’s inference that Jack did not intend to transfer the farm to Gary before his death also inexplicably fails to give any consideration to the uncontradicted evidence of Mr. Riley, which he had set out at paras. 20-22 of his reasons. As the trial judge noted, at para. 20, Mr. Riley testified that in 2000, Jack and Helen decided that “it was time to act to roll the farm over to Gary.”
The appeal court ordered that the matter be sent back to trial to be heard all over again setting aside the $275,000 costs award and ordering Louanne to pay Gary $40,000 in costs for the appeal ; however, they did so with this warning:
 I must stress that a new trial is in neither side’s interest. This case cries out for a mediated, consensual resolution. This is a rare circumstance where in the interests of justice, I would direct that mediation be conducted prior to any new trial.
So what did the parties get for their more than half million in legal fees and months of effort preparing for trial? This case is a classic lesson in the value of proper planning.
What’s Your Greatest Legacy? Hint: It’s Not Your Family Business by Tom Deans, Ph.D
I was playing my regular Saturday morning squash game and had my friend two games to zero. I was only three points away from taking the match in a clean three-game sweep. But something happened. I started to drift and lose focus. To make a long story short, I flamed out and went down three games to two. The sting of defeat is always more acute when you’ve already begun to celebrate before victory is earned.
On the drive home I wondered how many business founders have always imagined that the surest succession plan – the sale of the business to their own children – is a slam-dunk, only to find out too late that their children love their jobs but hate risking capital.
The plan is to talk later
I also wondered how many business owners never really know how to broach the subject of selling the business to their kids. The issue feels so emotionally complex and dangerous; the best plan is to plan to have the conversation…later. Many business owners in my audiences express to me the sentiment that if their kids were “real” business owners they would make the first move and raise the subject of a buy out. Similarly, kids will say “hey, I’m waiting for the big guy to make the first move.”
I wondered how many families feel the sting of defeat, never experiencing what could have been a great transition because no one knew how to start what is perhaps the most important conversation of a business owner’s life.
The blunt truth is that too often owners never have the conversation. Life unfolds, and parents who are controlling shareholders become incapacitated and die. And then their family discovers that the owner has done what feels so utterly right: he or she has treated their children “fairly” and proceeded to gift, via the owner’s will, an equal number of shares to each child, irrespective of whether the children are working in the business or not.
What unfolds next is unpredictable and often wealth destroying. Children working in the family business can find themselves reporting to their brothers and sisters outside the business. And too often children outside the business are disappointed with the dividend stream and clamor for more. Many children on the outside looking in assume that their siblings working in the business are overpaid – not because they know this to be true, but because they find themselves awash with emotion about what the business is, what it was and where it ought to go.
Exceptional advisors force awkward conversations
Advisors can play a hugely influential role in sparking the right conversation among the family about the sale of the business – when everyone is still healthy and thinking clearly. When the answer emerges that there is a buyer in the house, what a magnificent event for the family to celebrate: an orderly transition. This natural trimming of the family tree forces ownership into one branch of the family – ownership by someone taking risks, with real skin in the game, just like the founder had so many years ago.
But if the answer emerges that the children rather like their jobs but are not interested in risking their capital, then the parent can get on with the job of selling the business outside the family. At least everyone has exercised control over his or her own future. Junior can hardly blame his parents for selling a business that he’s taken a pass on buying. I haven’t met too many business owners who can afford to gamble the retained earnings in their business on the idea that a son or daughter who doesn’t want to buy the business will run it profitably throughout the owner’s long retirement – a retirement that will likely be longer and more expensive than most imagine.
Find the end before the end finds you
When you’re up two games and business is going great, don’t forget why you started your business in the first place. It was to make money. Do your last deal by finding the end of your business before the end finds you. And when you do, celebrate the fact that the best is yet to come and that it has everything and nothing to do with you. Your legacy was never your business – it’s your family. So focus on making things right for the people you care about. That’s how founders who are mothers and fathers are measured and remembered.
If gifting money to your children, instead of gifting your business, feels problematic, think about why that is.
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Are you accidentally putting your next generation at risk? by Family Wealth Coach
No one wants to think that their successors would be in harm’s way of any kind, as a matter of fact, most leaders of family businesses are actively working to ensure that the next generation is not at risk. Who would want otherwise?
But there are certain conversations that need to happen, or it can put the next generation at substantial risk. Let’s take a look at one of those conversations.
Kelly Lector and Jennifer Pendergast, the authors of the book Roadmap, offer a thought that there is a single critical theme that must be handled properly, if a succession is going to be successful. That theme is Shared Vision.
