Family Governance Arrangements: Putting the SUCCESS into Succession Planning

It is a little known fact among us mere mortals, but the über-rich have a trick for both keeping the peace in their families and preserving their vast fortunes. They engage in something called family governance planning. Most of us are unfamiliar with this concept although those working in family law like for example Goodman Ray Solicitors should understand what this means, however it’s not difficult to grasp on a fundamental level. Put simply, family governance has two parts: First, it involves identifying and agreeing on specific goals which a family can actively pursue. Second, it involves establishing rules by which those goals will be pursued and what each family member will contribute in the furtherance of that pursuit. In other words, family governance charts a course for the family unit and provides clarity and transparency among and between the individual family members so that they can function more cohesively as a group.

I. The Problem. Most families fail to conduct any family governance planning whatsoever. In fact, most families do exactly the opposite. Rather than discussing openly the nature and extent of their bounties, most family heads in America will actively hide details about their wealth from their children and other family members. And their loved ones often pay for it in the form of costly legal disputes, intra-familial discord and lasting, emotionally-charged feuds.

Why do we do this? Well, there are two major obstacles, one or both of which may impact a given situation. First, discussing wealth is taboo. We all know that it is distasteful to discuss wealth publically, but the problem is that too many of us take the rule too far. Discussing wealth in a private setting with close family is not taboo. Second, discussing wealth is hard. If one is to have a proper discussion about their wealth with family, they need to arrange a meeting, collect all sorts of information and come up with an agenda. One also needs to know what to say, what questions to ask and how to listen to other family member’s input. All of this is labor-intensive and emotionally charged. Fortunately, however, there is quite a bit of help available, from books for those who want to educate themselves to professionals available to provide direct guidance.

Family governance seeks to minimize negativity by addressing some or all of the following:

  1. Expectations regarding wealth;
  2. Caring for elderly family members;
  3. Employment within the family business;
  4. Investment and management of family assets;
  5. Procedures for resolving grievances;
  6. Spousal issues;
  7. Enfranchisement and training of younger generations; and
  8. Charitable giving.

Different families will apply family governance strategies to varying degrees depending on a number of factors, such as size of the family, relative ages of the family members, assets held by the family, status of existing family relationships and quite a few more. Thus, every structure is necessarily bespoke and it is usually quite helpful to have a professional guide who can provide guidance, technical clarity and an unbiased third-party perspective.

II. The Tools. There are many forms that family governance can take. At the highest levels, comprehensive family governance planning may include some or all of the following:

  1. Regular family assemblies;
  2. Family mission statement;
  3. Family constitution;
  4. Formalized narrative of family history and traditions;
  5. Family counsel tasked with dispute resolution;
  6. Various committees (i.e. Investment, Education, Administrative, Charitable, etc…); and
  7. Trustees.

Typically, larger, wealthier families will employ more of these components while families of more modest means will employ less. At a minimum, however, regular (usually annual) family assemblies are necessary to identify the extent to which various components are needed and flesh them out. These assemblies (which in certain circumstances can even be deductible for income tax purposes) often take the form of a family vacation or reunion where participants are encouraged to both work and play.

III. The Program. A typical family assembly agenda might look like this:

A. Set the tone and talk family history. A family assembly will usually begin with an initial session to set the tone for the assembly, as well as the goals and ground rules. Steps should be taken to avoid disillusionment by family members because participation by all relevant players is crucial. Therefore, the patriarch or other organizer should avoid talking down to the other family members and focus instead on listening to the others’ thoughts and opinions. That said, it should be clear from the start that the purpose of a family assembly is not to voice grievances, assign blame or point fingers. Rather the focus should be on moving forward towards a common goal. At the end of the day (or weekend or week), the primary goal should be for everyone in the family to be “on the same page” about family business, relationships and expectations.

