Proper Planning is More Than Asset Allocation

People solving a problemHere’s the thing…good planning avoids conflict. But, good planning is much more than asset allocation.

Advisors implore their clients to plan for the future. They often use disturbing techniques like horror stories of deplorable outcomes due to a lack of planning. Usually the disturbing track is about a loss of money either to the tax man, business shrinkage or failure.  Losing assets is bad enough, but the loss of family is worse.

Conflict is inevitable, but it can be managed. Family businesses are a breeding ground for conflict like wet lands are for mosquitoes. Since we know that about wet lands, we have learned to control the mosquito population and where that doesn’t work we use repellent, dress protectively or avoid contact all together. We need to approach our life’s outcomes with the same gusto.

Asset Planning
If you have managed to amass some wealth you need to care for it. The wealth you accumulate in a private business is much different than stocks and bonds that can be traded and easily converted to cash. It’s even different than real estate that has a fair market value and can be liquidated. Those are things that can be converted to “cash” with little conflict or emotion. Perhaps the family homestead or cottage have some emotional strings, but it’s very unlikely that the Google stock, commercial buildings or an apartment complex have the same sensitivities.

Our planners can help us protect those assets with little conflict. They can even map out the distributions of your accumulations after your death. They can help you determine who will carry out your plan and how it will be done. They will place those assets where you want them, when you want them there and most efficiently avoid any excess taxes.

Family Business Planning
Unlike other assets, the family business has very different elements. It is an asset rife with history, emotion, and legacy. It becomes much more than a stock certificate liquidated to cash. The broader family dynamics swirl around that planning in so many ways.

—Upon your passing should the family keep or sell the business? Who decides?

—If the business is kept, how will the value of the business asset be determined and distributed through the estate to the heirs? Will those employed in the business be treated the same as those who are inactive?

—If the business is kept, how will it be managed and who will decide? Will family employees get a better “deal” through their employment than family non-employees? How will profits (losses) be handled? Will they become bonuses to employees, distribution to heirs, or kept to fund expansion – and who decides?

—If the business is sold, how are proceeds distributed? How are family employees protected for their future? Are they due special compensation in severance packages for their service? Is their continued employment part of the purchase agreement?

We could go on and on with potential conflicts. It becomes far more complicated than liquidating other types of assets. It isn’t a sell-off and distribute proceeds according to some formula.

Picking Your Successor
Here’s another thing – as much as you might try to do the best planning possible, once you’re gone your input and control goes with you. Things will change. Now others are left to execute a plan you put in place with the best of intentions. Most plans have some loose language giving latitude to Personal Representatives and Trustees to act according to the situation at hand. Life happens and it tends to throw lots of curve balls. Those curve balls can come with great emotion that can spin family dynamics.

Imagine being the CEO of the family business after the passing of your parents. Because of your closeness, both geographically and emotionally, you are also the Personal Representative and Trustee of their estate. You have siblings that think the scale has tipped very heavily in your favor to the point that if you even take a well-deserved raise you are paying yourself before distributing business assets to heirs.

Pile on what the in-laws think. If you think of paying yourself for the hours and hours you take to handle the estate affairs, you are raiding the estate. Mind you, the siblings aren’t local and can’t do much of the work at hand, but they sure think you should – and for nothing! Having control isn’t always what you expect. Be very careful before you accept any position that puts you in a direct line for a conflict of interest.

Even with the best intentions and outstanding planning with the help of top professionals, the execution of your plan probably won’t go the way you intended.

The best advice I’ve heard on this is that you need to go beyond the asset allocation. Deal with the emotional issues while you are still able to do so. Be sure not to put your successors in positions where they are faced with unavoidable conflict or double jeopardy. And, be sure to update your planning as things change.

Regular family meetings to discuss these things are a must for future harmony. One client drew up his estate plan and asked the drafting attorney to present it to his family (in-laws and all) at a meeting for the purpose of discussion.

Surprises about your “final wishes” shouldn’t come in the form of a document, or a difficult conversation left to your successor. As much as we might, even with the best of intentions, we can’t dictate what will happen in the future from the grave. It’s far better planning to include those who will benefit from the plan in its design, and it’s the best way to address family harmony in its execution.