Navigating the Maelstrom of Family Trust & Estate Planning

When it comes to intergenerational wealth transfer planning for families and business owners, advance preparation is the key to avoiding stormy waters.

Trusts & estates attorneys who advise wealthy families and their businesses are frequently asked to highlight the indelible characteristics that will help the family enterprise navigate tumultuous events and stay true to its mission and thrive. Unfortunately, many families often become intoxicated with the acronyms that promise to mitigate the pain of impending estate taxes at the expense of ignoring other important family and business planning issues.

Similar to television commercial advertisements that sound too good to pass up, many affluent families become consumed with such tax structures as FLPs, QPRTs, GRATs, CLATs and IDGTs, to name just a few. While these strategies can indeed be valuable planning tools, alone they do not adequately address the myriad challenges facing multi-generational family business enterprises.

Large extended families with diverse business interests are like ships at sea. When the weather is fair and the sea is calm, the structural integrity of the ship is not under stress. However, good times can mask vulnerabilities. Even if recognized, the action required to deal with important issues is often deferred under the guise of not wanting to rock the boat. Unfortunately, the weather never stays calm for too long. Every family will sooner or later enter a maelstrom of some kind or other.

The trigger could be unexpected and internal, such as the untimely death of a family patriarch or matriarch that provided the “glue” that held a family together, or external business factors that materially degrade the ability of the family business to generate the cash distributions to which family members have grown accustomed. When this occurs, a governance structure that lacks transparency and accountability, and one that ignores the importance of minimizing conflicts of interest, can quickly digress into a perfect storm endangering the fabric of the family and causing stress to its businesses.

It is surprising just how many families with significant business interests fail to take the time to understand the balance needed to perpetuate their legacy. Good tax planning combined with a deep understanding of the characteristics that enhance a family’s chances to endure and remain important within their communities can be as valuable as any of the previously referenced tax-planning acronyms. In fact, many advisors serving large family enterprises note the importance of having a strong governance structure represented by a family board of directors.

While a strong governance structure is not the sole attribute of what makes a family business endure over many years, it can be a critical component. Simply hoping that the family will deal with episodic events such as family arguments and generational planning issues as they arise will likely spell disaster when these lifetime events occur.

After all, we know that critical events — for example, selling a family enterprise, arguments, tumultuous markets or finding the liquidity to resolve an impending significant estate tax payment
— will occur. We simply do not know when.


A governing board’s primary responsibility is to protect the interests of the stakeholders (primarily the family members) and to help enhance the success of the family enterprise. Among the many fiduciary duties of the board is the age-old duty of loyalty, which requires that the interests of the enterprise come first, and trump any conflicting personal aspirations that a director might have in relation to the family business.

Obviously, the board must understand the values, needs and goals of the family and its shareholders to properly carry out its functions. A well-functioning board of directors, with contributing independent non-family representation, will assist the family and its enterprises in navigating a course of policy formation, developing long-range objectives and monitoring the strategic plan as it is carried out.


Who should be chosen as a board member? Business competency is obviously important, but it has been noted that “[t]he most critical qualification is having the ability to hold the company accountable and the discipline to not interfere in the company operations. The board of the typical family firm should have competencies that include communication skills, open dissent, understanding of business and collaboration with management to ensure strategic guidance of the company, effectively monitor management, and be held accountable to the company and its shareholders.”*

But contemporary family governance does not end here. Families and their boards should establish structures for dealing with intra-family disputes. Emotionally charged and financially draining events are likely to occur in all families. With this in mind, it is somewhat surprising to learn that, according to the PriceWaterhouseCoopers Family Business Survey, 2007/2008, more than two-thirds of surveyed family-held companies have not adopted any procedures for resolving conflicts between family members. Considering that family-held businesses often involve conflicts, this is indeed an alarming figure. An internal conflict policy adopted by the family board, while not a guarantee of peace and tranquility in family and business affairs, does help mitigate the consequences of these lifetime events, and at least can create a predictable methodology for resolving conflicts other than through traditional legal means.


It is not unusual for parents connected with large family businesses to leave their equity interests to trusts established within their estate-planning documents. However, very careful attention needs to be paid to family frictions that can be ignited when clients carelessly nominate trustees within wills and family trusts, when these same trustees occupy board of director positions of the family enterprises that comprise, in whole or part, the corpus of the trust. Most clients know intuitively that trustees must act solely in the interests of all trust beneficiaries. It goes without saying that a trustee cannot transact business with trust property for any personal benefit. But in family enterprises where there may not be that many trusted advisors who are willing or able to serve as fiduciaries, it is tempting
to simply default to a director who is also a family member, to serve as a trustee. But query whether this approach is always prudent. Without a system of checks and balances, the appointment of a trustee who is also a director or CEO of a trust that owns or operates a family business can easily compromise the general fiduciary duties of loyalty and impartiality that any trustee owes to all beneficiaries.

It is not hard to imagine situations arising where some minority family members might feel alienated
and estranged when they cannot impact the decision-making process because they are neither an officer of the company nor a trustee of the trust that owns the family’s business interests. While it
is often noted that not all disagreements create conflicts of interest that prevent the interested family member or board member from serving as trustee, diligence must remain high to carefully plan with your counsel and other professional advisors the structures of governance that remain viable and elastic over extended periods of time.

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