From Roles to Rules©: a New Model for Managing Family Dynamics in the Estate Planning Process

• Citation: Vol. 10 No. 1
• Publication year: 2004
• Author: By John W. Ambrecht, Esq.

FROM ROLES TO RULES©:† A NEW MODEL FOR MANAGING FAMILY DYNAMICS IN THE ESTATE PLANNING PROCESS

By John W. Ambrecht, Esq.^*
Howard Berens, M.D.^**
Richard Goldwater, M.D.^***

I. INTRODUCTION

A. Family Dynamics and Estate Planning

Estate planning for families who own businesses and other significant assets often presents difficulties rooted in the family's internal dynamics and psychological issues, which few attorneys are prepared to address. Even when such difficulties cannot be avoided, most attorneys focus exclusively on the financial and legal aspects of the estate plan. Unfortunately, this limited focus can permit family dynamics to distort or abort the planning process, or to generate an estate plan that is later contested in court.

The very act of estate planning may upset the delicate balance that a family has developed over decades to keep their business functioning. Strong emotions—pride, resentment, anger, fear, and envy—often suppressed for a lifetime, may emerge for testators contemplating their legacies and for beneficiaries contemplating their futures. When the will takes effect, death and grief can release pent-up emotions that fuel legal actions by survivors, which can erode the value of the business more quickly and surely than any tax code or competitor ever could. Indeed, fewer than one-third of family businesses survive the transition from first to second generation ownership, and about half of those survive to the third generation.¹

Addressing psychological issues usually lies outside an attorney's area of responsibility and expertise. However, in situations where such issues threaten to undermine the estate planning process, attorneys who can at least recognize the root problem will hold an advantage. They may be prepared to address the root problem, to bring in an expert qualified to address it, or to limit or terminate involvement with the client. Responding in these ways can add value for the practice in the form of saved resources.

This article provides case examples that illustrate psychological dynamics at work in the estate planning process both for good and for ill. It also discusses ways in which estate attorneys can deal with a family's psychological issues in the planning process. We shall also briefly introduce the idea that carefully examining the organizational chart and reporting structure is the quickest way to identify internal conflicts, and to evaluate their capacity for remediation with and without outside help.

B. Definition of a Family Business

In this article, a family business is defined "as a pool of capital (usually, but not always, in the form of an operating, economic entity) that happens to be influenced/controlled, owned, and/or managed by: one or more members of a single family; one or more branches of an extended family; one or more unrelated families; and/or some combination thereof."² For our purposes, family businesses include not only operating businesses but also jointly owned assets, such as real estate or other capital assets where active management may or may not be required, as well as assets in which different family members are required to share use and ownership.

II. FAMILY DYNAMICS AND ESTATE PLANNING

A. The Effects of Negative Family Dynamics

The difficulties arising from negative family dynamics and psychological issues may take explicit forms, such as family members' spendthrift behavior or drug dependency, which can be addressed in provisions of a trust. In other instances, the difficulties may take more subtle forms, such as family members' absenting themselves from meetings or failing to sign documents. Other difficulties include intractable arguments among family members, repeated changes of intention or direction, threats of outright disinheritance, or legal action among family members.

Legal action among family members involved in a business can be particularly destructive. As one attorney pointed out,

Litigation involving disputes between family members is often bitter, hard fought, expensive, personally devastating to the litigants and financially devastating to the family business. The personal stake may be high. Emotion may often overrule rational and economic decision making. Family business members might be more inclined to expend on litigation amounts that far exceed the potential economic benefit that one or more of the litigants or the business hope to achieve.³

Avoiding the damage done when the emotional dynamics of the family trump the logic of business economics may be the most compelling reason for an estate attorney to address those dynamics.

