Estate Planning

Failing to Plan is Planning to Fail

Failing to Plan is Planning to Fail: Key Considerations for a Successful Family Business Transition

Family business dynamics can be tremendously complex. There can be a wide range of opinions among family members regarding their contributions toward the business and what the future should look like once the current owner is no longer involved.

Business planning with family members raises many intensely challenging questions, including:

  • What is the best way to reward the efforts of family members who have dedicated years of service to the business?
  • How should you “fairly” provide for those who have moved away and are uninvolved in the business?
  • Does the “heir apparent” even want to continue with the family business?
  • If the business is jointly held by siblings, what is the likelihood of success for co-ownership in the next generation?
  • Is now the right time to approach family members on a potential buy-out? Or is it better to seek a strategic buyer or outside third-party?

While the questions above may be difficult to answer, business owners should not let family dynamics or complexities prevent the successful implementation of transition plans. Family-owned businesses must decide what a successful business transition looks like and then proactively plan to accomplish those goals.

A True Success Story: The Power of Family Business Estate Planning

While it is very difficult to please every family member, partnering with estate planning professionals and other advisors can help to facilitate timely implementation of business succession and transition plans. Significant and purposeful results can be achieved with appropriately executed planning techniques. One such example is an Eide Bailly client named Jack (name and details have been changed to protect privacy).

Jack was first introduced to Eide Bailly planning professionals in 2014 when he was 86 years old. Like many family business owners, Jack did not have any estate planning or business succession plans in place. His total net worth of $40 million included an S-corporation appreciating in value and farmland in several states. Jack’s goal was to leave the S-corporation stock (valued at $21 million) to his son to operate the business and distribute his remaining assets to his other children.

Eide Bailly’s teams advised and recommended a grantor retained annuity trust (GRAT) strategy for Jack. GRATs can be an extremely effective and efficient estate planning tool allowing growth and appreciation to pass to beneficiaries free of estate or gift taxes. With a GRAT, a grantor (creator of a trust) transfers assets to an irrevocable trust. The grantor may create a series of short-term GRATs, with annuity payments rolling into subsequent GRATs with the returns in excess of the Section 7520 rate being received by the trusts for the benefit of beneficiaries.  

By 2022, Jack had transferred 59% of the S-corporation to his son using no gift or estate tax exemption. This tremendous result allowed Jack to transfer significant wealth to his son, leaving Jack with gift tax exemption to make gifts to his remaining children.

To further advance his planning, in 2021, Jack transferred farmland and ranch properties to a limited liability limited partnership (LLLP). Eide Bailly’s Business Valuation team assisted with valuation of corporate stock and partnership interests. A Financial Services professional also evaluated Jack’s financial position to assess his cash flow and anticipate future expenses to ensure Jack maintained his standard of living throughout his lifetime.

Through collaborative planning among wealth transition, business valuation, and financial planning, Jack was able to transfer $34.4 million of wealth to his family with the use of only $9 million of his estate tax exemption.  

Establishing a Key Person to Continue Your Legacy

To effectively transfer the family business, it is also important for business owners to mature and empower certain key persons who are critical for business transition. This individual typically possesses the necessary acumen, judgement, and knowledge that is vital to the success of the business. They are also able to implement the operational and organizational aspects of the business and harness the vision, skills, and capability to follow through on business decisions. Your key person should be ready, willing, and able to run the business should you suddenly not be able to.

Let’s return to our real-world example with Jack to illustrate the importance of developing key persons and refining key person planning when the unexpected arises. Following Jack’s transition of the business to his son, Kyle, it was time for Kyle to carefully consider how he was going to continue his family’s legacy and who his key person would be in the event of Kyle’s absence or death. Remember – continual family business planning always needs to be considered.

Through much deliberation and consideration, Kyle selected his son, Jacob, as the key person to continue the family business. However, after two years of developing and building Jacob as the next leader, Jacob decided that the family business was not for him.

What now? Fortunately, Kyle was able to consult with members of the Eide Bailly Business Valuation team who used a strategic interview and management survey process to determine who was best suited as the key person. Kyle successfully redeployed his revised strategy with this new individual. This allowed Kyle the ability to focus on the success of the business and skill development for the new key person.

Step Confidently Towards the Future of Your Family Business

Family business owners are far more likely to achieve a successful business transition when they have strategized a plan that considers their personal goals, involves appropriate family members, and cultivates a thoroughly prepared key person. In addition, coordination between various professionals (tax, legal, accounting, financial, insurance, business valuation and others) are critical to achieve success in the transfer of your family business.


Rolling GRATs: Asset Selection Trumps Current Interest Rates

Financial planning during periods of relatively higher interest rates is certainly not elementary. In a low interest rate environment, the opportunities for wealth transfer seem boundless; one can seemingly draw from a myriad of strategies and have a high likelihood of success. A high interest rate environment, however, all but eliminates the effectiveness of such. In particular, strategies that involve intra-family loans or installment sales are negatively impacted by high interest rates. A Grantor Retained Annuity Trust (GRAT) is one of the few exceptions.

A GRAT does not seek to transfer the trust assets to the beneficiaries, but only the appreciation on those assets. Transferring only the appreciation, unlike other gifting techniques, can[1] allow for a transfer that is entirely gift and estate tax-free. For this reason, GRATs are particularly attractive for those who have already transferred assets equal to (or more than) their lifetime gift tax exemption of $12.92 million per person. GRATs may also be a good fit for those who are undecided on how they would like to use their lifetime gift tax exemption.

A GRAT is an irrevocable trust, yet it contains characteristics that are contrary to the very essence of an irrevocable trust. For example, by definition, in an irrevocable trust, the grantor relinquishes his or her ability to change it. However, for a trust to be considered a grantor trust for income tax purposes (i.e. the grantor pays the taxes incurred by the trust), certain features must exist. This includes, but is not limited to, grantor powers such as adding and changing the trust beneficiaries, or the power to substitute the trust assets with other assets of equal value. The ability to substitute trust assets in a GRAT should not be overlooked.

Functionally, the interest rate at GRAT inception is meaningful. You may be familiar with the Applicable Federal Rate (AFR), which is the minimum interest rate that the Internal Revenue Service allows for private loans and is published monthly based on current interest rates. GRATs utilize another monthly interest rate known as the Section 7520 rate. By definition, this is the AFR rate for determining the present value of an annuity. It is also known as the hurdle rate and can be perceived as the IRS projection for appreciation on the assets contributed to the GRAT.

For a GRAT to be successful, the trust assets must appreciate more than the annuity stream. This is why GRATs are particularly successful in a low interest rate environment when the Section 7520 rate is low. However, GRATs can still be fruitful in a high interest rate environment. The current market conditions could be viewed as favorable for GRAT creation due to the repressed prices of assets—most publicly-traded securities are trading at significant discounts due to lower valuations. As of this writing, the Section 7520 rate is 4.40%. A GRAT created today can successfully transfer wealth to the beneficiaries if the assets contributed appreciate more than 4.40% over the GRAT term.

