How to Choose a Trustee: Why the obvious choice may not be a wise choice

One of the most important estate planning decisions is that of selecting a trustee or executor. The choice can be a game changer for how your heirs live with and execute your decisions. However, too often the selection is made without the benefit of talking through the potential pitfalls or consequences.

Common pitfalls to avoid
Many families select the oldest adult child as their power of attorney during life and trustee and executor at death. While a strong family bond may exist with first-born children, it doesn’t automatically make them the best fit. It’s important to consider their adult history with regards to decision making. How do they handle their own medical and financial life? How do they behave in business or with family obligations? Do they have a track record of making consistent decisions and being accountable?

What to look for in a trustee
The person should have the affinity, desire and experience to step into the role. They’ll need the capacity or training to understand complex legal, financial and investment situations. Alternatively, they need to be able to discern who to hire for help and when. This includes having a track record of making sound financial decisions and generally being well organized with their own affairs. Ideally, your trustee will have the capacity to think like you and make judgment calls in the manner you would for yourself. They should be aligned with your value system and able to objectively make decisions from your vantage point; as if standing in your shoes.

Sustaining relationships requires eliminating surprises
A family trustee can easily become doused in negativity from other family members. It’s crucial to consider whether the selected person can handle conflict, and truly wants the role. Ideally, it’s best to eliminate the element of surprise for everyone involved by communicating your plans in advance. On the medical side, this involves documenting and communicating your Advanced Directives – specific decision making guidelines to follow should you be unable to make decisions for yourself.

With regards to the role of trustee and executor, all family members should understand not only your choices, but the reason you made the choices. They should understand the context for your estate decisions – hearing it directly from you so they can air their questions and listen to your thinking. The family member(s) chosen for leadership roles should understand why they were selected. Likewise, siblings or other heirs should understand this too. That way, you can set the stage for the selected individual(s) to succeed in their leadership role(s).

Beyond the legalities
Finally, it is important to transition all of your decisions in context of your vision for the use of your wealth. Develop a Family Mission Statement and share it with all heirs. Ensure they understand your philosophy and expectations for the family wealth going forward. Ensure they receive the training they need to be effective stewards of both your vision and your financial resources.

An International Perspective on Effective Leadership

It does not matter where in the world a family business is located, according to Deniel Banks of DW Banks Company, Inc, one thing all family business leaders have in common is that they want easy-to-use tools to help with succession planning.

As a result of seeing this trend around the world, Banks developed a checklist as a meaningful way to stimulate business leaders thinking and starting important conversations with family members.  He says the checklist has an international perspective integrated in.

“Ten Principles for Family-Owned Business”

  1. Make dreams a reality – What are your own dreams?  Your family’s dreams?  You customer’s dreams?  Answer these questions and align these dreams with business and family strategies.
  2. State principles and goals clearly and allow your children to develop their own goals for personal happiness and success regardless of whether they end up in the family business or not.
  3. Distribute leadership, empower others, and offer mentoring and coaching when necessary.
  4. Follow criticism with encouragement.  Be ready to apologize.
  5. Lead the family by example.  Apply some of what you do best at the office while at home.
  6. Know yourself.  Be clear on your leadership strengths, your beliefs, and your values.
  7. Encourage your next generation family members to take action and do what’s right.  Be persistent in communicating ideas and listening to theirs.
  8. Respect and honor differences.  Learn from other cultures and create an environment the embraces the diversity in people and ideas.
  9. Collaborate by moving from “position power” and hierarchy to building “relationship power” locally and globally.
  10. Foster a broad perspective and give something back.

Banks said he likes to ask his clients to circle three of the ten items that they want to focus on most in their own business to move towards 21st century leadership and a global perspective.

Incorporation is Key

Corporate structure is an important conversation to have when creating your succession objectives. The type of corporation has a major impact on your transition. Are you going to sell to a public company? Are you going to go public? Who are your potential owners or future owners? Are you going to keep your company in the family? How many owners are there going to possibly be? The answer to all these questions would encourage one corporate form over the other.

In 80% of our consulting cases, some change of corporate structure occurs. Usually we see a corporation set up at inception with little thought to the long term objectives. As a result, a change often occurs as the business becomes significant. So what are the key differences? And which of those factors is most important to you and your company? Follow the link below for a very basic overview of C-Corps vs. S-Corps vs. LLCs.

Looking Forward – Which Road to Take

For most owners of a closely held business, building the business is a labor of love.  It provides a major reason for living, however because we don’t live forever, one day that business asset will have to transfer to a partner or family members or a third party.

That transition will require significant planning to realize the business owners goals for themselves and their family.  And with any good plan, you’ll first need to know where you want to go.  As the Cheshire Cat observed, “If you don’t know where you’re going, any road will take you there.”

The following article addresses some of the questions that business owners need to consider to determine, “Where are you driving?”

