For wealth managers, a family business is often the most valuable, yet volatile, component of a client’s net worth. When a client holds control as an officer or managing member, their fiduciary duties to minority owners and beneficiaries are constant. Issues arising during succession can have ramifications that ripple across generations, transforming the controlling interest holder into a defendant litigation against other family members.
“The goal is to protect the company and the client’s standing within it,” explains Craig M. Frankel, a founding partner of Gaslowitz Frankel. “We have seen cases where businesses owned largely by trusts required extensive litigation to secure control. Seasoned counsel is key to ensuring a financial advisor can continue advising the client on their investments without the core asset being dismantled by disputes”.
Fiduciary Duty Claims in Business Succession: When Informal Management Results in Formal Claims
The success of a founder-led business often relies on informal, decisive control. Practices that were once acceptable, such as aggressive use of company assets for personal benefit or subjective compensation, can become liabilities when control transfers. When non-controlling siblings or minority interests inherit a share, they can weaponize past practices as formal allegations of breach of fiduciary duty. Resentment over a lack of transparency regarding business performance can also drive demands for exhaustive information.
“It is common for a business to be run informally under the original owner,” says LeAnne M. Gilbert, an attorney specializing in fiduciary and commercial litigation. “When control transfers to multiple owners, past practices, such as compensation structures must be addressed. Establishing enforceable boundaries can mitigate the conflict and resentment that arise when one sibling controls the majority of assets and information”.
Related Article: When Family Business Disputes Threat Client Wealth: Guidance for Wealth Managers
Defending the Fiduciary’s Conduct and Right to Control
When a claim is brought against a controlling partner, the first step in a strategic defense is to determine whether the claimant has a a genuine grievance or is merely engaging in a “fishing expedition” for family leverage.
“Most wealth managers focus on liquid investments like stocks and bonds,” notes Frankel. “They rarely advise on the management of family partnerships or LLCs. Obtaining specialized litigation expertise early in the process is essential to defending disputes regarding the governance of non-traditional, non-liquid assets”.
Strategic defenses may involve enforcing corporate documents or navigating a “business divorce.” This process can mimic the practical realities of traditional divorce, as it often involves buying-out minority partners.
Related Article: Mitigating Investment Litigation Risks for Your Clients: A Fiduciary Perspective for Wealth Managers
Mitigating Generational Conflict in Fiduciary Selection
Family business disputes often stem from a flawed choice of fiduciary. Founders may reflexively name the oldest child as manager, ignoring sibling rivalries or a lack of administrative skill. This choice is a frequent point of failure.
An unqualified sibling may provide inadequate accounting or operate with a perceived sense of entitlement, leading to protracted litigation. Guiding a client toward an independent or corporate co-fiduciary is often the most effective preventive measure.
“In corporate disputes, ambiguity is a liability,” explains Gilbert. “We assess the veracity of claims to establish the boundaries of the manager’s duties. The goal is to vindicate the client’s conduct or negotiate a resolution that secures the business’s continued operation without ongoing conflict.”
Related Article: When Wealth Managers Need Fiduciary Litigation Experience
Strategic Foresight: Stress-Testing the Succession Plan
The most effective service a wealth manager can offer is integrating legal foresight into the succession plan. This involves “stress-testing” governing documents to identify vague language or insufficient guidelines likely to fuel future disputes.
- Document Review: Analyzing rights to extinguish suspicion before it reaches the courtroom.
- Asset Protection: Utilizing trusts to provide legally required transparency while protecting the manager.
While trial readiness is necessary, Alternative Dispute Resolution (ADR) like mediation or arbitration is often the best path to preserve business value. Mediation allows for customized, confidential resolutions that avoid the financial and emotional costs of a public trial.
“In fiduciary disputes, the cost of a public trial can be immense,” says Frankel. “ADR allows us to present complex governance and financial realities in a private forum, allowing for a cooperative resolution that a court battle cannot guarantee”. The attorneys of Gaslowitz Frankel have years of expertise in handling the complex issues surrounding will, trust, estate, business, and securities disputes. For trusted estate law and fiduciary legal guidance, consult with the attorneys of Gaslowitz Frankel today.