So how do you go about actually creating a GRAT? First, identify the assets you wish to fund the GRAT with—generally either marketable securities, private company shares or real estate. Then you must engage an estate planning attorney to draft the GRAT agreement. This document will contain key provisions such as the funding amount, the annuity term, the annuity payments back to the grantor and the trust beneficiaries. It would be prudent to consider utilizing a “zeroed-out” [1] GRAT strategy, for which the annuity payments bake in the hurdle rate. These annuity payments will be considered in good standing with the IRS as long as they do not increase by more than 120% of the prior year’s payment. There’s an alternative Section 7520 interest rate applicable for these purposes (this rate is 4.45% as of this writing versus the 4.40% standard Section 7520 interest rate).

It’s important to note that success can be contingent on selecting the best assets to fund the GRAT, but an unsuccessful GRAT shouldn’t necessarily be considered a loss. If the contributed assets do not appreciate more than the hurdle rate, those assets are simply transferred back to the grantor. Keep in mind, however, that you will incur administrative expenses to implement the strategy, including, but not limited to, fees paid to the attorney who drafted the trust agreement and valuation expenses should you choose to contribute private company shares to your GRAT. While it may be tempting to fund a GRAT with family business stock, some experts opine that GRATs funded with marketable securities are more likely to succeed than their counterparts, as valuation expenses can be quite costly. A pre-initial public offering stock would be a notable exception.

Even in a high interest rate environment, there is one GRAT strategy that is highly likely to succeed. This strategy is known as “rolling GRATs”, which can be defined as a series of short-term (read: 2-year) GRATs, for which each subsequent GRAT is funded by the annuity payments from the preceding GRAT. This strategy reduces mortality risk versus implementing one longer-term GRAT, which is one of the key considerations for any GRAT. The grantor of a GRAT must survive the annuity term. Otherwise, the contributed assets and their appreciation are clawed back into the grantor’s estate. Rolling GRATs also spread out interest rate risk, as each subsequent GRAT would have a new hurdle rate.

Functionally, a rolling GRAT strategy would operate as follows:

  • Execute the trust agreement with a 2-year annuity term and a zeroed-out[1] annuity payment schedule. Assume an agreement date of March 15, 2023, a contribution of assets with a fair market value (FMV) of $2,000,000 and the current 120% Section 7520 hurdle rate of 4.45%. For your GRAT to be successful, the GRAT assets therefore must appreciate to $2,089,000 by March 15, 2025.
  • The first-year annuity payment, made on March 15, 2024, should be 47.47729% of the initial FMV of the contributed assets. This allows for a second-year annuity payment percentage to be 120% of the first-year annuity payment percentage and for both annuity payments to total the FMV which beats the hurdle rate ($2,089,000). Therefore, the March 15, 2024 payment is calculated to be $949,546.
  • If you funded your GRAT with marketable securities, you would calculate the FMV of the GRAT on March 15, 2024, and transfer shares with an FMV of $949,546 to a new GRAT with an agreement date of March 15, 2024, which also has a 2-year annuity term. The hurdle rate would be the Section 7520 interest rate on March 15, 2024. Should you have chosen to fund your GRAT with, for example, real estate family business stock, you would engage an expert to perform a valuation as of March 15, 2024, and transfer an interest with an FMV of $949,546 from the initial GRAT to the new GRAT.
  • Given that the first-year annuity payment percentage is 47.47729%, the second-year annuity payment should be 56.97271% of the initial FMV, which is 120% of the first-year annuity payment percentage and calculated to be $1,139,454. When you add both annuity payments together, they total $2,089,000, meeting the hurdle rate.
  • Should the FMV of your initial GRAT be greater than $1,139,454 on March 15, 2025, this would make it a successful GRAT. You would then apply the same exercise that was performed at the end of year 1, calculating the FMV of the initial GRAT on March 15, 2025 and transferring shares with a FMV of $1,139,454 to another new GRAT with an agreement date of March 15, 2025. The shares remaining in the initial GRAT after the second-year annuity payment can now be transferred to the GRAT beneficiaries free of gift and estate tax. Again, do keep in mind, should you have chosen to fund your GRAT with harder-to-value assets, you would need to obtain yet another appraisal as of the end of the initial GRAT term.  Avoiding the expense of obtaining three valuations for your initial GRAT (and then annually thereafter for each of the new GRATS) makes for a compelling argument to consider funding your GRAT with marketable securities rather than illiquid assets.


[1]: Only a “zeroed-out” GRAT eliminates all possibility of a taxable gift. A Zeroed-out GRAT is one where the present value of the annuity of the grantor’s retained interest is equal to the full value of the property initially transferred to the GRAT. Essentially, the hurdle rate is baked into the annuity payments.


How to Create a Next Gen Wealth Education Plan

Most families struggle when it comes to planning wealth education for the next generation. Often, learning initiatives start informally and don’t get real traction because  there is no formal learning program in place. Initially, parents conduct wealth education in fits and starts. Perhaps the family brings in a consultant or speaker, attends a conference, or the CFO provides an annual review of the company’s financial statements. After the event, interest is high and the next gen is excited, but time passes, momentum is lost, and interest in wealth education wanes.

Knowing when, where, and how to build a framework for intentional wealth education is key to keeping next gen wealth education on track. Follow these steps to create a wealth education plan for your family that will inspire the next gen to become extraordinary stewards of wealth.

Start with Clear Purpose and Direction

The first step of developing a wealth education plan is to define a clear purpose and direction. Just as a mission and vision statement pull a business towards a unified goal, having a clear vision, purpose, and desired outcome for education
initiatives will help align next gens to the importance of wealth education. Simon Sinek, speaker, and author of “Start with Why” wrote, “Achievement happens when we pursue and attain what we want. Success comes when we are in clear pursuit
of Why we want it.”

The “why” drives the education plan through purpose and intent. Anyone planning wealth education should ask, why is education important to where the family is at this time? Furthermore, why should family members prioritize the education that is presented to them? Knowing the why is fundamental to lasting and meaningful education for next gens. Education for the sake of education and checking boxes isn’t likely to win hearts or minds and get the intended result of engaged and competent stakeholders. However, demonstrating how wealth education is an integral piece of their personal development, goals, and ultimately, defining what’s in it for them, drives adoption and engagement.

Determine Motivators and Cater to Competing Priorities

The second step when planning wealth education for your family is to understand competing priorities and the “WIIFM Principle.” WIIFM or “what’s in it for me,” gets to the heart of motivation and engagement. A next gen’s time is a finite resource as they build their career and life both in and out of the family enterprise – thus, the asks of their involvement and engagement should be valuable to them and impactful to the family system.

Identifying the WIIFM for the next generation will be unique to each family, its values, and priorities. Some families use wealth education to build relationships between branches or large shareholder groups, some use education mandates for board participation, while others use successful completion of wealth education programs as a benchmark for family council eligibility. These extrinsic motivators can be a carrot and stick when it comes to initially engaging the next generation, but they lose their impact over time. While prepared and competent stakeholders are important to the family enterprise, this intangible vision is not guaranteed to incentivize the next generation. Instead, to encourage genuine buy-in and lasting engagement, focus on intrinsic motivators to answer the WIIFM question. Perhaps wealth education is an overarching family goal, but individuals set the meaning and importance for their own participation. Consider that each family member is truly different from the next, and some may have different goals depending on their learning capacity, direction, interest, and engagement. Pairing a family purpose while allowing next gens to define their own meaning and success will encourage adoption at the individual level.

