 
A Different Model for Wealth Transfer Planning
By Karl Bareither, CLU
Most family businesses fail to make to the second and third generations. Clearly, the failure of family business owners to provide for the intergenerational transfer of wealth and business leadership is a serious problem. Since there are more than enough competent attorneys, accountants and financial services professionals available, what accounts for this lack of planning? Obviously, it’s reluctance on the part of current business owners to create an effective wealth transfer plan that causes the dismal statistics. This reluctance may be rooted in a number of factors, but frequently it stems from family relationship factors, such as sibling rivalries and intra-family communication struggles. In many cases, families don’t plan for the future of the business because to do so means facing issues that some family members would rather not address. A case from my own client files serves as an example.
The Lazy J was a successful Wyoming cattle ranch. I first met Jake, the 56-year-old son of the founder, at the conclusion of a business planning presentation I made to a group of business owners. Jake was one of five children in the family and the only one actively involved in the family business. Jake and his wife, Martha, lived and worked on the ranch with Jake's parents, Mel and Alice, for thirty years. Whenever he asked his father about the future of the ranch, Jake was always assured that someday the ranch would be his.
When Mel died, Jake learned that he wasn’t heir to the ranch after all. All the ranch property had been owned jointly by Mel and Alice and Alice became sole owner. Jake wasn't overly concerned, however. He was certain that his mother would arrange to leave the ranch to him at her death. When Alice later died, however, her will stipulated that ownership of the ranch was to be divided equally among her five children. Instead of becoming sole owner, Jake had merely a one-fifth-minority interest in the Lazy J ranch. Adding to the tragedy was the fact that Jake had always worked on the ranch for low wages. He and Martha felt this sacrifice, and the lack of a retirement plan of any kind, was their investment in the future. As it turned out, after his parents’ death, Jake and Martha had very little to show for their thirty-year investment.
The sad truth is that the failure to plan had destroyed the opportunity for the one person with the most interest and experience in the family business to take it over. Jake couldn't afford to buy out his siblings so the ranch had to be sold. A business continuation plan could have been constructed that would have left the ranch to Jake and other property or assets to the non-ranch children. The business could have remained in the family for yet another generation - and who knows for how many more!.
The problem in this case, as in so many others, was the unwillingness of the parents to confront the major sticking point; how to treat all the children in the family fairly. Their solution was to opt for treating them all equally by leaving the family business to all five children.
Jake told me this story with tears in his eyes. "Who can you trust if you can't trust your own father?" he asked.
In the course of my thirty-plus years working with family-owned businesses, I’ve developed an approach that I believe not only protects and preserves the family’s wealth, but greatly enhances family relationships in the process. I call this approach the Family & Business Renewal or the FBR Model. Here is a graphic representation of the benefits, phases and steps involved:
The FBR Model
Most of the steps will look familiar to anyone actively involved in advising family businesses. Analyzing the current plan, seeking advice from advisors and developing a new plan are obviously necessary steps. Presenting and implementing the new plan are also obvious. Step 1 is a not-so-obvious refinement I have made to the process. Instead of treating the business owner solely as the client, I consider the entire family the client and interview all family members — including spouses— about their needs, desires and expectations related to the family business. This leads to Step 2 of the process; Determining Family Objectives. The new plan that I develop takes into account all the needs, desires and goals of the entire family, not just the owner and spouse.
The second major refinement in the process is not evident by studying the diagram. In Step 7 (Present New Plan) I do more than simply discuss my proposal with the business owner (remember the entire family is my client). Instead, I present the new plan at a family retreat in a neutral site such as a hotel, conference center or resort. Everyone in the family participates in the retreat. Because I know all the needs of the family so well, due to the thorough interviewing process, my solution virtually always hits the mark.
Part of the power of this approach to wealth transfer planning is that it not only protects the family’s wealth, it also encourages family communication. Working through this process is often the first time the family has ever discussed business affairs openly. Often the family retreat is an emotional experience for everyone involved. Tears are not uncommon as family members relate the joys and pains that result from being associated with the family and the family business.
The FBR Model addresses the whole problem that faces most family business: how to preserve the business, treat everyone in the family fairly and strengthen family relationships in the process.
You may be wondering how I can afford to spend so much time and energy on each case. Well, the answer is simple. I charge a fee for my wealth transfer planning services. Most insurance agents are focused on their commission and don’t stop to realize that they are giving away their valuable expertise and advice. Over the years I generated $1.3 million of wealth transfer fees and qualified as a lifetime member of MDRT and Top of the Table. I believe the services that I bring to my clients add considerable value. My fee typically ranges from $10,000 to $40,000, depending upon the size and complexity of the case. I find informed business owners are not reluctant to pay the fee once they understand the objective nature and scope of my work.
If this approach to wealth transfer planning makes sense to you, I urge you to consider adopting it for your practice. Charging fees adds credibility to your recommendations and creates a new source of revenue to replace or supplement commissions for product sales.
Karl R. Bareither, CLU
Founder and President, FBR System, Inc.
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