The Future for Family Business Estate Planning:

• Publication year: 2022
• Author: John W. Ambrecht

THE FUTURE FOR FAMILY BUSINESS ESTATE PLANNING1:

INTEGRATING FAMILY DYNAMICS IN THE PLANNING PROCESS²

AUTHORS

John W. Ambrecht

Elizabeth Mackey-Sall

A basic human value provides that:

"No human being has the right to make a unilateral decision that affects the lives of other individuals without offering them a voice in that decision"³

INTRODUCTION

Startling statistics show that only about 30% of family business will successfully pass to the second generation, only 12% will successfully pass to the third generation, and approximately 3% reach the fourth generation.⁴

Research has shown that the reasons for the breakdown in the succession process fall into three general groups or categories, namely:

1. Problems in relationships among family members (approximately 60% of the time);
2. Heirs not being sufficiently prepared (approximately 25% of the time); and
3. Issues related to planning and control activities (approximately 10% of the time).⁵

With the historical results of family business succession referred to above, the question must be asked: Why is this happening in a society with numerous lawyers, accountants and other professionals that specialize in estate planning? Because of the shockingly poor success rate of family businesses passing to subsequent generations, perhaps the thinking process usually accepted by the estate planning community, as well as family business owners and potential owners themselves, needs to move to a different level. As Einstein postulated: "The problems we have created have been created at a certain level of thinking, and cannot be solved at that thinking level that created them." Thus, the evidence persuasively illustrates that the past "financially-tax driven" approaches to family business succession planning, to the exclusion of the family issues, simply have not worked.

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A working definition of a family business could be defined "at the simplest level, 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."⁶ Family businesses can thus be defined to include jointly owned assets, such as real estate or other capital assets where active management is not required, or to include assets where simply different family members are required to share use and ownership.

Different approaches to dealing with the family business transitions are being, and have been, developed in many other professional fields that focus on the succession process of family businesses.⁷ The legal and accounting professions, however, generally have not yet integrated the knowledge gained from these other fields into the more technically "financially-tax driven" estate planning for family businesses that are typically utilized by those professions. Is it possible then to speculate that a share of the responsibility for the failure rate for family businesses must fall on the legal and accounting professions?

It is not the authors' purpose to provide an in-depth analysis of the typical, technical, estate planning methods used to reduce estate and gift taxes, or a detailed discussion of the many "soft-sided" factors involved in planning for a family business succession since those topics are discussed in many other books, journals, papers and treatises that the reader can refer to.⁸

THE TWO CRITICALLY INTERRELATED ASPECTS OF FAMILY BUSINESS SUCCESSION PLANNING: THE "FINANCIALLY-TAX DRIVEN" AND THE "FAMILY DYNAMICS."

As the statistics reveal, succession planning for the family business involves more than just the "financially-tax driven" approach historically used by the legal and accounting professions; otherwise, the success rate for family business succession would have been significantly higher because most succession work is done using this traditional approach. It is intuitively obvious to any estate planning lawyer and accountant, that, "family businesses differ in a variety of critically important ways from non-family businesses, and business families function quite differently from non-business families."⁹

Even with the "financially-tax driven" approach, a "soft-sided" issue becomes apparent because success depends on the implementation of...