Select Effective Administration

The third step is to determine how and by whom wealth education will be administered, or the educational strategy. Ask the fundamental questions regarding “who, what, where, when, and how.” Who are we educating? Where will they learn? Is learning in-person, with a mentor or virtually better suited to family’s schedules? Determine the cadence (monthly, quarterly, etc.), method (in-person, remote, asynchronous), and clearly define success (complete coursework, pass an exam, etc.). Determining the educational strategy sets the stage for the family to focus on learning and keeps momentum moving forward.

Prioritize Learning Areas

Finally, focus on outlining and prioritizing learning objectives. Are there topics that need to be urgently addressed to accomplish ownership or governance related issues? Use urgent items as a starting place for the wealth education plan and to inform the overall curriculum. To aid curriculum prioritization, survey the next generation to see what topics most interest them, and how topics help them to meet their personal goals. From there, plan education and mentoring around those key areas.

Alternatively, provide a pre-selected list of education topics for next gens to explore. After establishing a list of important topics and objectives, create a learning schedule and review it periodically to ensure it is still aligned with the family’s goals. While not every detail needs to be in place, having a clear framework will keep the wealth education plan moving forward.

Planning and executing wealth education for the rising generation can be a monumental task but starting with the purpose and vision can guide the process. Wealth education is a wonderful opportunity to bring the family together and unite around shared vision and values, drive engagement, and move the family enterprise forward.

To get started with your family’s wealth education plan, take our learning assessment here and unlock access to the Personal Education Plan workbook.

Kirby Rosplock, PhD. is the Chief Learning Officer and Founder of Tamarind Learning. Torri Hawley, MS, is the Client Education Manager at Tamarind Learning.



Women & wealth: Be prepared!

In the past few months, the subject of women and wealth has come up frequently in my conversations with friends and colleagues. This is a timely topic indeed. According to Diane Doolin of the Doolin Group at Morgan Stanley, “The greatest wealth transfer in history is under way, and research tells us that women will control 70% of the nation’s wealth by 2030.” In keeping with the Girl Scout motto, “Be prepared,” women must educate themselves about the challenges they will face.

Doolin presented a session on financial readiness for women at our recent Transitions West conference, held in San Diego. According to Doolin, many women have not met with their family’s trusted financial adviser, nor do they have access to key records, passwords and documents. This can be a critical issue when facing the sudden death of a spouse or partner. She poses some questions: Are you aware of all your financial assets? Do you have life insurance, a will and a tax plan? Have you informed your children about your estate plans?

Having a family business further complicates the situation. What is the family’s policy toward married-ins? Where are the key documents? Who owns the stock? What trusts have been set up?

Women must ensure their children and grandchildren are prepared to be good stewards of their wealth. Regular family meetings with financial advisers are a good place to start. Often, until a death or divorce occurs, most children have not met with their family’s adviser and have not been part of the planning process. Early communication and financial education are necessary to have a successful wealth transfer. Otherwise, Doolin warns, the family faces a universally lamented fate: “shirtsleeves to shirtsleeves in three generations.” (A similar saying in Chinese translates to “rice bowl to rice bowl.” In Italy, it’s “stables to the stars to the stables.” In Brazil, it’s “rich father, noble son, poor grandson.”)

“It is critical for women to participate fully in decisions about planning and their financial futures,” says Adrienne Penta, senior vice president of private banking at Brown Brothers Harriman.

“Families make better decisions when all stakeholders are at the table,” Penta says. “Unfortunately, women sometimes opt out of these conversations because many feel as if they are not heard or they are misunderstood. In fact, 67% of women feel as if their adviser doesn’t understand their values or objectives.” This drives the need to create an inclusive and dynamic environment for conversations about wealth that, in the end, will provide a foundation for preserving family wealth over generations, she explains.

Women who work in their family business or are active in family governance tend to be better prepared for their future roles as inheritors. The rest must begin the process of educating themselves. If you cannot answer all of the aforementioned questions, start asking for help now.

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

Who will inherit the family business? A strategy for succession planning


A poorly planned succession has the potential to derail a closely held family business. The lack of a well-drafted plan can cause financial hardship on both the business and the family. Letting the estate plan dictate how a business is passed on may cause issues, and there are numerous stories of prominent business empires that have been adversely affected by the lack of a well-designed succession plan.

There are several strategies that small business owners can take to ensure a smooth transition from one generation to the next. Careful planning is needed. Families should be aware of the important role that life insurance can play in smoothing the transition from one generation to the next.

Estate planning is not succession planning

The first thing to keep in mind is that estate planning and succession planning are not the same—they have very different goals. Generally the goal of an estate plan is to primarily provide for the surviving spouse and subsequently provide for children equally. The goal of a business succession plan, however, is to ensure the business passes to the heirs who are active in the business. One of the big challenges involves addressing the needs of children who are active in the business as well as those who are not. Should all the children be treated equally, or should they be treated equitably? Too often, the succession defaults to the owner's estate plan, which usually calls for the estate (including the business) to be divided equally among all children.

As an example of how complicated this can be, consider a business family with two sons, one who works in the family company and one who doesn't. The active son, John, has really built up the business, spending considerable time and effort to grow it. The dad, Mike, stepped aside many years ago, although Mike still owns 60% of the business because he is not yet ready to relinquish control. Of the balance, 30% is owned by John and 10% by his brother, Mark.

John feels that he should get the business, and he's been identified as the heir apparent. In fact, the estate plan says that the business passes to John and all other assets are divided 50:50. Mike's wife, Ann, is upset that Mark's inheritance isn't the same as his brother's. Ann wants everything equal across the board. Succession plans for family businesses can become fraught with all the emotional interplay that occurs in families. Family members must understand that there is a difference between "equal" and "equitable." Equal distribution does not take into account the contributions of the children who are active in the business and contribute to its success. An equitable distribution considers these factors.

There are several strategies that closely held family business owners can use to ensure a smooth transition.

1. Address the needs of both active and inactive children. Those who spend their careers contributing to the company's growth and success should be rewarded for their efforts.

2. Recognize the difference between equal and equitable distribution. Should all the children be treated equally, or should they be treated equitably? Business owners should consider the needs of all family members, including their own needs, when developing a distribution strategy. Not every family member has the same needs or wants. It may be best to leave the family business to the active children and other assets, such as investments and life insurance, to the inactive children.

3. Hold a family meeting. Family business succession planning can get bogged down by emotional complexities. The family should consider holding a family meeting, moderated by trusted professional advisers. A meeting enables family members to talk through the issues and the roles and responsibilities of all family members, both active and inactive.

4. Obtain a valuation of the business. The key to a viable succession plan is a formal valuation of the business. Basing any transfer, during lifetime or upon death, on a proper valuation helps to limit the chances that the IRS will contest the valuation, which would result in additional estate or gift taxes.

5. Commit to a succession plan. Without a well-designed business succession plan, inheritance of the business defaults to the owner's estate plan, which often distributes the estate (including the business) equally among all children. Owners must give careful consideration to how the business should transition to the next generation. When a written plan is created, it should be communicated to all family members.

Gifting stock

Once a succession plan is in place, it is important to recognize the efforts of the children who are active in the family business. For example, John, in the situation described earlier, should be rewarded for his efforts in growing the business. Mike should consider gifting additional stock to John, both to reward him and to shift the future appreciation and growth of the family business to John's estate as opposed to Mike's.