The overriding theme of the book is that it is critical to invest time and resources to develop a vision for the future of the family business, and it should be started sooner rather than later. But this kind of vision casting is often overlooked by business families for five great reasons:
- It’s not action oriented — it doesn’t seem practical and it seems like a waste of time
- It typically doesn’t solve a particular problem at hand
- Many families don’t know how to do it, what questions to ask, who should be involved, or who should lead it
- Sometimes there’s a fear of asking big questions in case stakeholders [including children in the business, sibling partners, etc.] have different answers
- They fear conflict – avoiding the conflict is much easier than facing it
These are good reasons. Unfortunately, not facing them can put succession at risk. It’s better to clearly understand the motivations of all the constituents sooner, rather than later. What would happen if you reached a crucial moment in the succession, only to discover that someone has a completely different goal? If there is uncertainty in the business succession with the owners, it will affect all stakeholders. Clarity of vision helps ensure confidence for everyone involved.
So what kind of questions would you ask if you wanted to arrive at a shared vision? Here is just a handful:
- What are we trying to be as a family? As individuals? As a business?
- How will we know when we’ve achieved it?
- Why is it important for us to own this asset together? Is it because it’s profitable? It keeps the family together? It is our heritage and our purpose?
- Under what conditions would you sell?
- Is it important that a family member lead the business?
You may want to consider having some conversations with stakeholders, having a family meeting, surveying stakeholders, and becoming more prepared to take on hard questions. If your values, principles, and vision are aligned, you can likely have a shared vision and smoother continuity. If you have different values, different principles, and a different vision, perhaps you can’t follow the same purpose.
We encourage you to start a process of continuity planning, not just succession planning. Succession implies a single event, while continuity implies an ongoing process. Plan the future by involving people who will be a part of it.
Do you have a shared vision?
The New EBITDA: Emotions Before Interest Taxes and Depreciation by Tom Deans, Ph.D.
Sitting in the departure lounge at LAX, I couldn’t help but overhear a conversation between an investment banker and his younger associate. I learned two things. First (and most business travelers can relate), it is amazing how cavalier people are about discussing confidential details in public places. The second confirmed something I had been thinking about family businesses for some time.
The older of the two bankers was whining about how he thought the slam-dunk deal they had just presented was now probably never going to happen. On and on he grumbled about the time he had spent running the numbers, lining up partners and generally bringing the deal to a crescendo, only to have the business owner change his mind about selling.
The investment banker was completely perplexed about why the offer, the numbers, the multiples that looked so good weren’t enough to entice the owner to do the deal of a lifetime.
It took everything I had to stop myself from leaping into the conversation and selling him a copy of Every Family’s Business (it wouldn’t have been the first time). But I exercised extraordinary restraint and settled back and listened to him talk about the clever structure of the deal, the tax that could have been saved and the instant wealth the owner would have secured if only he had been smart enough to take the deal.
Emotions are Squishy – Not the Stuff of Deal-Makers in Suits
The funny thing about listening in on a conversation is that the longer you listen the harder it is enter the conversation. So I bit my tongue and instead simply wondered how many other business brokers, M&A professionals and investment bankers expend such effort trying to bring deals to fruition only to have sellers back out. I wondered how an entire industry of intermediaries could so badly underestimate the emotional connection that owners have to their businesses, and also fail to understand how these emotions can scupper so much good work and extraordinary planning and lead the owner to ultimately destroy the business’s value.
When really bright finance experts hear the word “emotions” you can so often see their eyes roll back and the calculators shut off. Yet students of the greatest financiers of all time – deal-makers like Warren Buffett – know that these people get deals done by running the numbers and then engaging business owners in the one corner of their life where most number crunchers don’t go – their family. It is the rare rainmaker who has both the left and right brain firing on all cylinders.
Buffett and other great deal-makers know that the sale of a business will typically result in a “liquidity event” that will leave owners with more wealth than they feel comfortable consuming. Most business owners accumulate wealth precisely by denying themselves consumption. Sellers will often kill deals, blaming a low bid price, but there’s almost always much more at play.
Reducing An Owner’s Life Work to a Number is Depressing
Most deal-makers underestimate the guilt and remorse sellers feel when they reduce their life’s work to a single number. It feels so crass and empty and hollow to imagine that decades of risk-taking, relationships and earned status in their community will end the day a check is cut and control is relinquished.
That’s why so many business owners don’t do their last deal. That’s why so many let their death be the event that triggers the transfer of controlling interest of their business to family – typically ill-prepared family members uninterested in continuing the business.
With universities, associations and institutes granting so many awards dedicated to perpetuating family businesses at any cost, it’s the duty of intermediaries to serve family business owners with a counterbalancing narrative that places the preservation of capital at the center of more intelligent estate plans.
Preserved capital from the sale of a family business – capital a former owner can then deploy for philanthropic endeavors and for funding the next generation’s own businesses – and not an operating business that’s well past its shelf life is what pays homage to the most enduring legacy: family and community.
Buffet is Both Psychotherapist and Financier
I really wanted to tell the two guys in the airport that Buffett’s best deals had come after he cemented his own family business succession plan. Buffett can easily look into the eyes of any family business owner and talk with authenticity. He can empathize with a business owner’s struggle and can explain why selling the business is the key to securing their greatest and most enduring legacy – their family and their philanthropy.
