Articles

When Good Planning Goes Bad... Family Conflicts in Wealth Planning

Douglas K. Freeman, J.D., LL.M. & Lee S. Hausner, Ph.D.

April 1, 2009

If you could revisit your family 10 years after all the wealth you intend for them has been received, would you find each of your inheritors to be productive and contributive, closely and fondly connected to their immediate and extended family, appreciative of your thoughtfulness and efforts, and emotionally (content and stable)? That is the goal of many wealth creators, as they plan for the distribution of their wealth during their lifetimes and upon their deaths. A great deal of time, money and effort is directed towards these ends. The actual results, unfortunately, are often quite different.

Wealth creators spend a great deal of time, money and effort to create a plan that is right for their family, however sometimes conflicts arise stemming from these plans.

Conflict within wealth planning should be anticipated, not ignored. Strategies should consider not only the goals and expectations of the wealth creator and transferor, but the goals, expectations, characteristics and dynamics of current future inheritors and their own nuclear families. An estate plan is not a tax strategy. It's a family wealth plan that has enormous implications for the financial, intellectual, social, and human wealth of the extended family for years to come. Tax is a cost to the plan. Tax planning is a tool. The goal should be to help each family remain productive, contributive, loving and connected through the generations. That takes real planning.

The reasons for family conflict in wealth planning are varied and intertwined. But it's important for you and for your advisors to consider the possibilities and to structure your affairs in such a manner as to minimize the causes and the extremes. Saving the tax but destroying the family is not a good Family Wealth Plan. Develop first an empowering plan and then structure it in the most tax efficient manner.

Here are some of the reasons that family wealth planning creates conflict.

• Family dynamics. Every family has its own dynamics. These dynamics are the backdrop to conflict often triggered by otherwise logical wealth planning strategies. It may be sibling rivalry, in-law competition, perceived "favorite child" or "disfavored child."
• Allocation of the estate. An obvious source of tension is the allocation and distribution of the estate assets. Though usually well-intended by the wealth creator, with logical justification based on history and behavior, the perception of the inheritors (or their spouses, issue, or advisors) can be quite different and quite hostile.
• Shared ownership. Perhaps the most frequent source of conflict in the Family Wealth Plan is the shared ownership and management of the family business, financial and other investment assets, as well as personal use assets, like vacation property or the private plane. Each such shared asset has the potential for disrupting the family, reopening old wounds, or highlighting the differences amongst the inheritors.
• Selection of assets. Sometimes, in anticipation of the potential conflict created by shared assets, wealth creators allocate specific assets to different individuals. But will those assets have equivalent value? Is a business that must be worked daily and has significant downside risk as well as upside potential the equivalent of a passive investment that may have less upside but less personal effort and risk? Will the recipients of each perceive the economic equivalent or will they resent the selection made for their benefit.
• Timing and amounts. How much should be distributed to heirs and will such distribution incentivize and encourage hard work and financial independence, or will it generate dependency and indolence?
• Wealth creators and their advisors often turn to both professional and non-professional trustees to administer the wealth plan for the immediate and future generations of inheritors. Those professional trustees who have been in the field for a decade or more know how difficult and contentious this role can be. The explosion of fiduciary litigation between trustees and beneficiaries is an obvious indicator. As careful as the planning may be, leaving the implementation and management to those individuals or organizations unqualified, poorly prepared or inadequately supervised can create antagonism, dysfunction, resentment and litigation.

Conflict within wealth planning should be anticipated, not ignored. Strategies should consider not only the goals and expectations of the wealth creator and transferor, but the goals, expectations, characteristics and dynamics of current future inheritors and their own nuclear families. An estate plan is not a tax strategy. It's a family wealth plan that has enormous implications for the financial, intellectual, social, and human wealth of the extended family for years to come. Tax is a cost to the plan. Tax planning is a tool. The goal should be to help each family remain productive, contributive, loving and connected through the generations. That takes real planning.

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