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The 10 deadly sins in estate planning

“There’s no greater gift you can leave your spouse and children than a well-thought-out plan,” say two veteran advisors. Here’s why many business owners fail at it.

By Ross W. Nager and Léon Danco

It’s a subject that only lawyers, accountants, and insurance salesmen seem to enjoy discussing. Estate planning requires us to face our mortality. The process seems to imply that we must close the book on our dreams and aspirations with so many things left undone.

Woody Allen once said that he didn’t mind dying; he just didn’t want to be there when it happened. If you focus on death, you won’t accomplish your dreams. But, if you view estate planning with a focus on life, you can get things done.

Business owners make numerous mistakes in their estate planning. Unintentionally, they wreak havoc on family harmony and their businesses. We’d like to share with you the top 10 deadly sins that we encounter in consulting with business owners.

1. Procrastination

There seems to be no greater spoiler of our philosophies than continued delays in putting them into effect or even giving them some thought. In addition to our material possessions, we have many things to give to those who will follow us. In fact, probably the greatest things we can leave our children, our employees, and others are our business philosophies, our moral and social values, our work ethic, and the like.

You can continue your legacies only through the lifetime actions of teaching and explaining. The most consummate paper shuffling in estate planning will not, by itself, transfer your philosophy and dreams. Only you can do it while you’re alive.

Don’t delay. Planning for the future is like anything else that is difficult. You cannot pay someone to lose 10 pounds for you. You cannot pay someone to get you to give up smoking or to be nice to your spouse. Only you can do it. Inaction does not improve with time.

2. Wishful thinking

You have to play with the hand you are dealt. You may have children who are interested in the business; or not. Some of them may be cooperative; others not. Your spouse and your children’s spouses may support you; or not. And some family members may be technically competent enough to take over; others may not.

These are all realities—competency, willingness, motivation, interest, support. They are facts to which you, as parents and spouses, do not always pay enough attention. But they exist, and you simply must face them.

When we asked an 82-year-old founder about when he would pass the baton to his successor, he said, “The kid isn’t quite ready yet.” How old is the kid? Fifty-five. Who’s fooling whom?

You can’t relive the past 10 or 20 years over and over again. You can only plan for the time that is left. You have to face the reality that your business is not only a giver of joy, but a demander of talent. That is a reciprocal relationship.

You have to recognize that you will not be available to help your successors when you’re gone, whether your exit is due to retirement, disability, or death. The business should not be a holding pattern for incompetent or unwilling heirs. Nor is it a family cow to be milked by the kids, the cousins, and the aunts. The business deserves the best, and you must arrange for the best to continue after you are gone.

3. Saving pennies on advice

There is simply no substitute for the best advice when it comes to estate planning. In your businesses, you put your name on the door, your reputations on the line, and your financial futures behind your warranties. When it comes to perpetuating your philosophy and values, why not seek out the best advice available?

If you want cheap advice, go see your bartender. But the advice won’t sound so good the next morning. The real cost of advice is not what you pay to get it, but what you pay when you take it and find out it was wrong. There is also a second cost, that of opportunities you miss when you lack the confidence necessary to act on the advice. Estate planning is more than reducing estate taxes. It involves emotions, and it affects others’ hopes and aspirations. It includes gut-wrenching choices such as deciding what to do when your daughter-in-law tells you that you will never see your grandchildren again if you do not make her husband president.

Advisors must understand more than just the financial consequences of what they recommend. They must understand that their planning techniques will affect not only control of the business and family members’ financial security, but also relationships. The actions they recommend usually affect these relationships far into the future.

Your advisors must be compassionate and understanding. They must have strong convictions and the courage to stand behind them, even if they must risk losing you as a client. They must have a commitment to you, your family, and business. And they must be able to communicate in terms that you understand.

You and your family must have confidence in your advisors. If you do not, you won’t trust their advice. If you don’t trust their advice, you won’t act. And we’ve already said that delay is a deadly error.

4. Trying to skin Uncle Sam

You won’t gain a better seat in heaven by telling St. Peter that you skinned Uncle Sam. We have seen many instances in which people have done outstanding estate tax planning and significantly reduced payments to the IRS. But too often the result is that uncooperative heirs become owners and their disputes over management ultimately result in the sale, liquidation, or destruction of the business itself. The question arises: Is saving the 50 percent estate tax so great if the result is that the kids will just squander twice as much?

Most people who have acquired sufficient property to make estate tax planning worthwhile recognize that when their money is presented as a gift it should be used for something worthwhile. You should not simply add more stock certificates to your feuding children’s arsenals. At least Uncle Sam takes his share and goes away happy.

5. Confusing equality with fairness

The notion that “fair is always equal” is nurtured and endorsed by parents who love all of their children equally and don’t want to play favorites with them. Children begin to learn at very early ages that fair means equal.

But fair isn’t always equal. If we have children with different needs, we take care of those needs as best we can. If they have different talents, abilities, or aspirations, we enable them to pursue educations suited to developing those talents, abilities, and aspirations. Those with special medical needs get preferential treatment; the healthy children do not receive equal or equivalent benefits.

The special needs of the business, just like the special needs of children, must also be met. To survive, the business must have competent management and cooperative owners. While you are alive, you recognize and deal with special needs, often increasing your own effort in order to compensate for your children’s shortcomings. Your involvement also restrains the demands made by children and possible tensions among them. Does it really make sense to change the ground rules simply because of the untimely event of your death? The ballgame should not start when the umpire goes home.

