New study finds they’re not attending to their businesses’ futures — even though so much is at stake

By David T. Leibell and Daniel L. Daniels, partners in the Stamford, Conn. office of Wiggin and Dana LLP

It seems that F. Scott Fitzgerald was wrong. According to a new study, “Protecting the Family Fortune,” the very rich are not all that different from the rest of us — at least when it comes to estate planning. They also avoid it, because making or implementing plans means coping with the unpleasantness of death, incapacity and taxes.

“Protecting the Family Fortune,” issued June 11, is the first study of its kind dealing with ultra high-net-worth family business owners. It surveyed 242 second- and third-generation ultra-high-net-worth business owners based in the United States (49 percent), Europe (35 percent) and the Far East (16 percent). The study was sponsored by U.S. Trust, Bank of America Private Wealth Management and conducted in the third quarter of 2007 by Campden Media and Prince & Associates, Inc.

The study's objectives were to examine the success of family-run businesses in transitioning from one generation to the next and to uncover any wealth planning issues that may have been left unaddressed. The criteria for participation were: (1) all participants were senior officers of the company with a seat on the firm’s board of directors, and a personal equity share of the company of 10 percent or greater; (2) all owners had a personal net worth of $5 million outside the stake in the business; and (3) all businesses had values in excess of $300 million, with a mean value approaching $730 million and one family owning at least 60 percent of the business.

You'd think that these would be precisely the kind of people who'd have effective estate plans. All had successfully moved control of the family business beyond the first generation to the second generation (75 percent of participants) or even the third generation (25 percent of participants). Seventy-eight percent expected the family to maintain control of the business for the foreseeable future. And all had sufficient assets outside the business so they shouldn't have to depend on the business' cash flow.

Yet, the study found, more than 60 percent had not implemented an effective succession plan. Particularly weak was planning for estate tax mitigation and asset protection.

The results of this study are consistent with the findings in two recent studies on smaller family businesses – “Making a Difference: The PricewaterhouseCoopers Family Business Survey 2007/08” and the Mass Mutual/Kennesaw State University/Family Firm Institute's “2007 American Family Business Survey.”

In other words, there are now three studies proving what advisors generally observe: Business owners are not doing adequate estate and succession planning.

What’s Their Focus? An interesting aspect of the “Protecting the Family Fortune” study that was not present in either the PricewaterhouseCoopers or Mass Mutual studies, is the fact that the participating ultra high-net-worth family businesses were segmented into two behavioral groups identified as “family-focused” and “business-focused” family businesses. Sixty-two percent of the participants were categorized as family-focused. These people place family first, using the business as a mechanism to address family concerns. They primarily view the business as a source for wealth creation in service of the family. The remaining 38 percent were defined as business-focused. These people find the needs and wants of family members to be less meaningful when making decisions that will affect the business. This segment prioritizes business decisions above family decisions. Perhaps not surprisingly, the study found that the median value of business-focused businesses tended to be higher than that of family-focused businesses ($694 million versus $499 million).

Are They Making Plans? Carrying Them Out?

When it comes to succession planning, 76 percent of the participants have some form of succession plan in place, which is consistent with the fact that 78 percent would like to keep the business in the family for the next generation. Unfortunately, most of those plans are collecting dust. Only 38 percent of participants actually are implementing their succession plans.

In addition, most of the succession plans focus on management/ownership succession; only 27 percent deal with wealth transfer tax issues. This is startling, considering that 93.4 percent report wanting to minimize their tax bill on the transfer of the family business.

They should, because a lack of planning to mitigate taxes can place a huge financial burden on both heirs and the business. That's sad, because business owners who focus on tax mitigation can achieve great success using advanced estate-planning strategies such as estate freezes and discounts or even relatively simple techniques like buying sufficient life insurance outside the estate to pay any estate tax due.

On top of failing to plan properly for the business succession, the majority of participants did not have up-to-date personal estate plans. In fact, 22 percent had no personal estate plan at all.

Asset protection was an area of particular concern for participants. Although 90 percent of business owners are “very” or “extremely concerned” about protecting their family’s wealth, 73 percent do not have asset protection plans. When questioned, 67 percent report that they lack a plan because they have not been provided the proper guidance to develop one.

Why are these extremely wealthy business owners in such bad shape with their succession, estate and asset protection planning?

The Fault, Dear Brutus

We all know the lore of family business owners: They are unwilling to give up control and that is why they do not plan effectively.

But the reality is not so simple. The fault lies as much with the business owners' advisors as with the business owners.

Some businesses have outgrown their existing advisors.

Even the best advisors may not be able to handle all aspects of the succession plan, but because of insecurity about losing what may be their biggest client, they are unwilling to bring in specialists.

Often, too, there's no clear quarterback among advisors for family businesses. The wealthy business owner works with an accountant, a bank or financial advisor, an estate-planning lawyer and sometimes a family business consultant or organizational psychologist. Unfortunately, these advisors may be working at cross-purposes with no one advisor coordinating the effort. The result is often that we see a busy, business owner getting inconsistent advice from a variety of advisors.

It’s no wonder the vast majority of succession plans are not implemented.

We need a better way. Hopefully, studies like “Protecting the Family Fortune” will begin the dialogue among advisors and with business owners.