Insight into Surviving the Sale of a Family Business

Bruce Werner, currently managing director of Kona Advisors LLC, spent 12 years at the family busniess, Werner Holding Co., in a variety of senior positions before the family made the decision to sell.  Werner gave tips and insights from his own personal experience into how he survived the business sale and life afterward in an interview with Lauren Wolven, J.D., a partner at Horwood Marcus & Berk Chtd in Chicago, featured in the Estate Panning Journal.

Werner had eight main tips to offer:

  1. Be honest about priorities and values.
  2. Develop a personal strategic plan.
  3. Invest in friendships.
  4. Understand that wealth works in step functions.
  5. Realize how the family business experience situates oneself in the job market.
  6. If early retirement is chosen, consider the impact on family members.
  7. Get used to the everyday inconveniences.
  8. Enjoy the ride.

Werner said the decision of his family to sell the business evolved over three years and was not as difficult as it can be for some families because, although the company was private, in many aspects it was run like a public company.  After the sale, eight of the ten insiders, Werner included, continued to work for the company.  He said before they even got into sales negotiations, the insiders had discussed what would change about their positions and perks after the sale and had already come to agreements, making this part of the transition much easier as well.  He feels it is important for people to understand things will change if they stay with the company after the sale.

Werner’s first tip during a transition is to be honest about your own values and priorities.  He explained that it is important to really consider for yourself and your family that the trade-offs that come with a sale are made in the pursuit of happiness, family harmony, money, or whatever your priorities may be.  He said it is also crucial to have a long term plan personally after the business is sold.  Werner advised others to ask questions like: Do you really want to run another business?  Would you rather pursue a hobby or charity?  If you are entering young retirement, will it be fulfilling?  Make sure you have an idea of what to do now that you no longer have the business.

Werner said he feels cultivating outside friendships is important during a transition period like this because you need someone to help guide you and talk things through.  Also, work relationships are lost in a job transition, and other relationships can fill a void.

Finally, Werner also addressed the issue of what it is like to deal with a new liquid wealth and going back to work.  He said the initial step-up in lifestyle is easy, but for him there was never a question of whether he would go back to work.  Even during his time of sabbatical, he had an office outside the house so his children would have an example of good work ethic.  The family business experience proved to be an advantage and a disadvantage it certain situations.  Werner said some employers stay away from former business owners for fear that they will be too independent or difficult to manage.  In the end, Werner said he needed to figure out how his unique skills can apply in a different, changed market.  He recommended the help a career counselor to aid with this process and decision.

Identifying a Successor for Your Family-Owned Business

Last week I was introduced to a family owned business owner by his estate attorney.  They were interested in learning more about succession and exit planning.  The business owner described his reluctance to begin planning for succession because he still had 20 years to go before retirement.  Though dedicated to his large family, he loved his work and was extremely proud of the organization he had built and the team of 100 employees he had assembled over the last 3 decades.  Yes, the last 30 years.  The gentleman is over 70 years old.  Yet, ironically he doesn’t see the immediate need to address the issue of “What is the future of the company should he not be there to continue to lead the day to day operations?”

Resistance by business owners to begin their planning for the inevitable transition is common.  The reasons vary from “I’ve got plenty of time.” to “I love my work, I’m never leaving.”  The truth of the matter is that many times we are not in control of the date we exit our businesses.  Life events might dictate our decision.  We might get an offer we can’t refuse or information from any of a myriad of sources that will change our previous thinking.  Even if the business owner plans on staying at the job forever, someday they will not be reporting to work.  Isn’t that a good reason to plan on the possibility you might want to realize the value of your life’s work for you and your family?  It is an important issue and the effect of your decisions will be felt by many families; yours, your employees, your clients, and your vendors.  Many times this business represents a disproportionately amount of the business owners net worth and the source of their largest income stream.  Are there any guarantees that its value will be realized?  The following article from Forbes discusses this very issue:

Why Families Should Ask Their Advisors to Collaborate

As we discussed in the previous article, estate and financial affairs for established families are highly complex. Each of the disciplines – tax, legal, investment, insurance – are inextricably linked. And, planning can actually change after it’s executed, even if the family doesn’t touch it. This is due to the dynamic nature of the tax code, legal stuctures and the financial markets. Ongoing compliance and accuracy must include true collaboration among your various advisors.

The difference between coordination and collaboration
Coordination is often referred to as “quarter-backing”. It may refer to one party posing a specific question to a colleague or informing the colleague of a decision. In contrast, collaboration requires all advisors to participate simultaneously in conversation. The group designs solutions together using the family’s documented vision as a filter for whether an idea is relevant.

The magic of true collaboration
Think of a time when you were involved in a group discussion and everyone in the room had mutual respect, and a commitment to work as a team toward a documented result. The spirit of collaboration causes you to listen more attentively. It quiets your own mind while you’re opening up to others’ contributions. That space in your thinking inherently increases your creativity. Questions and thoughts raised by others challenge or deepen individual and collective ideas. The result is a body of work that no single person, discipline or vantage point could arrive at independently.