Fair does not mean equal ownership of the business. Successors who supply the business’s special needs should not be held in bondage by those who supply nothing. It is unfair for you to bequeath the labor of these successors to your other heirs. Disharmony and incompetence will destroy the company, which is not fair to anyone.

You have to be prepared to let go. You usually know well in advance which of your children are prepared to handle the responsibilities of owning what you choose to leave to them. Think realistically about what they will do with what you give them, particularly with respect to the potential impact on their relationships. If you anticipate problems, change your plans. If you can’t see clearly into the future—and none of us really can—you should probably reduce your risk by forgetting equality and putting the best and the brightest in charge.

We consultants are parents, too. We understand and agree with a parent’s equal love for children. If you must translate this equal love into a need for equal sharing of your estate, we suggest that you focus on equal overall financial treatment, not equal, undivided sharing of the business. There are a multitude of clever ways to equalize the sharing of value. They include preferred stock for inactive heirs, life insurance, the sale of assets to active heirs with proceeds passing to others, dividing up the business, and more. There may be some financial sacrifices, like taxes, professional fees, and the like. But the investment of time and money now could ensure continued business success and family harmony.

Whatever you do, don’t fall into the trap of believing that your actions can create permanent financial equality for your children after you are gone. Their financial successes and failures will and should vary based on their individual abilities, opportunities, and luck. If you force them to have a common financial destiny and their individual desires and objectives vary, you will destroy the fairness and family harmony which you so desperately seek to achieve. Your children can stay together as a family without forcing them to remain business partners.

6. Hoping for consensus management

If consensus is a requirement for a decision, an estranged minority can always exercise a veto. Rarely can a business function for very long if it is governed by a committee of individuals who each have their self-interests at heart. It is a tremendous distraction for really capable family and nonfamily managers to constantly deal with the input of owners who are not sufficiently involved or are not capable of understanding what should be done in the business. There must be a leader, and the leader must have the power to act.

Consensus is great, but what happens when there is no consensus? The classic case is two siblings who each inherit 50 percent of the stock and cannot agree on day-to-day operating details, much less the strategy and future direction of the company. The result is a stalemate which cripples the company. Since Dad and Mom diluted the power to act, the siblings must resort to lawyers and the courts to legislate “consensus.”

7. Failure to share your philosophies

It makes for a good TV soap opera: On the way home from the funeral of its patriarch, a family stops by the lawyer’s office for the reading of the will. Inevitably, someone gasps, “How could the SOB do that to me?” Real life isn’t that dramatic. But the reality of what the old man did when he left the family in the dark will be long remembered.

We know of no one who bestows material possessions on heirs out of spite. We give as an act of love. But when they’re nailing the lid on the box, you’re in no position to explain why you did what you did. Business owners routinely leave their grieving widows or widowers to placate people for the results of their acts of love.

Your dreams and philosophies are the fuel of your estate planning. You should share them while you are alive. It can’t be done afterwards through paperwork.

No one likes to raise the subject of estate planning within a family. If you do, your spouse may think you have a terminal illness. If your spouse raises the issue, you might wonder if there is a secret lover. If the kids raise the issue, the parents might think they are greedy. But if you don’t discuss it, how can your beneficiaries understand? You are the best person to explain it to them.

The beneficiaries also should agree with the plan. If they can’t, wouldn’t everyone be better off if you changed the plan accordingly?

8. Failure to teach—and to test

The best way to see if your estate plan works is to test it while you are alive. If you can’t decide whether your kids will get along or which one should be the boss, let them try it for a while. Don’t compensate for their inadequacies—recognize them. Give them responsibility and let them learn from their mistakes. This is part of the testing process.

If you don’t know how your kids will handle money, give them a little dose and watch what they do with it. If they don’t handle the responsibility well, you can readjust your estate plans.

There is no greater joy than watching your children and grandchildren rise to the occasion and properly handle their responsibilities toward the wealth that you give them. Properly done, the gift of wealth, both financial and in terms of authority, can lead to a renaissance in your life. But you must explain, teach, and test it to avoid surprises.

9. Not keeping the plan up to date

Estate planning must be a constant concern. Your planning must be done in pencil, not ink, because things change. Family members change. They get married and divorced. They have children. They move out of town. They develop likes and dislikes, and their skills change. Financial needs change because of ups and downs in the stock market, interest rates, and inflation. Of course, the business keeps changing, too. And legislators keep coming up with amendments to the tax code.

The potential for change does not excuse you from estate planning. You have to do the best you can based on your knowledge of the facts as they are. Then, you must constantly review your plans to keep up with changing circumstances.

10. No outside review

In addition to reviewing your estate plans yourself, you must seek periodic review by objective outsiders. Your advisors as a group should review your plan and agree as to what changes are needed. Incidentally, this is a good time to make sure that your family gets to know and trust your advisors.

An outside board of directors can be a big help in creating and reviewing your estate plan. If you have used your board correctly, your directors will have tremendous insights into your family. Their knowledge and advice is critical on an ongoing basis.

Your directors and advisors can play a crucial role in the execution of your plan as well. But they must be fully aware of your wishes. After you’re gone, they can be a surrogate spouse for your grieving widow or widower, a surrogate parent for your children, a surrogate boss to your employees.

Estate planning, like a rosary, is a never ending circle. To avoid these 10 fatal errors, you must continually address them. It does not get easier, and the issues don’t get clearer. But there is no greater gift that you can leave to your spouse and children than a well-thought-out and executed plan, which is current and understood by all.


Ross W. Nager is executive director of the Arthur Andersen Center for Family Business in Houston. Lťon Danco is chairman of the Center for Family Business in Cleveland.