If Mike is thinking about gifting an additional 5% stake in the business to John, he should consider using valuation discounts to leverage this gift. For decades, senior-generation family members like Mike have made gifts or sales of minority and non-controlling interests in their family businesses to junior-generation family members. Through proper planning, these business owners have used the lack of marketability and lack of control valuation discounts—generally 20% to 30%—to reduce transfer taxes and increase the amount of wealth transferred over several generations. If he wants to implement this strategy, Mike should act now, as the availability of these discounts in the future is questionable.

The role of life insurance in succession planning

Owners of closely held family businesses should understand the multiple roles that life insurance can play. Since the triggering event in most business successions is death, life insurance can obviously serve as the main funding vehicle for a well-designed succession plan. It can also provide liquidity when it is needed most—not only to transition the business to the next generation, but also as a source of funding to pay federal and/or state estate taxes. Life insurance might be used to fund a buy-sell arrangement for the active children, or it can serve as a wealth-replacement vehicle for inactive children who will not receive an interest in the business. In the previous example, John could own a life insurance policy on his brother Mark's life to help pay Mark's family for the value of the business when he passes away. If John owns a permanent life insurance policy, he might have cash value that he can access for an installment purchase of the business in case Mark wants to be bought out sooner.

Another objective that life insurance can fulfill is equalization between children. For example, Mike, the dad, could purchase an insurance policy on his life (or on him and his spouse) and name Mark (or a trust for his benefit) as the sole beneficiary. John would inherit the business, and Mark would inherit an equivalent amount in life insurance to make the brothers' inheritances equal—just as Ann wants.

Succession planning is a big topic, and this brief overview has barely scratched the surface on many issues, but this should help explain the importance of putting a plan in place. Formulating a succession plan is critical to the continued success of a closely held business over several generations. If the legacy of the business is important to your family, take the time to develop a strategic succession plan.

Meg Muldoon is an assistant vice president of advanced sales with The Penn Mutual Life Insurance Company ( She also has related experience as an attorney in the financial services industry.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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Two money-management lessons for heirs: Quantify and qualify


In estate planning and wealth transfer, various financial tools—including trusts and partnerships—are available to help the next generation "test the waters" of sound money management.

At some point, however, the heirs take over and the risk of errors increases. Responsible heirs follow two simple but critical rules of fiscal stewardship: Quantify what you really need to live on, and qualify what a rewarding or comfortable lifestyle means to you.

This is not always as simple as it sounds. Heirs' abilities to understand the responsibilities and pitfalls of wealth vary, depending on their knowledge, interest and preparation. As any parent or key manager will admit confidentially, some family members are ready and others have a long way to go.

A 2014 survey by Merrill Lynch found that 70% of respondents with $5 million or more in investable assets wanted their money to last beyond their lifetime, but only 16% of those respondents correctly pegged the percentage they could actually live on for sustainable wealth. (Most overestimated.) Two common mistakes included overgiving without accountability and confusing wealth discussions with simply talking about dollar amounts.

Discussing dollars and cents is important. However, these conversations require context. What dollar figure does each heir believe he or she needs in order to live a quality and comfortable life? What is considered "fair" treatment of family members who work in the family business and those who don't?

Below we present a scenario involving a family who needed to quantify and qualify their approach to individual inheritance. (The names and situation are fictitious and are used for illustration only.) Note that the situations they faced had the potential to reduce their wealth and raised questions about fair distribution, wealth management competency and philanthropy.

The Dahlagher family

The Dahlagher family made their money in farming and built an agricultural products enterprise that includes a feed distribution company. The business is in the third generation of family ownership. Howard is the retired family patriarch. His brother Arthur (president) and daughter Jordan (vice president) are running the company. Most family members do not work full-time in the business, while some have transitioned in and out.

Let's examine how the individual goals of three next-generation family members affect the family business and the family's wealth.

Carla: The aspiring entrepreneur. Carla, a recent college graduate, is Arthur's youngest daughter. She wants to run her own business, financed initially by family money. She has worked in the family business off and on but doesn't have an interest in it as a potential career.

Carla won't have access to her trust until she is 35, but she would like to open a restaurant and has requested startup funds from Arthur. Carla hasn't had to worry about money and is used to asking for it when she needs it. She has a business plan and has set her sights on leasing a building in a trendy part of the city. She has also discussed partnering with a chef.

Because Carla is unproven as an entrepreneur, it is not likely that family members want to put their personal money or the family business at risk. One option is to discuss the possibility of a loan from Carla's trust. If the business thrives, she can pay the money back and begin to earn an income from the business until her trust matures. If the business fails, she will effectively receive a smaller inheritance with low risk to the family wealth.

In the meantime, Carla will recognize that she has a finite amount of money that she could lose if the business fails. She will also realize that she is in charge of sustaining and building her own personal wealth for her lifetime. As a young person, she may not have previously considered the long-term impact of risking her wealth. This request presents a perfect opportunity for Arthur to talk with her about her life goals and the variety of ways to build wealth with less risk. What does she believe is "enough" to live on, now and later? Arthur can let her know that she will always get family support, but financial support is not guaranteed forever.

Jordan: The vice president. Jordan, married with one child, is Howard's daughter. She has worked in the family business since graduating from college. She also assists with decisions regarding the management of her father's and uncle's personal finances and investments through a family office. She has a strong interest in preserving the family wealth for the next generation, but she also wants to leave a legacy.

Jordan's idea of a fulfilling life involves traveling and helping needy communities around the world. She anticipates working part-time and hiring a non-family CEO when Arthur retires. She also wants to set up a private foundation, but she hasn't convinced the family to take action.

Many members of wealthy families want to support worthy causes. It is OK for individual family members' philanthropic goals to differ, as long as there is some agreement on which causes the family business will support. Establishing an annual budget and clarifying giving categories can keep family members inside and outside the business on the same page. This will also help the business manage requests from community or charitable organizations.

There are pros and cons to starting a private foundation that should be considered. As an alternative, donor-advised funds for specific causes or charities require less administration while still offering tax benefits and the rewards that philanthropic activity brings.

Jordan's plan to hire a CEO to enable her to pursue her personal passions also needs careful consideration. Currently, she receives a salary and benefits from the business. If she cuts back to a part-time position, her pay will be reduced—and so will her influence on business decisions.

It is in Jordan's and the family's best interests to have discussions about succession before Arthur nears retirement. She may be able to maintain her full-time position while also taking breaks to pursue her volunteer activities—and gradually transition into retirement with a comfortable nest egg for herself and her family.

Jon: The doctor. Jon is Howard's son and Jordan's brother. He has a specialty medical practice in an affluent area. He has some personal ongoing expenses from a recent ID theft, a divorce settlement and shared custody of his three children. Although Jon earns an income outside the family business, he believes he should have a share of the family wealth. Currently, he is a shareholder in the business and receives an annual profit-sharing dividend. He thinks the amount of his dividend will increase.

As a busy doctor, Jon experiences a lot of stress. He has a vacation home but wants to purchase a second vacation home in the Caribbean that he can escape to and rent out when he's not there.