A detailed search of hundreds of cases reveals that litigation regarding family business estate issues most often involves certain presenting problems that form the legal basis of the case, but also likely point to negative underlying (and unaddressed) family dynamics and psychological issues. These presenting problems most often include the following:

1. Undue influence in preparation of estate documents⁴
2. Oral agreements as to distribution of estate assets⁵
3. Interpretation of estate documents⁶
4. Fiduciary issues, including trusts, shareholders⁷, directors⁸, and valuation issues in, for example, sales, buy-outs, or purchases of corporate assets⁹
5. Mental incapacity¹⁰
6. Combinations of the above issues.

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Clearly, even the most diligent efforts to address negative family dynamics cannot completely prevent estate-related litigation. However, those efforts can lessen the likelihood of litigation by encouraging the attorney to exercise greater awareness, understanding, and control of the estate planning process when family conflicts threaten to undermine the process or to generate a plan that perpetuates those conflicts.

B. Other Psychologically Oriented Approaches to Family Dynamics in Business

Over the past twenty years, experts from various disciplines, and business owners themselves, have recognized the importance of family dynamics in family business.¹¹ Business consultants, family therapists, and organizational behavior academics have applied several approaches to addressing family dynamics in family businesses.¹² Non-psychologically oriented approaches have included advising the family to keep family matters separate from business matters, focusing on improving communication, and applying formal business procedures, such as strategic planning, to the family business.

Psychologically based approaches to addressing family dynamics in family business have most prominently included the Myers Briggs Type Indicator (MBTI^TM) of personality type and the Firo-B model of communication. Business consultants have used these tools to explain differences in the personalities and viewpoints of family members, and to smooth relations between those in the business.

For instance, we used MBTI to good advantage in the case of an elderly mother who owned a ranch with four daughters. One of the daughters lived in Oregon and the other three lived on the ranch with the mother. The goal of the estate plan was to divide the ranch so that everyone would get a share and be happy. So we arranged a meeting with the mother, the four daughters, and their CPA. We had everyone take the MBTI beforehand so that we knew everyone's type preferences.

Before the meeting started, the daughter from Oregon was quite nervous and approached us in private and said she did not want to be singled out in any way; she did not fit in the family and that was why she moved away. She was very tense.

We started the meeting by agreeing to communication rules (See Section V B. 4 below and Exhibit A), and then discussed the MBTI. As the meeting progressed and people understood their differences, it became apparent to everyone in the family that they needed the Oregon daughter's gifts to help them make better decisions. At that moment, the three daughters looked at her and said, "We need you," and the whole tenor of the meeting changed. Everyone started cooperating because they saw that differences were not necessarily difficulties, and could even help the group. Work on the estate plan progressed smoothly, and we found a fair solution that was blessed by the mother.

Although they have been used by business to improve teamwork and communication for more than forty years, the use of psychologically oriented approaches can be considered new in estate planning. Over the past decade, we have applied both Myers Briggs and Firo-B with some success in difficult estate planning situations. For us, the main benefit of these approaches has been to help family members realize that each member's thinking and behavior is individual, and may be legitimate even if idiosyncratic or annoying. However, the use of the MBTI and Firo-B did not provide us with a process for addressing family dynamics and psychological issues in the context of estate planning.

The approach that we call, for reasons that we explain below, From Roles to Rules does provide such a process. In this process we help family members move from decisions and behavior based on family dynamics and psychological motivations (that is, based on family roles) to decisions and behavior based on business needs and practices (that is, based on rules). We do not use Roles and Rules to analyze family members as psychological types or to assess their communication styles. That is not the purpose of the Roles and Rules model. Instead, the model sorts behavioral relations among people—their actions and interactions—into two kinds: role-driven relations, and rule-driven relations.

III. A MODEL OF HUMAN DEVELOPMENT AND BEHAVIOR

A. Roles and Rules

An old witticism identifies two kinds of people: those who believe that there are two kinds of people, and those who do not. Many people justly recoil at any hint of "categorizing." After all, the word root of "to categorize" is "to accuse." In our view, however, neither kind of relation—neither roles nor rules—is in any way "better" than the other. Furthermore, unifying the two categories is...