After setting the initial tone and ground rules, the family may benefit from some exercise designed to promote what the military calls “unit cohesion.” That is, a discussion designed to get the family pumped up about its own history and traditions. Discussions of family heritage, retelling of family lore and recognition of individual accomplishments (i.e. since the last family assembly), may help motivate the family to proceed with the work ahead. The family should also acknowledge the extent to which it was able to meet its goals as set out in the previous family assembly.

B. Review mission statement. At this point, the family mission statement should be restated and evaluated. Note that this is done before the new goals are set out because the adoption of new goals will be guided by the family mission statement. That is, goals that do not fit within the mission statement probably should not be adopted.

Often times, this discussion is best had over dinner with a little (but not too much) drink. It also provides an opportune time to incorporate and educate spouses. Remember, the directive to have fun at a family assembly is just as important as the conduct of business.

C. Get to business. The next step is to report on the status of family affairs and set expectations. This will often be the point at which the patriarch does the most talking. He or she should describe with appropriate specificity the outlay of the family’s assets and liabilities. An accurate description of his or her estate plan is also germane to this part of the meeting and should be made in front of all relevant family members with complete transparency. The implications, tax and otherwise, of any estate planning techniques should also be explained to each expectant beneficiary so that they can have clear expectations of what is to come and avoid being blind-sided by confusing legal jargon and unintended consequences when the time finally comes.

When discussing his estate plan, a patriarch should make sure to declare his intentions regarding how beneficiaries are to enjoy their inheritance and put them on notice of any restrictions on the use of property. Clarity with regard to the enjoyment of property held in trust can go a long way to reduce friction between beneficiaries and trustees. Thus, the patriarch should state whether he or she intends for future generations to enjoy the estate assets liberally, as a nest egg, or only as a safety cushion. Some mention should also be made regarding the ability of spouses to benefit from the estate. Finally, there will almost always be tax-based restrictions placed on assets held in trust. These along with any others (for example promoting certain behaviors) should be made clear.

Of course, end-of-life planning is ancillary to any discussion of estate planning, and depending on how things play out, may be just as important, if not more so. Modern medicine makes it increasingly likely that each of us will need extensive care, often for a number of years before we die. Not only is this care labor-intensive, it is incredibly expensive and emotionally draining on family. By setting out a plan before incapacity, we can greatly reduce these burdens on our loved ones. To this end, we might want to discuss i) the nature and extent of the care we might need, ii) the expected costs and how they will be covered, as well as iii) how specific family members might participate in assisting with such care and the extent, if any, to which they should be compensated for their efforts. Remember that caring for a loved one can be a full-time job in and of itself. Also, caregivers who are able to maintain regular employment may have to reduce their hours, pass up promotions and otherwise sacrifice in ways that are financially burdensome, so compensation will often be appropriate.

The estate and end-of life planning portion of a family assembly may be the most difficult for the patriarch. As mentioned above, discussing wealth remains extremely taboo in our society and nobody wants to think about a slow decline towards the inevitable. However, in controlled circumstances, these discussions can literally save future generations from ruin, so it may be helpful to view openness as a lesser evil. One way to mitigate apprehension in this regard is to set clear expectations for family members’ keeping the discussion confidential. Also, clear policies for when and how such information may be brought up with younger family members will likewise provide comfort. In any event, a balance must be drawn between the need to promote family unity and the desire to avoid embarrassment (or worse) if details are made public.

D. Setting goals for moving forward. Once family members have been apprised of the family’s overall status, they can go about setting goals for the future. This may be a tricky part of the program, because family members may not understand what options are available as family goals or the extent to which their eventual achievement might be realistic. But this part can also be the most fun because it affords the individual family members the opportunity to think creatively and plan with hope in their hearts about the future. The nature and extent of the particular goals will vary widely from family to family. Within a family, the goals will likely change over time as well. To the extent there is a large family business, a stronger focus on business objectives will be needed. These might include some discussion of:

  1. Goals relating to growth;
  2. Acquisition or divestiture of assets;
  3. Development of new products or services;
  4. Employee matters (including hiring family members, spouses or others); and
  5. Tax matters.