Although Jon worked in the family business in the past, he isn't contributing to its success going forward. The family must discuss the difference between compensation and bonuses (for family members who work in the business) and dividends (for all owners, whether they work in the business or not). Determining a value for the business today may help calculate each family member's fair share. Those figures can be brought to the board for a vote.

Whether an individual family member should benefit from the company's future growth may be decided on a case-by-case basis. By the same token, the way ownership is divided determines the risk each family member would face should the business profits shrink.

Jon has a right to use his money however he chooses, but he must understand that his dividend from the business is based on the company's continued profitability and is not guaranteed. Can he afford the lifestyle he wants (and be able to pay his debts) on just his salary? The second vacation home may have to wait in light of those considerations until some of his debt is paid off. He also has his retirement and children's futures to think about. He needs to get his estate planning in order, as well; after all, he might get married again.

Start your planning now

Each person has his or her own understanding of what a comfortable lifestyle entails. That's why the family and their advisers must review the numbers in terms of liquid and illiquid assets, tax impact, risk management and charitable giving. Each individual heir's life expectancy and goals should be considered. Your advisers can help you devise the best solutions for your family members, your business and your family legacy.

The senior generation shouldn't just assume that their children will make sound spending decisions. A family wealth education program can teach heirs how to preserve family wealth into the next generation and beyond. It is best to have a series of discussions over time (months or years leading up to the generational transfer of wealth) so that heirs are informed as well as comfortable with the plan.

Sometimes major life or business transitions can prompt these discussions. With change can come strong emotions. Try to look for areas of shared values and goals within the big picture of preserving family wealth.

Homero Carrillo Jr., CPA, manages the family office and tax practice at Weinstein Spira (, where his clients are entrepreneurs and high-net-worth individuals. Amy Sbrusch, CPA, serves the real estate and business interests of her clients at Weinstein Spira.

Copyright 2016 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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Estate constraints often do not work as planned

In a letter to James Madison dated September 6, 1789, Thomas Jefferson wrote, "[T]he earth belongs in usufruct to the living . . . the dead have neither powers nor rights over it." But contrary to Jefferson's suggestion, in multigenerational family businesses the earth often belongs to the dead.

While we are all influenced by past generations, some family businesses (and their stakeholders) are not only influenced but also controlled by them. Devices such as elaborate estate constraints, incentive trusts and restrictive gifts determine which actions the living must take to inherit a full share in a family business, how the living will manage the business and the terms under which they may sell it.

When family business owners are deciding how to dispose of their interests, they are typically concerned not only with the preservation of the business, but also with the development and self-sufficiency of their heirs and the strengthening of the family that owns the business. The way these dispositions are made affects the long-term sustainability of the business, the functioning of the family as a group and the functioning of individual family members. Despite the attention usually put into the structure of transfers, some of the most serious problems family businesses experience result from intergenerational transfers that do not accurately assess such impacts.

Decision making after death

Consider the following hypothetical: The patriarch of a family established a chain of local hardware stores that has thrived despite vast changes in the competitive landscape, especially intense pressure from larger, well-capitalized competitors such as Home Depot and Lowe's. The business owner also shrewdly purchased the real estate in the stores' locations. In his estate plan, the father transfers ownership of the stores (the family business) to his two children in equal shares. One child works in the family business but the other does not.

The terms of the transfer prohibit the alienation of the shares during the children's lifetime for less than a price predetermined by the parent. They require that if a transfer is to be made, all of the family business assets must be disposed (e.g., the non-real estate assets may not be sold without the real estate, and vice versa). The terms of the transfer also require the creation of a board of directors consisting of three people—the two children and the father's financial adviser.

Despite the father's best intentions to plan for the future, this restrictive structure may generate a set of problems once he dies. A restrictive transfer implies that the transferor views his or her heirs as immature and doubts their capacity for judgment and for cooperation in the present and the future. Thus, it may limit the heirs' personal development. In addition, it puts extra pressure on the relationship between the heirs as they engage in joint decision making about the business. Even after death, the transferor remains the decision maker. Yet, for a transfer to have long-term success, the next generation must make a transition from "the children of the family" to a partnership of mature adults who are able to make their own decisions.

Overfunctioning and underfunctioning

Family Systems Theory, introduced by Dr. Murray Bowen in the 1960s, describes "over/underfunctioning pattern," a relationship pattern that is helpful in understanding the underlying family dynamics of a restrictive transfer and its implications for the future. One family member (often a parent)—the overfunctioner—takes more responsibility than appropriate for a given situation, while another (often a spouse or a child)—the underfunctioner—takes less responsibility than appropriate. Both postures have costs, yet the pattern tends to perpetuate over time. Overfunctioners often feel overburdened, tired and resentful of the excessive load but are convinced that things will fall apart if they fail to act. Underfunctioners deny themselves the chance of living life to the fullest of their capacities by staying in a more dependent and immature position. Underfunctioners are convinced that they can't do anything different and resent the miserable position they are in. Analysis, thinking and effort can unlock an over/underfunctioning pattern. Regrettably, a restrictive type of transfer can contribute to the persistence of this pattern for generations to come.

In addition to locking such a pattern in place, restrictive transfers of family business interests can carry other serious complications. No transfer can fully and accurately foresee the future circumstances that family members and the business will face. In the hypothetical example above, the parent limited the rights of his children to exit the family business by establishing a minimum sale price. That price may not be realistic by the time the siblings inherit the business. Further, if one of the children experiences significant financial need—because of an illness or for another reason—and a sale becomes necessary, the restriction is likely to cause serious consequences for that child as well as conflict between the siblings, who in this case have very different roles in the business.

Beyond a foreseeable circumstance such as financial need, other situations may arise in which the only rational option is to sell the family business. It may turn out, for example, that the land proves to be far more valuable than the business itself. The children or family members need to have the freedom to sell in that situation, or else one goal of the parent (the financial health of the heirs) is jeopardized. The restriction itself, contrary to the father's desire to promote his family's financial security in the present and in the future, may cause unnecessary and otherwise avoidable stress to the family as well as undermine their well-being.

Other alternatives

There are many alternative paths that do not carry the risks that restrictive transfers do, while preserving both the family business and the family itself. The identification of such alternatives should begin with a serious analysis of the transferor's goals in making a property disposition, as well as an analysis of the family's relationship style. Often, it becomes apparent that less restrictive devices are more effective in accomplishing the transferor's purpose while avoiding the downside of a restrictive transfer. In the example above, the father imposed on his children a governance structure for the family business. This imposition may imply a concern over the children's ability to cooperate. If that is the underlying reason for the imposition, the desirability of transferring any asset to them in some form of joint ownership may not be the right course. But if, after further analysis and discussion, it appears that the siblings might be able to learn to work together, an intermediate approach may carry the most potential. For example, the father could transfer certain limited management and ownership rights to the children while he is alive, but retain some control to intervene and guide the children until some determination can be made regarding their ultimate ability to work together.

Another benefit of a serious analysis of the transferor's goals and family dynamics is less obvious. Upon deeper examination it may become clear that multigenerational family dynamics play a larger role in a transferor's decisions than at first appears. For example, a transferor's birth order (whether the transferor was the oldest, middle or youngest child) and role in the family help explain the degree to which the transferor tends to overstep the boundaries of his or her areas of responsibility. Another example is a family in which irresponsible behavior and decision making from a young family member in a previous generation jeopardized the business. This past experience might explain a transferor's apprehension about giving authority to the next generation. Awareness of these factors (family history, habits, fears, values and strengths) may lead the transferor to assess the extent to which decisions regarding property dispositions are based on past events rather than on a realistic evaluation of the present circumstances.

