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Articles - Estate Planning

'Soft' side of estate planning in the family business

Thursday, February 08, 2001



By Kathy J. Marshack, Ph.D., P.S.

Most entrepreneurs are so caught up in the passion of their enterprise that they rarely plan ahead for the wealth that will accumulate. Although there is a desire to make money, only a select few entrepreneurs actually make money their goal. Rather wealth is a byproduct of having done well. Furthermore, most entrepreneurs did not grow up in wealthy families, so they don't have role models for managing their money or planning for the continuity of the family business. As a result when it comes time to develop an estate plan, many entrepreneurs are at a loss for where to start, or to even know they should start.

It would seem that the logical place to start is with your attorney, CPA, investment advisor or banker. However, while all of these professionals should play a part in the development of your estate plan eventually, the first stop on the way to a successful estate plan is the psychologist's office to deal with the soft side of the family business. Many an estate plan has been left undeveloped because the interpersonal relationships in the family were counter to the best interests of the business.

It is important to understand that the most important part of our lives are spent not as individuals but in relationships. And the relationships that we hold most dear are those of our family (whether or not we hold them fondly or with resentment). Within the context of a family business this fact is quite evident. Regardless of how successful, famous or old the family business, the family still comes first. Understandably the system that has been around the longest has priority.

Gerald Le Van, an attorney explains this concept from the perspective of the changes that have occurred in the business world in the latter half of the 20th century. The Industrial Revolution that lead to the technological revolution created the philosophy that the business world was like a clock, where successful enterprises were machines, conceived by engineers and monitored by accountants, where the goal was maximum industrial productivity at minimum cost, and workers were a collection of individuals or parts of the machine. Today, however, the business world is not envisioned like a clock, but like a rain forest.

According to Le Van, "Enterprises are no longer machines, but ecosystems whose fitness to survive is determined by their relationships to other organizational ecosystems in the rain forest world. Enterprises are no longer collections of individuals, but systems."

Within the world of family business the rain forest model is very effective. Family firms are a system of family members, in-laws, shareholders and stakeholders. These systems interact with vendors, customers, employees, and the commercial community at large. It is a delicate balance to maintain a successful business and a successful family enterprise when the systems are integrated into a family firm. The stress on the system becomes even greater when it is time to develop a plan for the continuity of the business and the family, and a fair apportionment of the wealth. If the family does not have mature and healthy interpersonal relationships, the process of estate planning can be costly, painful and unsuccessful.

Consider for example a CEO who is about to retire. He has two daughters and his instruction to his attorney is to develop a plan that gives each daughter an equal share. One daughter has worked for years for her father, helping him to manage his investments. She has proven to be a leader and visionary, much like her father. The CEO wants her to succeed him in managing the business because he believes in her competence. The other daughter has never worked for her father but has benefited indirectly from the growth and wealth of the business. Although she has never been interested in the management of the business before, now that her father is retiring, she and her husband want to take a more active position in the company. The first daughter doesn't mind continuing as the president of the company. In fact she believes she deserves the position. But she is not pleased about her sister's new interest, nor her father's decision to treat them equally. Where this family once got along just fine, a new problem is growing that they never had to face before. How would you are your advisors handle this "hot potato"?

Consider the entrepreneurial couple, who for decades have successfully founded and managed three enterprises. They have sent two children through college and now one of them works for the family business. The husband, now 58, would like to retire to the new vacation home they have recently built in a resort community. However, the wife is ten years younger and is not ready to retire. She is still excited by the challenge of managing their investments. Furthermore, she is grooming for the presidency, her son by a previous marriage. She would like to stay on long enough to see him well established in the leadership of the business. There are more than business challenges that this couple faces. Will the marriage withstand one working while the other retires? Will the husband trust that the new president will be trained well by his wife? How do other family members feel who are not related to the wife's son?

Consider the attorney who must advise his client on an estate plan. The attorney and his client, a CEO of a national corporation, have always trusted each other and seldom had a conflict. The attorney has always known that his client is alcoholic, but the alcoholism never interfered in their dealings, even though it did cause great personal tragedy for the CEO (i.e., a divorce and estranged children). Now, however the attorney is in conflict over the advice he must give his client. The CEO wants to place in the presidency the only child who is not estranged from him. Unfortunately this child is alcoholic too and has never held a responsible position within the company. The CEO is ignoring other possible successors, such as loyal executives who are not family members. The attorney appears to be in a no-win situation. If the attorney says nothing, the CEO may proceed with a plan that will ruin the company. If the attorney confronts a non-recovering alcoholic with the foolishness of his plan, he may lose a valuable client. In either case there is no healthy solution.

To create an estate plan that truly integrates the success of the family and the firm, it is necessary to seek the help of a psychologist who understands the soft side of families and particularly those families who are in business together. Cleaning up root interpersonal problems can mean the difference between the development of a meaningful estate plan or the development of increased family conflict. For example, with the help of a psychologist, the father with two daughters learned that "fair" was more appropriate than "equal" when it came to dividing the wealth and the business with his daughters. The entrepreneurial couple learned that their marriage could survive the transition of the wife's son to the presidency if they developed a clear buy-in for the son. Fortunately for the CEO of the national corporation, his son went into alcohol treatment after a serous auto accident. The CEO participated in family therapy at the treatment program, which forced him to look at his own untreated alcoholism. He eventually could see how he was letting his alcoholism make business decisions that were neither sound for the business, nor his family.