Other families, however, might focus more attention on personal goals such as:

  1. Family members’ education (i.e. high school, college and/or professional degrees);
  2. Identifying charitable beneficiaries to support;
  3. Family members’ personal goals (i.e. weight loss, writing a book or promotion at work); and
  4. Setting standards for the care of elderly or disabled family members.

Setting goals necessarily requires the family to assess its own definition of success. Some measures of success can be objective. For example, determining an amount the family intends to give to charity may be straightforward. On the other hand, success may also manifest itself more as a path than a destination. That is, the continuance educational goals developing new familial relationships (i.e. through marriage or the birth of children) are more subjective.

E. The plan of attack. Once the goals have been laid out, the family can map out a path to success. Typically, they will do this by first brainstorming ideas for achieving their goals and then by developing (and memorializing) clear steps each will agree to take in furtherance of each goal.

There are a few keys, however, to doing this effectively. First, larger tasks must be broken down into progressively smaller ones until they become realistically achievable for the individuals responsible for their completion. Thus, the creative gives way to the practical. Also, it is important that all family members are encouraged to avoid creating work for others. Some families have rules effectively stating that the person who mentions some new task should be in charge of seeing to it that the task, if adopted, is completed.

Second, it is very important to avoid disenfranchising any family member. The input of all family members, once they meet certain general criteria, should be valued. Thus, the tasks assigned to younger family members will be very different than those assigned to older family members, but they should not be described in terms that portray relatively less value. For example, a family may choose to enfranchise children at age 16. At that age, however, the child’s primary focus should be finishing high school with the best possible grades and beginning the next phase of life (be that military service, technical school, college or something else). While young family members may work at the family business in the summer, they will not be responsible for the successful deployment of the new marketing push for the coming fall. Similarly, adult family members with diminished capacity or those who simply are not interested in participating in the family business should be provided with some opportunity to contribute, no matter how trivial that contributions might seem. This is because the very essence of family is promoted by each individual’s opportunity to contribute and their ability to “own” some task.

Third, it is absolutely critical that deadlines be placed on each step of the plan. Like it or not, it is a reality of human nature that the road to hell is often paved with good intentions. A family will have done itself no good if it fails to implement the plan, however masterful it may have seemed when laid out. By providing deadlines, individual family members can be motivated to take the necessary steps towards realizing the family’s stated goals. Of course, the deadlines (like the individual steps themselves) must be realistic. This may take several attempts to get right—that is, several years’ worth of family assemblies—so families should not allow themselves to be put off by this. Rather they should adjust their expectations accordingly. And to the extent possible, individual family members should avoid criticism of others who missed their deadlines. Giving a family member less responsibility for the coming year because failed to meet deadlines in the past is criticism enough for most.

F. Review and revise documents. After setting out the path towards achieving its goals, the family may wish to revisit operational documents and procedures and amend or adjust as needed. Are the nepotism rules for the family business sill relevant and just? Does the constitution adequately address methods for resolving conflict? Does the policy for loaning money to family members need adjustment? Likewise, appointments to the family council and any committees should be made at this time. Note that this may not be something that all family members at the assembly participate in. Depending on the particular family’s circumstances, this may be the exclusive purview of the family council.

G. Here’s to us! The final agenda item for most family assemblies is to recognize a job well done by all. It can be hard work to map out the family’s year, so thanks and congratulations all round are in order, particularly if and to the extent that the family has been able to conduct its business peacefully and on schedule.

IV. Tailoring the Plan. Obviously, not every family will follow the exact plan laid out above, but it is illustrative as to how family governance can be implemented. Some families may wish to adopt a paired down version of this plan while others may wish to add to it. For example, workshops can be added to help keep up to date with market trends or other matters relevant to the family business, as well as legal, tax, financial, insurance and other matters.

