Law Tips: It’s Up To You! Get Your Family Business Owners Off the Dime on Succession Planning

Family business owners typically adopt the Scarlet O’Hara approach to succession planning:  “I will worry about that tomorrow, for tomorrow is another day.”  Because there always is a tomorrow, they never get around to it.

In the above scenario, Eric Manterfield, respected business estate planning counsel, points to not only the client’s future issues, but lurking ethical concerns for the attorney.  For our Law Tips readers, Eric shares pointers on why and how you should get family business owners “off the dime” on their succession planning:

One of the most difficult challenges facing those who advise owners of family businesses is to get them to take the first step in the planning process.  You are familiar with the numbers: eighty percent of family businesses do not pass successfully to the second generation; of the twenty percent which do pass successfully, eighty percent of them never make it to the third generation.

People blame this incredible failure rate on death tax; however, taxes are not the problem.  You can plan to minimize and to pay the tax, but you cannot plan around the entrepreneur’s refusal to face his or her own mortality and to make difficult (and emotional) decisions about which child will run the business in the future.

What will motivate your family business owning client to engage in thoughtful estate and business succession planning?  How do you get him or her off the dime?  How do you get them started?

There are a number of issues which may (or may not) be significant to a particular client.  Each family business owner is different, of course.  An issue which may be critical to one business owner may not be at all important to another.  You know your client.  What will motivate this particular client to start down the road?

Too many advisers present many alternative (and sometimes conflicting) strategies, leading the business owner to conclude that this planning is an all or nothing thing.

I recommend, in the alternative, that you make the first step  as small as possible, just to get the family business owner started on the path to business succession planning.  Do not let the client think that everything must be done at once.  Try to avoid complicated design schematics, which are meant to diagram the entire end result on one piece of paper.  I had one client tell me later that the paper looked like “the wiring diagram for a nuclear submarine.”  Why make the first step so big?

Start with the low hanging fruit, such as a simple update to the client’s estate planning documents and buy-sell agreement.  After the owner begins the process, I have found it is easier to keep them going.

One of our most challenging goals is simply to get the family business owner to start on his or her own estate and family business succession planning.  This is not easy.  We ask them to confront their own mortality, to decide which child will be the new manager, to deal with the guilt of naming another child and so forth.  They prefer to put this off.

If you can sit down with a client and discuss some of the critical issues, you just might get the family business owner’s attention.  Have the spouse sit in on your meeting – he or she may be the most effective motivator!

These are real issues which must be dealt with by real people.  It is our obligation to urge our clients to engage in this critically important work.  It is too easy for business owners to adopt the Scarlet O’Hara approach to estate and business succession planning.

Our ethical requirement is to provide our clients with “competent representation.”  For business owners we have represented for years, it is reasonable to conclude that estate and business succession planning are part and parcel of this competent representation we are expected to provide.

We each need to document for our files the continuing efforts we make  to encourage our business owner clients to engage in this work.  Too often the advice is oral and there is no record of the conversation in the lawyer’s file.  When the business owner dies without doing this work and the disaster you warned of becomes real, how can you convince the unhappy family that you had tried to get their father to engage in the strategies which they now (with 20-20 hindsight) understand could have prevented the problems.

Working with family business owners can be very rewarding.  There are complex interplays of business, family, tax and emotional issues.  No plan exactly replicates another because of the wonderful human elements with which we deal.  But this is exactly what makes it fun!

I appreciate Eric Manterfield’s contribution of these words of wisdom. For a thorough discussion by Mr.  Manterfield of many specifics issues, such as lifetime transfers, valuation discounts and Subchapter S protection, take a look at our calendar for the “Best of ICLEF” video program, by Clicking Here.

Thanks so much for reading Law Tips.  But wait!  There’s more Manterfield advice scheduled next week: “The Problem of Too Many Advisers.”   See you then. Have a good week.

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About our Law Tips faculty participant:
Eric Manterfield concentrates his practice on estate planning, family business succession planning and probate litigation.  Eric is a Board Certified Indiana Trust & Estate Lawyer by TESB.  He frequently serves as co-counsel with attorneys throughout Indiana. Mr. Manterfield has created succession plans for family businesses with net worths totaling more than $3 billion.  He is a former President of the Estate Planning Council of Indianapolis and served as the Adjunct Professor of Estate Planning at the Indiana University School of Law in Bloomington for thirty years.  Eric lectures regularly before attorneys, accountants, insurance professionals and the general public on estate planning topics.  He is the author of Critical Elements of Estate Planning with Forms.

About our Law Tips blogger:
Nancy HurleyLaw Tips blogger, has long-standing connections with Indiana lawyers. She was formerly a member of the ISBA and IBF staffs for over 30 years. Nancy’s latest lifestyle venture is with ICLEF. We are utilizing her exceptional writing and interviewing skills while exploring how her Indiana-lawyer background fits with ICLEF’s needs. When she isn’t ferreting out new topics for Law Tips, her work can be found in our Speaker Spotlight blogs, postings on the ICLEF Facebook and Twitter pages, and other places her legal experience lends itself.

Thank you for reading Law Tips. You may subscribe to this weekly blog through the RSS link at the top of this page. Also, you are encouraged to comment below or email Nancy.  She welcomes your input as she continues to sift through the treasure trove of knowledge of our CLE faculty to share with you onLaw Tips.

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