Decreased costs and increased efficiency
Some families feel that bringing advisors together for group meetings may increase fees. Ironically, the opposite occurs. With communication occurring real-time amongst all parties, better ideas are formulated in less time, often reducing taxes or other expenses. The team arrives at more relevant solutions faster and there’s less chance of one person’s style driving the result. Also, collaboration reduces the likelihood that an idea from one vantage point will cause costly problems – in a neighboring discipline – that have to later be unraveled.

Getting started: an action checklist

  • Call each of your existing advisors. Explain why you’re interested in creating a collaborative effort. Define what collaboration is, and what it’s not.
  • Bring all your advisors together socially. Allow them to become acquainted in a casual unstructured environment.
  • Schedule your first team meeting. Identify a process or methodology for refining or creating your overall vision for your wealth. The collaborative team will need this documented vision to drive their future idea development. 
  •  Together, create communication ground rules for future meetings. 
  • Create a schedule for future meetings and ask everyone at the table to commit completely to the structure. Many of these meetings may be held with the advisors only. Then you’ll schedule a group meeting at which advisors share ideas with you – only the short list of ideas they all believe are relevant.

Once you’ve begun, make sure the process and ground rules are followed. Keep in touch about what’s working or not working and commit to achieving true collaboration over time.

The Benefits of Bringing in an Advisory Board

It can be a lonely world out there for an entrepreneur. As you make your decisions, you have your family’s livelihood and the livelihood of your employees resting on your shoulders. And even though self-made business owners are some of the best instinctual decision makers in the world – sometimes a second opinion, an outside perspective is necessary to achieve instinctual clarity.  It’s amazing how much leverage there is in continuity, ideas, options, and possibilities when you have a “brain trust” at work. By having an advisory board you have that “master mind group” to help you make sound decisions.

Here is an article you might be interested in for continued reading on the topic of advisory boards:

Why Entrepreneurs Sabotage the Succession Process

Recently, while having an in-depth discussion with a client regarding the potential of transitioning ownership of his company to one of his four children, he made the comment, “I will take this company down before I let it ruin my family.” This was in response to a series of questions about treating his children “equally and fairly.” It is a reflection of an emotionally charged issue. It is also just one of many issues that need to be addressed to have a successful business succession to a family member.

Along the planning path to exit a business there are many potential pitfalls. Some are created by elements outside of their control and others are caused directly by the business owner. This two-part article published on the Harvard Business Review blog speaks to some of the unique challenges for succession in entrepreneurial family businesses.


The Impact of Collaboration on Managing Your Affairs

When a family addresses their affairs, whether it’s a small change or a big decision, they’re in search of a quality result. Established families have inherent complexity in their affairs. The tax code, legal system, financial markets and various financial or insurance instruments are inextricably linked. Even if the family changes nothing, their past planning changes with the passing of time.

Let’s look at how advisory models traditionally rise to this momentous occasion for families. Historically, advisors in different professional disciplines working with a common family haven’t had an intentional model for frequent communication. This article suggests that not only is communication essential, it’s no longer enough. In today’s world, collaboration is the ideal advisory dynamic for affluent families.

Why is communication between your advisors essential?

A great advisory team has a central goal: to understand the family’s vision and carry that vision forward effectively and with integrity. To achieve this, advisors require a common starting point – a confirmation of the client’s vision. In order to act on the vision effectively, planning implementation has to be airtight. For any given decision a family makes, three to four advisors may need to touch the implementation to get it right. It would seem difficult to achieve effective implementation without a model for intentional communication. 

The difference between communication and collaboration

Communication is essential; however there is a deeper opportunity at hand for families – the opportunity to have a collaborative advisory team. Communication is more about the coordination of tasks; one person informing another about their actions. This passing of information back and forth is helpful, yet families can ask for more.

Collaboration, is defined by The American Heritage Dictonary as: to work together in joint intellectual effort. Consider the impact of having a truly collaborative advisory team. The team assesses the families’ challenges and opportunities and brings the necessary advisory strengths to the table to move the family forward. Advisors sit together at the table and brainstorm on a family’s behalf. Ideas are more innovative and more refined. Consensus builds confidence and momentum into the execution phase – for the advisors and the family.

How families can foster collaboration?

Two dynamics must be in play. Collaborative advisors assess their strengths and proactively invite additional talent to the table based on the family’s vision and goals. This requires self-confidence and confidence in their relationship with the family. 

Families must also play a role. Insist that your advisors collaborate. Consider bringing all of your advisors (tax, legal, financial, insurance) together for a social outing. Foster communication and relationship first. Then move into a more formal brainstorming process. Enlist assistance from the group in confirming your vision. Then draft some ground rules around how the professionals can move beyond communication and into collaboration on your behalf.