If you have worked hard to create an enterprise you can be proud of and if you want to create a legacy to pass onto your children and grandchildren, first evaluate the soft side of your family system for any unresolved issues that could spring up and bring the whole system down, during the process of estate planning. Also be prepared to deal with problems that never would have surfaced except for the need to discuss money matters with family. Then take these concerns and realizations to the psychologist, the professional uniquely trained to help with untangling family knots and reweaving a healthy family/business tapestry.

One man gives back to the community that supported him

Monday, October 25, 1999



By Kathy J. Marshack, Ph.D., P.S.

Let's say you have worked for the same boss for 15 years. You are a loyal, hard worker who takes pride in your contribution to the company. You have a fair boss, who pays you well and trusts you to handle your responsibilities like a mature adult. You have good benefits, including a tidy retirement that has been generously matched by your employer. If you call in sick or just want an extra day off occasionally, your boss assumes you have a good reason. To top it all off, everyone else in the company is treated the same way, so you have a happy group of coworkers. Of course you are looking forward to retirement, because work is not your whole life, but for now you couldn't find a better place to work.

Then one day, you receive a letter in the mail from your boss. He announces that he has sold the company and plans to retire. You had heard the scuttlebutt but weren't sure if it was true; now you know. The letter goes on to reassure you that your boss has negotiated for all employees to keep their jobs; nice guy again. You sigh, because at 52 you're not quite ready to retire. Then you pull the bonus check from the envelope. For all your years of service and dedication your boss is rewarding you with one million dollars . . . tax-free!

This fairytale is real, believe it or not. Bob Thompson of Belleville Michigan surprised his 550 workers with similar letters. All told, Bob divvied up $128 million among his employees. Bob's "share the proceeds plan" included paying hourly workers who already have pension plans, $2000 for each year of service. Salaried workers, without pension plans were given annuities they can cash in at age 55 or 62. Those annuities range from $1 million to $2 million. Thompson even included some retirees and widows in his plan. And to insure that employees actually reached the one million mark, he paid the taxes on these gifts, which amounted to $25 million.

Bob Thompson sold his 40-year-old firm for $422 million, but long before he grew this big he and his wife had planned the gifts. Years before he had already included a number of employees in his will. Bob is not a man who has always lived with money. He started the road construction business in his basement with $3500.00 and the support of his teacher wife.

Although over the next forty years, the money did roll in, money wasn't Bob's goal. He said, "People work exceedingly hard for us. It's a tough business, and this is a demanding company. Some people make a lot of money in the stock market, but we're dependent on people, so it would just not be fair not to do it. They've allowed me to live the way I want to live."

In addition to the gifts to employees Thompson plans to gift even more to other entities. "It's sharing the good times. I don't think you can read more into it. I'm a proud person. I wanted to go out a winner, and I wanted to go out doing the right thing." Yes, I agree Bob Thompson is a winner, but he's more than that. As an entrepreneur he took his responsibility seriously. He used his talents to evolve a business to the level where he could give even more back to the community who supported his growth. This stage of development is called Stewardship.

A business, like a child (and adults for that matter) goes through stages of development. Given the right mix, the business will complete its evolution at stewardship. According to psychologist Will McWhinney there are three stages of growth for a family business. The first stage is that of Entrepreneurship. Entrepreneurship is the stage of early innovations, niche formation and creativity. Because of the entrepreneur's determination and charisma, there is high cohesion and commitment from all in the company.

The next stage is Ownership during which there is a need for stability and security to nurture the family. During this stage the family business structure becomes formalized and institutionalized.

The third stage and the one that Bob Thompson epitomizes is Stewardship. Stewardship results when the business is well established, the children are grown, and the founder has developed beyond the need to use the business for his expression of personal power. As the business expands, there is more structural elaboration, adaptation, and possibly decentralization.

Stewardship offers the family business the opportunity to give something back to the community. At the developmental stage of stewardship, family businesses often establish charitable foundations or employee stock option plans, but the family firm has even more to offer. Because family-owned firms are microcosms of the society at large, how the family manages its wealth and influence can have a major impact on society. You must go beyond simple economic theory to understand this influence. The values of the family and the culture of the family firm can have tremendous social impact not only on the quality of commerce, but on the total community.

Naturally many people want to know what Thompson's employees plan to do with their windfalls. Some have indicated that they will buy new furniture or a new car. Others are spending it on much needed braces for a granddaughter or care for a mentally handicapped child. Still others are putting aside money for college tuition and retirement. But there are a few who say they've been inspired to help others. "Of course, that's what I want to hear," says Thompson.

Stewardship is a wonderful stage of life for a family business because it offers the entrepreneur the chance to be proud of his or her accomplishments and go out like a winner, as Bob Thompson has. And it puts the entrepreneur and the business in the important position of modeling for others in the community not only how to be winners, but how to do the right thing. Bob Thompson's idea of winning is sharing the wealth. For him, stewardship is using his wealth to improve the lives of others. But beyond the money, stewardship involves changing the lives of people forever.

Kathy J. Marshack, Ph.D., P.S., Licensed Psychologist and Consultant to Families in Business, is also the author of ENTREPRENEURIAL COUPLES: Making It Work at Work and at Home. Dr. Marshack is hosting a seminar for entrepreneurial couples on October 15th and 16th and a free breakfast roundtable on November 5th. Call for details at 360-256-0448 or www.kmarshack.com.