I didn’t have the guts to chime in and say, “Fellas, I’ve really been enjoying your conversation but there’s way more to doing deals than running the numbers.” Deals get done based on trust and respect earned by intermediaries paying homage to the things in a business that transcend money. Intermediaries who approach this emotional subject like one more thing to check off on their due diligence list will be outed before the coffee is poured. Business owners can feel the disingenuous long before they actually hear it.
For most owners, the sale of their business represents the end of their professional careers and a major overhaul of who they are and where they fit in. Anticipation of the disappearance of their status as business owner, employer and boss often means the sale never gets completed.
Intermediaries who can honor the risk-taking that has gone into creating a business and connect that risk to something more enduring, like family and philanthropy, will themselves be participating in something that transcends money. A guy like Buffett, who is still driving hard deals while giving away half the wealth earned from those deals, tells you precisely what motivates him and his family.
Wealth with purpose: scoff at this soft, simple idea, diminish its importance in closing deals, and you’ll be the one sitting in an airport lamenting the one that got away.
PS: Most people wearing earphones in airports are only pretending to be listening to music.
Building a Family Business that Lasts
A Family Wired For Perpetual Dependence by Tom Deans, Ph.D.
When the sale of a family business is all about a founder becoming wealthy and their children losing their jobs, you can see why so few ever put themselves in play and sell.
The CEO – the Chief Emotional Officer (Mom, and increasingly Dad) – just can’t stand to see the family pull itself apart. Killing the business with love has always felt like a better plan.
With a wave of aging business owners trying to figure out how they’ll fund their retirement, you can understand the temptation to simply throttle back on their day-to-day involvement and draw a salary while Junior runs the business until the final curtain falls.
Of course, as I’ve discussed in previous articles, with owners living longer, it’s improbable that Junior is going to hang around the business into his or her 70s, when Mom and Dad finally reach their 90s and hand over the reins of control – not operating control, I mean real control, control of the voting stock transferred when the last parent dies.
How About an Exit Where Everyone Makes Money?
But what if an advisor could frame the exit of the controlling shareholder as the day when all family members become wealthy? Far too often, death is the triggering event for the transfer of stock. Few children are offered an opportunity to risk their capital to buy the stock of their parents’ business at an early age. I recommend that when a child is 14, the parents and advisors begin the process of implanting the idea that the family business will be bought, not gifted, and that employment is different from ownership.
For a variety of reasons, the majority of parents signal that there’s no real or pressing need to recycle dollars in the family: “Hang around long enough, Junior, and all this will be yours – for free.”
Of course we know that nothing is ever really free and that while the ownership question is left hanging, there are as many underpaid children working in family businesses, as there are overpaid children. My experience on the speaking circuit is that few overpaid children ever risk their capital to buy out their parents. Why derail the gravy train? Parents who use their business to purchase and control family harmony do more harm than good and always pay the greatest price of all – a family wired for perpetual dependence.
Family Business Math
The dysfunction around the issue of compensation percolates and festers because the stakes have always been high. When Junior complains about low wages, some parents simply say, “If you don’t like what you’re paid, leave.” Emotionally and financially, it’s never been easy for a child to quit a parent’s business.
Child Quitting Over Compensation + Aging Business Owner = Less Inheritance For Junior.
You can see how family business math becomes really interesting when only one child working in the business quits and one or more siblings stay and toe the family line. Trimming the family tree, hacking off a limb, call it what you want, the family business too often becomes the fault line in relationships and turns financially advantaged families into emotionally bankrupt ones.
The equation for this scenario looks like this:
The Value of the Family Business When Child Leaves Over Compensation = More Money for Remaining Children
The Link Between Compensation and Wealth Protection Is Profound
What if the mathematics of a great exit has always been rudimentary? What if advisors could convince clients that all family members, both inside and outside the business, can build a great exit plan collaboratively? What if the key to this plan is asking children to risk capital and perpetuate the business for the right reason – because they think they can grow it and make money? Now there’s a novel idea.
For this to be successful, family members working in a business need to be paid for the value they add. There are significant risks to an owner’s successful exit when compensation for family members is too low or too high. Getting compensation right is one of the pre-conditions for leading a business to be sold to someone, either inside or outside the family – but sold nevertheless.
Dynastic Families Understand This Equation
Business Owner Paid Appropriately + Children in Business Paid Appropriately + All Other Relatives Outside the Business Not Paid at All by the Business = Business Sold, Wealth Protected, Happy Family
It’s simple addition – so simple it’s often overlooked. Treat your family business like a drive-thru ATM and pay family members not involved in the business for work not done, and your exit will be a tad complicated and painful. Keep treating your children as indentured laborers and you’ll get to the same place. If you’re a business owner, all of this can seem difficult. It is, but it’s not impossible and it’s definitely worth getting compensation right.
If you are an advisor, are you really prepared to leave your spreadsheets in your briefcase and talk to clients about important issues like compensating family members appropriately? Can you see the link between compensation and protecting your client’s wealth is an emotional issue? Can you see that the hard emotional issues are where advisors earn client trust?