Worried about family feuds over money once you’re gone? Experts recommend paying as much attention to family dynamics and legacy as the legal and accounting elements of estate planning. This is because even the best-laid plans can be derailed by latent sibling rivalry, acrimony among in-laws and breakdowns in blended families.
Assets with some level of emotional attachment are also likely to trigger trouble beyond their ostensible monetary value. Determining who gets mum’s diamond engagement ring, for instance, calls for an elevated level of sensitivity and transparency.
Chris Balalovski, a business services partner with BDO in Sydney, says there are a surprising number of very wealthy Australians who do not have detailed estate plans in place.
Why neglect such an important task? Part of the reason, he says, is that conversations about estate and succession planning can be confronting. They can stir up resentments or seem crass for those who aren’t used to speaking frankly about money. People may also find it uncomfortable to consider their mortality so closely.
But difficult conversations and thorough planning now will spare expense and heartache later.
Balalovski tells the story of two brothers who squabbled over their deceased father’s $8 million estate. One argued for a greater entitlement because he mowed his father’s lawn each week. The other insisted he bought the petrol to run the mower, thus evening the score. What ensued was a costly and time-consuming search for evidence to settle the dispute. The cost of fuel was determined to be $1000. The bill for legal and other advisory fees required to come to that figure was $375,000.
The world is on the cusp of an enormous intergenerational wealth transfer event as Baby Boomers enter old age. Less discussed are the mechanisms for how this will occur. Done badly, it will take a terrible toll on families.
Clark Morgan, senior partner and head of advisory at Crestone Wealth Management, says dispute avoidance begins with engagement. If getting started seems overwhelming, start slow, he adds.
“You don’t have to talk about the dollars right at the outset,” says Morgan. “It might start out as a discussion about where the wills are located. After an initial conversation, the founder will ask themselves whether they feel comfortable putting the family balance sheet on the table.”
Communication breakdowns can lead to nasty surprises, Morgan adds. “We’ve even had a situation where a successful couple in their 70s hadn’t told their children they’d sold the business,” he says. “And one of the children actually worked in the business.”
Morgan notes an uptick in clients seeking advice about handling relationships as part of intergenerational wealth transfer.
One of the biggest mistakes people make is failing to review their will and estate plan, which are not static, Morgan says. But the other key mistake is not having the courage to have difficult conversations about family dynamics. Fiona Hinrichsen, an associate partner with family office advisory services at EY, says a good first step is to call a family meeting, which can be as informal or formal as required.
Either way, it is best to do some preparation, she adds. “Maybe you say to the kids, ‘We’ve been thinking about our legacy and would like to chat to you about it to get your views’. It doesn’t have to be all about the parents’ demise. You can talk about looking forward across the generations.”
Hinrichsen, who joined EY from the Myer family office about two years ago, says as families grow in size and complexity, a conversation around the kitchen table may no longer be sufficient.
“Having a family council or board can provide clarity around roles and responsibilities, as well as managing expectations. But no matter what the size or wealth of the family, what keeps people up at night is not whether they’ve got the right tax, accounting or legal advice, it’s relationships.”
“Legacy” is a concept Hinrichsen encourages clients to get comfortable with.
“We all think about what sort of footprint we’re leaving on this earth,” she says. “Families with significant wealth have opportunities as well as complexities and responsibilities.”
Hinrichsen advises clients to document what they would like their legacy to be as part of a structured estate planning process. This is because legacy means different things to different people – for some, it will be the continuation of a successful family business, while others want to leave a philanthropic legacy. Documenting legacy leaves less room for disputes once the family founders are gone.
Handing on the business
Hinrichsen says she worked with one family for whom business succession was a problem.
One of the children was very capable and ready to take over the business but the founder was unsure about his ongoing role. “He was stepping in and causing conflict,” she says. “Every time they tried to resolve it, the family got caught up in some historical issues. So we set up a board and brought in some independent directors.
“The founder was given a role as chairman so he still had strategic oversight and input but the role of the adult child was recognised, documented and remunerated. We also created a reporting process up the board. That had a very powerful impact on the family. It was an example of taking the conversation away from the kitchen table to a more structured format.”
Indeed, wealth transfer and succession planning can be especially tricky when a family business is involved.
What if there is no obvious successor? What if there are too many? Hinrichsen says there are multiple options in both scenarios. The key is to talk the options through well ahead of any crunch-time decisions.
“Where the family business is the key legacy and they really want to keep that going, it might mean the children retain ownership but don’t directly manage the business,” she says. “Others might decide that their legacy is more about philanthropy. Selling the business might make sense in that case because the wealth is going to be used to create opportunities elsewhere.” The worst-case scenario is the sale of a business because of a failure of planning or breakdown in relationships.
Hinrichsen encourages all families to think about the value of human capital in terms of emotional intelligence because it can help quell conflict.
“Oftentimes there might be two or three kids and one child is an obvious successor, or contributor to the family enterprise, because they’ve studied law or accounting,” she says. “They might be quite confident and articulate and used to numbers. But they might have a sibling who is qualified as, for instance, a nurse. He or she may not be so used to the business concepts and numbers but they’ve got this emotional intelligence, which can play a really key role.
“I’ve worked with a couple of families where they’ve had that realisation and they’ve changed the style of their family meetings or incorporated those considerations into when they set up their family council.”
Morgan says a challenge arises when it comes to remunerating one family member for his or her role in the family business when other siblings are hands off.
“This came up with one of my clients and we came up with a solution that involved paying the individual who worked in the business a market salary and bonus plus an employee share entitlement,” she adds. “The remaining siblings were involved in the trust that owned the business. When it’s set out like that, people understand the arrangement. But if it’s not transparent, there can be a level of resentment.”
This gets to the heart of what Morgan encourages clients to do: bring your beneficiaries along on the journey, including those you are going to exclude if there are any. It’s not easy but you don’t rectify the problem by postponing it. Nobody wants to leave a legacy that involves their kids saying: “I wish dad told me about this, I’m never speaking to my brother again.”
Thorny issues emerge when it comes to whether extended family and in-laws should be included in family meetings.
Morgan says one option is to split the family meeting into two components – an initial discussion for direct descendants followed by one involving partners and spouses.
Transparency and documentation are vital. “If in-laws are not all going to be treated equally in the will, then put that on the table,” Morgan says. “Some people say my children from my first marriage are going to get more because I built the business up when I was married to their mother and a lot of the heavy lifting was done back then. But I’m also going to look after you, the children of my second wife, because those relationships are important to me too.”
The handling of “black sheep” in families can be the catalyst for big problems.
Hinrichsen says something to be carefully considered in this scenario is whether control of the money goes to an independent trustee or the children. Take a family of four where three children are left money in the will but the fourth has restrictions imposed because he or she has had problems in the past. That might be a perfectly sensible asset protection measure but it can cause friction among the siblings,” Hinrichsen says. “You’ve got to think about what sort of dynamic certain structures will create.”
Extra-marital relationships can be especially tricky. Balalovski says that except for NSW, where there is waiver in the succession act, there is no way to quarantine one’s fortune from future claimants who might be broadly described as “lovers”.
“It is a very difficult area because of the nature of de facto laws in Australia and what people are entitled to in the event of a relationship breakdown,” he adds. “If Greta has a toy boy and comes into an inheritance, he may be able to make a successful claim by proving that he had a dependent relationship with Greta. These things just have to be dealt with if and when they arise.”