An experienced professional can contribute a great deal in crafting an effective asset transfer process (whether by estate planning or otherwise) by encouraging an in-depth examination of the transferor's goals and family situation. It should be acknowledged that the success of an intergenerational transfer is never guaranteed. Nonetheless, the prognosis is better if a transferor, aided by professional expertise, considers the characteristics, history, strengths and vulnerabilities of both the business and the family involved. Exploring possibilities other than restrictive transfers may provide, in the long run, a better chance of achieving the transferor's goal of preserving and strengthening the family as well as the family business.

Mariana Martinez Berlanga, Psy.D., operates Bethesda Family Therapy in Bethesda, Md. (www.bethesda, and is on the faculty of the Bowen Center for the Study of the Family in Washington, D.C. Peter M. Bloom, Esq., operates The Bloom Group LLC in Washington, D.C. (

Copyright 2015 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact

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A tax-efficient way to transfer your business

Estate tax “freeze” techniques offer great flexibility for the senior generation to protect and oversee business operations as the younger generation eases into operational control. The owner of a successful family business can use these techniques to transfer appreciating assets to the next generation or to key employees.

The goal is to maintain the value of the business while avoiding a double level of corporate taxation and minimizing gift and estate taxes. There are a variety of ways to structure an estate freeze, such as recapitalizing the business, setting up a grantor-retained annuity trust or making an installment sale to a trust or family member. Although the adoption of any transfer technique must depend on the specific circumstance of the transferring business, one variation of a recapitalization, often called a “drop and freeze” transaction, is designed for owners of closely held businesses, especially those organized as C corporations.

The C corporation conundrum

Many small and family-owned businesses are organized as C corporations, but there are more tax and non-tax advantages to being a limited liability company (LLC) or partnership. Consequently, according to Internal Revenue Service data, the number of businesses filing tax returns as C corporations has declined almost 16% over the past three decades, while the number of businesses organized as partnerships or LLCs has increased more than 55% over the same period.

As the owners of older family-owned C corporations begin to contemplate various exit strategies, such as a sale or transition to the next generation of owners, the corporate form poses several problems:

• A sale of the corporation’s assets will create a double level of tax on capital gains—once at the corporate level and again when the assets are distributed to the shareholders in a liquidation of the corporation or as a dividend.

• Gifts of valuable corporate stock are subject to federal gift tax at rates as high as 35%.

• The owners of a rapidly appreciating asset, such as a successful small business in any form of entity, face an ever-increasing estate tax liability as the value of their estate increases.

The drop and freeze solution

Many small businesses use the drop and freeze transaction to solve these problems. In this transaction, an existing C corporation contributes its operating assets to an LLC or partnership in return for a “frozen” partnership interest. As part of the transaction, two classes of equity are created in the partnership: (1) a preferred interest that is “frozen” in value and pays a fixed and certain rate of return, with little participation in equity growth; and (2) a common interest that enjoys all of the income, growth and appreciation above and beyond the preferred return.

For estate tax purposes, this technique can effectively “freeze” the current value of the preferred business interest within the owners’ estate. The common interest transfers the desired portion of the appreciation in the business to family members and employees at a reduced tax cost. The common interest is generally structured without voting rights and with restrictions on its transferability. As a result, the common interests have valuation discounts for lack of control and marketability, allowing them to be sold or transferred at a lower value.


While the procedures in any specific case must be tailored to the facts of the business and the needs of the transferor, here are the steps in implementing the technique:

1. Transfer assets to the LLC. The existing C corporation contributes all of its operating assets to a wholly owned LLC in exchange for 100% of the membership interests in the LLC. Initially there are no tax consequences, because the LLC is wholly owned by the corporation. The LLC now owns all of the assets necessary to conduct the corporation’s business. Owners may consider a Subchapter S election for the corporation as part of this restructuring.

2. Assess the asset value. After the corporation’s assets are transferred to the LLC, the value of the assets is assessed to determine the potential gift tax consequences of a gift or sale of the LLC interests to family members. The LLC will be treated as a partnership for tax purposes when the interests are later transferred to family members and employees.

3. Structure the preferred and common interests. After the assets are valued, the two LLC equity classes—the preferred, or “frozen,” interest and the common interest—are set up. The preferred interest must generally carry a preferred return that entitles the holder to a priority payment of the LLC’s cash flow. The preferred return would have priority over other distributions and would be paid to the corporation first. One disadvantage of the drop and freeze is that this preferred return is subject to the corporate double level of tax. As a result, many LLCs make the preferred return as low as possible without its being commercially unreasonable.

4. Begin buying down the corporation. The owners begin a gradual buy-down of the corporation’s equity through allocations of the LLC’s cash flow. This process attempts to “freeze” the taxable value of a business within a taxpayer’s estate so that future appreciation is transferred to family members and employees free of tax. Using the asset value established when the corporation’s assets were transferred to the LLC, this “invested capital” amount would be paid down over time as the stockholders of the corporation are gradually bought out.

5. Complete the asset transfer. During the buy-down, the corporation continues to receive a preferred return as described above. However, as payments in excess of the preferred return are made to the corporation over time, its invested capital is bought down until reaching zero (or some other minimal level desired by the owners), and the corporation is bought out of the LLC at a nominal amount. The result is an effective and tax-efficient transfer of wealth to younger generations or key employees.

Gift tax issues

Any succession planning strategy, including the drop and freeze, must comply with Chapter 14 of the Internal Revenue Code, which provides that the transaction must meet certain tests in order to be considered a bona fide business transaction and not a taxable gift. That is especially so when family members receive interests in the LLC, regardless of whether the LLC common interests are purchased for fair market value or given for no consideration.

In general, the value of the common interests must be at least 10% of the total value of “frozen” or preferred interest. Thus, if the value of the preferred interests in the LLC is $10 million, then the common interests must be valued (for gift tax purposes) at a minimum of $1 million. Chapter 14 also requires that the common interest transfer:

• Is a bona fide business arrangement.

• Does not transfer the assets for less than full and adequate consideration.

• Compares with similar arrangements that would not involve family members.

All three of these tests are presumed to be met if the agreement is only between unrelated individuals, such as non-family key employees. If common interests are issued or sold to key employees at the same time as they are issued to family members, and if each interest transfer is commensurate with the recipient’s role in the LLC, there is less likely to be gift tax liability. However, if family members receive preferential treatment, it is more likely that at least a portion of the equity grants would be considered a gift.

Looking toward the future

The partnership drop and freeze must be carefully structured to comply with the relevant laws and regulations in order to avoid adverse gift tax consequences. It should be done in consultation with a competent legal adviser. However, if done correctly, the estate freeze transfer can be accomplished while minimizing gift tax on the asset appreciation. The drop and freeze can thus be an effective strategy to preserve hard-earned financial assets and ensure that the family business is well positioned for the future.