Regardless of how the family governance is implemented, it is very important that the family continues to meet periodically. Most families will choose to meet annually, but bi-annual or quarterly meetings are also standard. Less frequent meetings, however, may not provide the necessary continuity or guidance. Indeed, a lot can happen in a year!

To the extent that family assemblies are deductible, they can also provide a patriarch with an excellent avenue for shifting wealth. In other words, a family assembly is not much different than a corporate retreat, so they provide an opportunity to give family members something nice (a trip) without any estate or gift tax consequence.

Also, the importance of seeking professional assistance cannot be overstated. A third-party facilitator provides numerous benefits. First, they can make arrangements for the family assemblies by coordinating with family members, booking hotel rooms, securing meeting spaces, preparing agendas and much more. Next, facilitators provide unbiased perspective to aid in the decision-making process. To this end, they can provide guidance with developing family goals, as well as breaking tasks down into achievable parts. Similarly, they can help keep the family on track. Family assemblies can easily devolve into chaos without someone who is willing and able to provide the requisite guidance. Furthermore, a facilitator can assume the role of the “bad guy” and help avoid negativity between family members. Finally, a professional facilitator may have the experience and specialized knowledge to provide clarity and answer questions regarding legal and other matters. Not only will this help promote realistic expectations, but it will also provide the patriarch an opportunity to communicate his or her thoughts and feelings without being the one who is actually talking. In other words, it affords the opportunity to talk without the appearance of talking down.

V. Pairing Down. Successful families of means use family governance to achieve their goals and preserve wealth. This can be a very involved (and therefore expensive) prospect. Fortunately, however, the same principles developed by and for the very rich can also be adapted for families of more modest means. By seeking the guidance of a professional to help develop a family governance plan and facilitating family assemblies, the family can compound the benefit derived.

VI. Fact-based example. While the benefits of goal-setting in the family business context may be easier to grasp, an example will illustrate how family governance can provide great benefits in other areas as well:

Assume Family consists of Dr. Patriarch (a successful physician), Mrs. Matriarch (a homemaker), Junior (an MBA working for a large corporation), Daughter (an art history major working as a docent at a local museum) and Baby (a high-school senior trying to decide on the right college). Assume that Family has a net worth of $7mm. At their annual family assembly in the Texas Hill Country, Junior expresses a desire to strike out on his own doing the same thing he has been doing at his large company. Similarly, Daughter expresses her desire to write a book about art collections of Upper Bavarian monasteries in the mid-1290’s. Baby, on the other hand is debating whether or not to attend an expensive private school or a state school. Finally, Mrs. Matriarch has joined the board of prestigious local charity that raises money for medical research.

At their assembly, the family might determine it will lend Junior the funds he needs to start his business and the specific terms on which that loan will be made (and repaid). The family might also determine to purchase equity in the new company.

Additionally, the family may agree to support Daughter by encouraging her to meet set deadlines for certain portions of her book. In this manner, they can increase Daughter’s motivation to accomplish her goals. She is less likely let herself down if doing so would also mean letting her loved ones down. Finally, the family might agree to hold their next family assembly in the Bavarian Alps, as it would be relevant to Daughter’s work.

Next, since all the family members are together, they will all be able to provide guidance to Baby with regard to his college decision. Also, the financial impact of his final decision will be out in the open for everyone to see. If Baby decides to attend the expensive, private college, it may be appropriate for him to enter into a loan agreement with Patriarch to cover the additional tuition, particularly if the other two children attended significantly less expensive schools.

Regarding charitable activities, the family can determine an appropriate amount that it will give away in the coming year. They might further agree that Mrs. Matriarch’s charity will be the charitable recipient and that they will purchase a table at the charity’s annual gala large enough for all the family members (along with a spouse or date)

VII. Conclusion. Family governance provides clarity of purpose, guidance for achieving specified goals and unity among family members. At the end of the day, this translates into increased family happiness. Of course, both time and money must be invested, but the rewards will generally exceed the costs by a wide margin. After all, what price can a family put on its own happiness?

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Read about author Christian S. Kelso