For wealth managers advising business owners, the transition of a closely held family enterprise represents the largest point of asset vulnerability their client will face. This asset is exposed to catastrophic risk during a generational shift. While the original owner often runs the business informally with single-owner control, including the potential for aggressive compensation or personal use of company assets, this model is inappropriate for the next generation. The change to a multi-owner or multi-beneficiary entity, where one child assumes control, but others receive ownership interests, is a common genesis of contentious litigation. The transition can create an environment rife with resentment for the non-controlling owners and a feeling of entitlement for the one in charge, which can all too easily snowball into situations that require defending a family business transition against disputes.
Here’s what to know and how working with fiduciary litigation experts can help create essential guardrails during transition.
The Catastrophic Consequences of Fiduciary Mismanagement
When a parent names one of their children as the executor or trustee of the estate, and that estate holds the family business, it can create instant problems. The worst scenario is where the appointed individual uses their position to exercise aggressive control that undermines the minority owners.
“The person who is put in charge is not always the most honest. It’s usually whoever happens to be the oldest, and that doesn’t usually end well. Sometimes, you’re dealing with people who are not even honest about how they deal with their parents – we’re talking about kids from first or second marriages. Sometimes, you’ve got a ne’er-do-well who’s always at the door with their hand out, taking as much as they can, and the closer parents get to death, the more they’re there with their hand out until eventually, they realize this is their last chance to make a big grab for assets. Then, you end up with all these siblings fighting to recover an estate that is likely quickly depleting,” said Adam Gaslowitz, a founding partner of Gaslowitz Frankel.
When this happens, the other siblings, feeling their inheritance is being controlled or diminished, resort to aggressive litigation. This can lead to the destruction of the family’s assets, undermining the wealth preservation goals you were hired to achieve.
Further, costly, protracted litigation, can paralyze business operations, ultimately eroding the underlying asset’s value. Such conflicts often end up destroying the family, along with their shared legacy.
Related Article: When Wealth Managers Need Fiduciary Litigation Expertise
The Essential Role of the Corporate Fiduciary
For the wealth manager, advocating for the use of a corporate fiduciary to manage the business transition is key advice. An uninterested fiduciary can avoid the complex family dynamics that almost materialize when there is perceived favoritism and inheritances are on the line.
“More often than not, when you’re dealing with first marriages, the problem you have is among the siblings – these dynamics change as families get more blended, obviously. We see a large number of cases that involve siblings fighting with each other, and one of the main issues we see is the choice of fiduciary. If you have three kids and name one of them as the executor of the estate; may create problems. Those kids have their own relationship with each other, and that relationship is strained to the breaking point when you put one person in charge of everyone else’s inheritance,” said Gaslowitz.
The misconception among clients is that using a child will be free and easier but that is rarely correct. You cannot rely on your child to work for free, especially if their relationship with their siblings is strained. A professional corporate fiduciary may charge, but they act objectively.
“Administering an estate can be a complicated job, and just because someone happens to be the oldest child doesn’t mean that they are the most qualified to do it. Some people lack the knowledge and skills to do a good job. They don’t account very well; they don’t communicate very well; they don’t let people know what’s going on; and the administration can drag on for years. At that point, the only person who’s benefiting from that estate is the one in charge because they’re taking administrative fees, hiring attorneys, and sometimes overreaching,” explained Gaslowitz.
Unlike a lay person, corporate fiduciaries have a dedicated staff to handle taxes, accounting, timber management, and asset distributions. They also have committees to review discretionary distribution decisions, ensuring they are made thoughtfully and impartially and reflect your client’s estate planning documents.
“Sometimes, you just need someone who can stress test an estate plan to really show the risk. The reality is we can’t make that decision for them. They can choose who they want to manage their estate. It’s their right, and that’s fine. But what we’ll do is show them what could happen if they do that. All they have to do is tell us a little about their family, and the plan unravels,” added Gaslowitz.
Related Article: When Family Business Disputes Threaten Wealth: Guidance for Wealth Managers
When Litigation is the Only Recourse for Defending a Family Business Transition Against Sibling or Fiduciary Disputes
Despite the best preventative planning, disputes will arise, and the fiduciary may face a legal challenge that necessitates defending a family business transition with decisive action. You and your client need a litigator with specialized experience in commercial litigation and fiduciary disputes. This expertise is essential for:
- Rapidly assessing the claims’ veracity.
- Establishing the manager’s legal boundaries.
- Executing a financially pragmatic strategy that secures the business’s continued operation.
The attorneys of Gaslowitz Frankel have years of expertise in the complex issues surrounding will, trust, estate, business, and securities disputes. If you are a wealth manager with a client whose family business transition is at risk due to governance failures or sibling disputes, trusted estate and fiduciary guidance is imperative. Consult with the attorneys of Gaslowitz Frankel to preserve your client’s wealth during a period of generational business transition.