Jeffrey A. Markowitz (left) is a principal and Christopher A. Davis is an associate in the Tax and Wealth Management group at Miles & Stockbridge P.C. They are based in the law firm’s Baltimore office (

Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact



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Multiple marriage planning

The family tree today looks much different than it did 50 years ago. Divorce and remarriage have caused new branches to take root and extend in different directions. Stepchildren are everywhere!

There have been other changes, as well. Consider the increased prevalence of medically assisted procreation, and of acknowledgment of children born out of wedlock. There are also more “dynamic adoptions” (grandparents raising their grandchildren owing to unstable family circumstances). Gay family members are coming out of the closet in increased numbers, and many of them are forming family units complete with children. Compounding these changes is the fact that people are living longer than they did 100 years ago.

The two family trees shown here demonstrate the changes in the institution of “family” over the last half-century. This new paradigm has dramatically affected estate planning concepts. Many family business owners are concerned about the effect of estate taxes, but tax considerations are not the only complicating factor. The “simple will” is going the way of the dinosaur. It is unrealistic to expect a form-driven document to be anything but a disaster.



Estate planning implications

Estate planning today means giving attention to three or more generations of the family on a simultaneous basis. Today’s family is more like a “group” than a “unit.”

Multiple marriages tend to create multiple “sets of children.” Complexity increases when both spouses have shared children with more than one partner—which may, or may not, include the current spouse. Stepparents and stepchildren are now typically part of the estate planning equation. Children living in the home often have labels such as “his,” “hers,” “ours” or “somebody’s else’s.” Medically assisted procreation, of course, could have a wide range of ramifications. Families and their estate planning professionals must evaluate such situations on a case-by-case basis.

Common misperceptions

Estate planning professionals often hear the following statements from their clients. Comments like these raise a red flag.

• “We have agreed to leave everything outright to each other. The surviving spouse will leave it equally to all of our combined children.”

• “I love my wife’s [husband’s] children like my own.”

• “My children are already well-provided for by the half of my assets I had to give to their mother [father] in our divorce.”

• “His [her] ex-wife’s [ex-husband’s] family is wealthy and will take good care of those children.”

• “I am scared to give [or leave] assets to my children from my prior marriage because my ex-wife [ex-husband] will talk them out of their money.”

• “I want to keep my assets in the bloodline because my father/grandfather would want it that way.”

• “I don’t want to include adopted children in my estate plan unless I have a chance to know them.”

• “Stepchildren aren’t my grandchildren.”

• “… born in wedlock.”

• “…natural-born children.”

The ‘evil stepmother’ myth

The “evil stepmother” immortalized by the Grimm brothers and, later, by Walt Disney infected many generations with unnecessary prejudice. Family psychologists and therapists have begun to recognize the prevalence of stepfamily situations. Several excellent books have been written on this topic, including Stepfamilies, by James H. Bray and John Kelly (Random House, 1999) and Becoming a Stepfamily, by Patricia L. Papernow (Jossey-Bass, 1993).

Relationships within a stepfamily are very subjective, qualitative, delicate, ambiguous and changing in nature. They include forced relationships, as well as relationships filled with genuine love and affection.

Age differentials between stepparents and stepchildren can be important factors. A combination of stepchildren and “our” children can have serious repercussions within the relationship matrix. The death, incapacity or divorce of the biological parent will likely have serious repercussions in the ongoing stepparent-stepchild relationship.

The standard will and trust phrase, “If any child of mine is not survived by children or other issue …,” will automatically disenfranchise stepchildren, regardless of the nature and quality of the relationship. This is often undesirable —and it’s often unintentional. In any event, it is worthy of discussion.

The trust trap

Trusts are frequently used to preserve and protect financial resources for the surviving spouse before substantial distributions are made among the children. Increased longevity, however, suggests that this typical pattern may be inappropriate. Rich widows tend to live to a ripe old age. This can postpone financial benefits for children until they are much too old to appreciate the financial windfall. This is an especially glaring problem when substantial financial resources are available for shared enjoyment among two or more generations of the family simultaneously. Estate planners are often guilty of allowing estate tax considerations to drive the plan.

Consider the planning complexities associated with stepparents and stepchildren. In many cases, financial resources are preserved for a surviving spouse, and assets are not distributed to children from a prior marriage until after that spouse has died. This may not make sense, however, if the surviving spouse is not substantially older than such children. In addition, there is an inherent conflict of interest between the surviving spouse as lifetime income beneficiary and the children of a prior marriage as remainder beneficiaries. Estate planners and clients should consider better alternatives.

• Life insurance policies can provide “excess funds” that can be distributed to children of a prior marriage so they will not have to wait for a stepparent’s death.

• Making children of a prior marriage beneficiaries of a portion of qualified retirement plans might be an attractive alternative.

Go ahead and face the tough decision of dividing financial assets between and among the surviving spouse and the children from a prior marriage or relationship. Do not be tempted to allow estate tax issues to derail an otherwise perfectly logical plan of action. Don’t be so sensitive about equal sharing with children of the current marriage—it can’t be done.

The timing and value of different assets will thwart plans of this nature. Control over asset distributions will change over time. Priorities will also change. Relationships between a surviving stepparent and stepchildren will likely change after death of the common denominator spouse-parent.

Advisers’ changing roles

Increasingly, estate planners are called upon to exercise multidisciplinary skill sets associated with sociology, behavioral science and psychology. Trusted advisers must be sensitive to family relationships and have an appreciation for family system dynamics.

Estate planning should be holistic and should encompass a process of communication within the family group. Assessment, evaluation and interviews with appropriate family members must be a part of the overall planning process. There is no excuse for the intentional, or unintentional, focus on mechanical and technical aspects of wills, trusts and document drafting. This often leads to the subliminal avoidance of the real issues, hidden agendas and future disasters.

Teamwork with qualified sociologists, behavioral scientists and psychologists is recommended in many cases. The existence of important “soft-side issues” cannot be denied in cases of multiple marriages, multiple sets of children and other special family dynamics.

Dealing with these issues will bring the estate planner into the den, kitchen, bedroom and closet. But that is where important decision-making is done.

Points to consider

There are many species of family trees. The definition of a nurturing and healthy family has been broadly expanded. Estate planning must have broader parameters to include a wide variety of circumstances and possibilities.

• Standard document provisions do not fit dynamic family circumstances. This is now the norm rather than the exception.

• In the most cases, family relationships are more important than estate tax considerations.

• Inherent and natural conflicts of interest associated with multiple marriage situations must be identified and discussed.

• The “all to spouse in trust or outright” will form is often a poor choice.

• Extra life insurance can be a relatively inexpensive planning option that can have remarkable benefits for the family.

• Unique and complex planning tools, such as charitable trusts and asset protection trusts, can provide differing financial benefits for various members of a family.

• Equal money does not define equal love.

• Stepchildren are people, too.

• No, the surviving spouse is not automatically entitled to receive everything.

• Special planning is required in the case of gay families (or gay family members).

• Longevity is an important factor in the estate planning process.

• Mental incompetence and undue influence are significant dangers to consider.

Estate planning for the dynamic family is a craft, an art, an expertise and a necessity. Sharing family wealth cannot be addressed with canned documents. Issues associated with death and relationships require a focus that goes beyond tax planning.

