Lessons Learned: The Role of the Family Counsel & Due Diligence When Transferring Family Business Interests

May 3, 2017

By: Roy P. Kozupsky

I once asked a new client why she had decided to switch attorneys.  Her answer was candid.  “After a meeting with my attorney he sent me an engagement agreement stating what documents needed to get drafted. Upon reflection, the documents had little to do with the impact my wealth had on my family other than its transference. Tellingly, he never asked a question that he already didn’t know the answer to.”

For attorneys, the problem with this one-dimensional dialogue with clients - being obsessed with strategies or outcomes, before understanding family systems - is likely to be of very little long-term value to clients who walk into our offices with complex family and business affairs.  Failing to elicit a probing dialogue will do little to help build a deep trusting relationship-one that is certainly needed if counsel is going to help a family navigate the tough decisions surrounding the transfer of its wealth and family business interests to the next generation.

“Many financial planners and advisers approach conversations with clients only as opportunities to get their point across, to persuade the client to buy a product or a service…The goal is to get things done rather than understand the client.  Yet, clients’ lives contain complex, nuanced emotional elements that are often difficult to share but important to know.  Bringing these elements to the surface and basing advice on them make great deal of difference in the relevance and applicability of the ultimate financial plan or strategy.” 1

So, why is this element of communication so critical in the attorney-client relationship, especially when the legal services revolve around money and family owned enterprises?  Invariably, part of the answer can be found in the commonality of family business disputes. Inevitably, in discussions with these families, it is revealed that some of the estate planning worked - the tax planning hit the basic objective, or so it seems, by having the business interests pass to the next generation, thus reducing the estate tax bite. But unfortunately, such planning fails the more critical test of keeping the family aligned around its purpose and mission, and focused on the growth of their businesses. Upon reflection, it is invariably revealed that prior services lacked any understanding of the family itself and instead fostered entitlement and conflict.

The lessons I learned have led me to a general set of criteria that hopefully will be useful for families to employ with their trusted advisors when thinking about family business interests.

First, I have found that nothing in the universe of attorney-client communications engenders more evidence of trust building, more evidence of caring about the families that pay us, than when we as counsel start asking sincere questions about the dynamics of the family.  Here are some thoughts and questions that both counsel and client need to ponder.


All clients need to pause and understand something before walking into a law office. Part of the practice of law involves selling services, and when presented with a problem, attorneys can usually craft a solution.      Why is this important to understand and what is its application to human behavior - especially with families who are owners of business interests and are contemplating passing business interests onto the next generation?  Part of the answer lies in the fact that if something can be explained, the client(s) might just purchase the advice without making sure that the transfer strategy or advice aligns with their best interests as a family. Everyone likes straightforward ideas. So it is relatively easy to jump at a solution and absolve yourself of critically thinking through some of these admittedly tough questions. 2

One of the first questions that all families with business interests need to ask is the big “why”.  Why do you want to make a transfer of business interests to the next generation? And, just as important, why now? If the answer is merely predicated upon the allowance of some tax objective I would advocate hitting the red pause button.

Rather than focus on the techniques of how something is transferred, the “why” should be the first question the family and their advisors need to address. The answer to this question might be found in an obvious, but often overlooked place. Much research has shown that those business families that have endured and prospered over many years have addressed, in writing, a fundamental sense of purpose and shared vision.

Tackling the “why” question, one well-respected author states:

“Enduring family businesses work very hard at defining a Sense of Purpose… They ask and discuss such questions as: Why are we doing this? Why are we working so hard?  Why are we spending the time to develop policies? Why are we exerting so much energy to prepare for the future?” 3

This sense of purpose, a navigation system if you will, will give meaning and direction to perpetuating your wealth and business interests. Worry about the how thereafter.


This overlooked question is not about how a transaction will be structured, or the techniques or strategies employed.  The “how” focuses on process. How will the family be making their planning decisions? Closeted away with any one of your advisors? Or, employing a team approach and including other advisory inputs into the process.

The reality is that rarely will one advisor have the multi-dimensional skill set necessary to deal with many of the non-tax issues that saturate family businesses, including financial, governance and often deeply rooted emotional discussions about issues such as what’s fair and who is entitled to what. In order to best serve the family, financial advisors must abandon their supply-side, product-centric methods of inquiry in favor of a deep listening and probing approach that focuses on needs identification.  Many   distinguished family business consultants have long argued and concluded that effective collaboration is an essential ingredient enabling families to perpetuate well-being   across   generations.   However, the family may not appreciate the value of this collaborative opportunity over their tendency to compartmentalize advisors and the value question will be influenced by how the family views a marginally higher investment in getting comprehensive advice. 4

The WHEN & The Next Generation

When to start a transfer program might be seen as a somewhat self-evident question. But unless the children themselves answer the “why” question in such a fashion that is beneficial to the entire family, then the result might be to simply opt to sell the business.

Which begs a question: Is there a process in place that the attorney and other advisors have employed to carefully speak to and listen to the next generation’s views on how the family enterprise fits into their own personal goals?  Has the planning accounted for the fact that there will likely be some who want no part of the business enterprise?  Without this process being in place, any planning will be superficial and fragile.

Finally, (at least) one other issue looms large.

If gifts or transfers are contemplated to the next generation, is there a written and clearly defined way for a child, or trustee of that child’s interest, to sell said interest back to the enterprise in the future if they no longer want to be part of the business? Being stuck with highly illiquid business interests without a desire to be part of the enterprise will ultimately cause disillusionment and resentment. Too much time by professionals is spent in a one directional linear manner of thinking-that of getting something off your balance sheet. But attention also needs to be paid to how a beneficiary (or trustee) can monetize the business interests if they choose not to be part of the family’s enterprise.


Bottom line in this author’s opinion is something very simple, that families need to pay attention to: namely that an “estate plan” is not a succession plan. An “estate plan” distributes assets after someone passes. That’s it.  In traditional estate planning, little attention unfortunately is paid in the process of striving to help the family perpetuate their values and align the family around the purpose(s) of their wealth. Succession planning on the other hand, practiced by multi-disciplined business advisors and attorneys educated and skilled in this area of work, prepares a family (and its enterprises) to navigate the complex issues surrounding their shared wealth and the storms that inevitably engulf all families at one time or another.

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