Preserving Family Legacy Through Strategic Estate and Business Succession Planning

In the hit HBO show, The Newsroom, news anchor Will MacAvoy observes, at one point, that the first step in solving a problem is recognizing that it exists. The same principle often applies to advising high-net-worth clients. Often, they have had their heads down for many years, concentrating on building their business and wealth. A big part of our role at Farella Braun + Martel is alerting these clients to their changed circumstances and guiding them to act. A high-net-worth legal practice is an intensely personal, hands-on specialty.

Problem: One of our clients is a Bay Area family that runs a packaged food business. Founded by the parents, through many years of hard work, what was originally a fairly small mom-and-pop business had grown into a substantial, complex multigenerational enterprise.

Our clients were Chinese immigrants who built a business with little more than hard work, grit, and personal commitment. As a husband and wife team, they built their family’s present and future. Their family also grew to include two children. Myopically focused on the business—the family’s only income source—they quickly threw together the simplest estate plan imaginable. Everything is equally split between the two kids. The end. Now, let’s get back to work.

Over time, the involvement of their two children complicated things. One child became a key part of the operation of the business. One did not. And as time went on, the role and importance of the involved child became more and more essential to the business. That child, who had significant responsibility for the success of the enterprise, was receiving precisely the same ownership share as his sibling, who was not involved. And the non-involved sibling was seeing the value of her ownership grow, due largely to the efforts of the involved sibling.

It is important to note here that there are no bad actors. Everyone was well-intentioned, and this was not an episode of Succession. However, some issues needed to be addressed and were growing more urgent every day—natural byproducts of the company’s growth and success, and the family’s lack of sophisticated planning. For example, the involved child was feeling like his efforts were not respected and began thinking through branching off and starting his own company. Would it be a subsidiary of his parents’ company? An independent entity? Who would own the company, and at what percentages? What tax or other issues should be defined? How would it all work? He wanted a resolution of these issues, and soon.

Behind that wedge issue was an array of other subjects that the family had not yet dealt with or planned for, nor trusted in sophisticated service providers to guide the aging parents. There was minimal estate and no tax planning for the family or succession planning for the business. The corporation lacked current governing instruments and maintained an Excel-based cost accounting system. Transfer rights and rights of first refusal were unclear, with only a basic, decade-old estate plan in place that was nowhere near sufficient to address the complexity created by the success of the company.

Solution: The first, essential, very challenging task was to get the founding parents to understand how important developing a strategic estate plan was to the future of their family and their business.  Busy entrepreneurs often must deal with today, not tomorrow, which is why, as lawyers, we see around corners and deal with possibilities that affect live issues. Through multiple meetings, we began discussing how to plan for the future and, specifically, for things like potential tax ramifications and allocation of company control and business assets and profits in both the short and long term. We brought all parties together via very carefully drafted correspondence that kicked off the proactive process of reaching out, setting a foundation based on mutual goals and objectives, and then guiding the family into thinking about specifics.

We assisted the family in identifying and developing a list of issues. Using concrete examples and a series of scenarios, we addressed the consequences of doing nothing or not much. We helped them address what happens if they did not get out in front of these significant familial and business issues. These conversations often involved other colleagues from Farella with specific expertise in corporate, tax, insurance coverage, intellectual property, and employment law, to identify a few.

When we tackled one issue, it created a new set of questions or a lens to tackle the next issue.  Our practice provides the most value when we guide clients through complex, multifaceted issues that have a major impact on their lives and the lives of their children and their children. As in this case, the first, most profound step was sensitively gaining the attention of the first generation to help them understand their situation and look beyond today into the future. Protecting what they built requires a level of sophistication that a simple bookkeeper can no longer handle, and also takes the time and trust of a team of sophisticated service providers.  That is often where our work begins. In the case of this family, we are helping them to define and articulate their legacy and plan for long-term wealth preservation that ensures their assets continue to provide them, and their descendants, value and joy into the future.

The family has just begun their planning journey. The story is far from over. But, to quote Winston Churchill, although this is not the end, or even the beginning of the end, it’s the end of the beginning. They’re on their way.

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