Joe M. Goodman is an attorney, a CPA with Personal Financial Specialist designation and a family business consultant with the Nashville office of law firm Adams and Reese LLP (

Copyright 2012 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permssion from the publisher. For reprint information, contact



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Autumn 2011 Openers

Wellington R. Burt of Saginaw, Mich., really must have disliked his relatives.

Burt, who died in 1919, was a lumber baron who invested in iron mines, railroads, the salt industry and foreign bonds. He was once named one of the eight wealthiest men in America. A probate judge estimated his estate to be worth $100 million to $110 million. But those assets would not go to his children or grandchildren.

Burt’s will, which he wrote in longhand and signed in 1917, stipulated that his fortune not be distributed to his heirs until 21 years after the death of his last surviving grandchild. It took 92 years before the disbursements were cleared to begin.

Burt’s last grandchild, Marion Stone Burt Lansill, died in November 1989. In May 2011, Saginaw County Chief Probate Judge Patrick McGraw made his last ruling in the case, enabling the estate to finally be divided among three of Burt’s great-grandchildren, seven great-great-grandchildren and two great-great-great-grandchildren.

As the nearly century-long saga finally drew to a close, the Saginaw News published a series of articles on Burt, his descendants and his will. Those reports attracted the attention of the national and international media. Many wealthy people have used their last will and testament as a way of punishing or controlling their heirs, but Burt’s measures were extreme enough to cause a global sensation.

Burt’s motivation for inserting such an onerous clause in his will seems to be lost to history. If he intended for his great-, great-great-, and great-great-great-grandchildren to remember the alleged transgressions of their forebears, he appears to have failed at that mission.

His heirs were not the only ones to suffer from his vindictiveness; the town of Saginaw also felt his wrath. At one time, Burt served as the mayor; later, he became a state senator. He funded a municipal auditorium, a women’s hospital, a Salvation Army facility and a YWCA in Saginaw. But he canceled bequests to the town after assessments of his personal property were hiked from $400,000 to $1 million in 1915, according to the Saginaw News.

He did leave a relatively small annual allowance to his children and grandchildren, the newspaper reported. A “favorite son” got $30,000 per year, but the others got only $1,000 to $5,000 annually. His cook, housekeeper, coachman and chauffeur, by contrast, each received $1,000 per year, and his secretary got an annual allowance of $4,000. (One of Burt’s daughters was originally slated to receive a $5,000 annuity, but Burt revoked it because of a disagreement over her divorce.)

As one would expect, various descendants challenged Burt’s will over the decades. In 1920, a son, three daughters and four granddaughters used a Minnesota statute to secure $720,000 in cash and title to iron mine leases in that state, which were valued at $5 million. In 1961, another $700,000 from Burt’s estate was used to settle a suit filed by nine descendants and the estates of three others, the newspaper reported. The state Supreme Court was asked to review the validity of the trust twice.

Divvying it up

Genealogical research was required to identify the 12 bona fide heirs out of 30 people who claimed to qualify for a piece of the inheritance. (The Saginaw News report said the parties were motivated to resolve their last point of contention quickly for fear that more faux heirs would come out of the woodwork.)

Judge McGraw ruled that the beneficiaries should decide for themselves how Burt’s estate would be divided. Their attorneys —about 20 in all—determined that the older heirs with the fewest siblings would get larger percentages. Shares range from 2.6476% ($2.6 million to $2.9 million) to 14.583% ($14.5 million to $16 million), the Saginaw News reported.

The youngest of Burt’s heirs who benefited from his estate was 19 at the time of the May disbursement; the oldest was 94, according to the newspaper’s account. They live in eight different states, from Connecticut to California. Only one lives in Michigan, Burt’s home state. Some of them had never met each other before they learned they’d be splitting the inheritance. Several of Burt’s descendants who would have qualified for a piece of the estate died before the end of the 21-year waiting period.

Did Burt’s spiteful will contribute to the scattering of the family? The answer to that question may never be known, but the facts of the case lead those of us in the family enterprise world to speculate on what might have been.

If Burt’s children and grandchildren had been given access to the lumber baron’s wealth—and the opportunity to learn about stewardship—the extended family might have kept in contact. If they had been able to invest the money as a family unit, they might have been able to grow their collective fortune beyond its current $100 million value. A family foundation might have enabled the Burts to build a legacy rivaling that of the Rockefellers.

Instead, Wellington R. Burt earned himself a global reputation as an ill-willed curmudgeon.








The stat

43% of respondents in a survey of small-business owners cited the economic downturn as a reason for recruiting a relative. The survey was conducted by Hiscox, a specialty insurer based in Bermuda and listed on the London Stock Exchange.





The scoop

The Family Firm Institute, a global association of professionals serving the family enterprise field, turns 25 this year. Practitioners and academics will celebrate the milestone and discuss best professional practices at FFI’s annual conference on Oct. 12-15. The conference will be held in Boston, where FFI is based.





Family Business Magazine receives editorial awards


Family Business Magazine was recently honored with several awards for editorial excellence.

“The accidental CEO,” by Margaret Steen (FB, Spring 2010) received a Gold editorial award in the Focus/Profile Article category in the national Tabbie Awards competition. The Tabbies are presented by Trade Association Business Publications International.

Steen’s article also received a Regional Silver Azbee Award of Excellence (Individual Profile cateogry) in the annual competition of the American Society of Business Publication Editors (ASBPE).

“A family summit gets the succession conversation started,” by Josh Wimmer (FB, Spring 2010) received a National Gold Azbee Award (How-To article category) in the ASBPE competition.

“Money wasn’t enough,” by Barbara Spector (“From the Editor” column, FB, Spring 2010) received a national Apex Award for Publication Excellence in the Editorial & Advocacy Writing category.





Destroyed by fire after 144 years


Store owner Maurice Reeves ponders the rubble that once was his family’s furniture store, House of Reeves, in the London Borough of Croydon. The store, which had stood on the same corner since 1867, was destroyed by fire that erupted in August after protests over a police shooting.

The Reeves furniture store was a local landmark; the part of the street on which it stood was known as “Reeves Corner.”

The Reeves family told the Croydon Advertiser that they planned to reopen. “I feel like I have gone through the whole range of emotions,” Maurice’s son Trevor told the local publication. “At first it was abject misery and despair, and then it was vicious anger at the people who did this. Now I just want to focus on the future and where we go from here, so that we can sustain the business and take care of our staff and their families, and our customers.”













“We did a deal with the devil and it really saddens me [that] the editorial of this quasi public trust that has been on the vanguard of world journalism for years is not in good hands. That I am really struggling with.”


— Bancroft family member Bill Cox III, reflecting on the sale of the Wall Street Journal to News Corp. in the wake of the News Corp. phone-hacking scandal (ProPublica, July 13, 2011).






“The Bancrofts were admirable owners in many ways, but at the end of their ownership their appetite for dividends meant that little cash remained to invest in journalism.”


Wall Street Journal editorial, responding to the ProPublica article and other criticisms of News Corp. (July 18, 2011).





“It has to stay in the family. I put it in trust. They can’t touch it. They can’t sell it. The [SOBs] are going to run it, or they’re going to starve.”


— Joe “Doc” Mattioli, founder of the Pocono Raceway, discussing his plans to have his children and grandchildren inherit the property, an independently owned NASCAR Sprint Cup track (Philadelphia Inquirer, June 9, 2011).






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