Originally published on Canadian Family Offices on Jan 20, 2023
Article written by Carolyn Cole for Canadian Family Offices.
Future inheritors are often unprepared for their ultimate responsibilities, so here are five questions to ask now
Being a shareholder-in-waiting can be a tricky position. If you ask too many questions you might be labelled “entitled” or inappropriate.
But if you don’t ask questions, you are at risk of being unprepared for the roles and responsibilities that come with inheriting family assets.
Additionally, what if you previously were not interested in the business operations, but your perspective has changed as you learn about becoming a responsible shareholder?
The challenges of this position compound when some members of the family enterprise work within it and others do not. Asking questions may seem unusual and may not be received well. As a result, many inheritors shy away from the topic of inheritance to avoid potential conflict or appearing improper.
For a future inheritor who is personally listed in various legal documents that have yet to become reality, however, it is essential to ask good questions about the future. It is just as vital that whoever is leaving the shares or assets to their family lead the communication for all family members who will take on some sort of responsibility or ownership. This matriarchal and patriarchal leadership within the family is a significant element of a successful transition.
In my experience, it’s helpful to ask these five questions if you believe you will inherit shares in a family enterprise.
1. What is the intent of the gifting family member?
In other words, what do mom or dad truly want to happen? Starting with this simple question enables everyone in the family to gain a clear understanding of the objectives. The questions and answers should come in the form of common conversational language, without legal or tax jargon. Sometimes this kind of conversation is avoided because no one wants to address an uneven split in either control or value between inheritors. Leaving this revelation to after the current owner passes can result in eternal rifts between inheritors.
All the tax and trust planning in the world won’t guarantee a smooth transition, but talking about why and when and the logic behind each decision is helpful. Transparency in real time limits the possibility of misinterpretation, especially once someone has passed away. Misinterpretation of intent can lead to significant and not always good consequences.
Questions to ask: “When you started the estate and transition documentation process, what did you want to have happen? Can you share with us why you made these decisions?”
2. Does everyone understand the terms and structures used by the lawyers, accountants and other advisors?
One of the greatest issues in family dynamics and a family office is the misunderstanding of documents created to deliver the intentions discussed in the point above. At times even the family members closest to the advisory teams don’t completely comprehend the complex structures. Therefore, if an inheritor begins asking the predecessor questions that are not easily explainable, the conversation can quickly become awkward. Instinctively, it is assumed that whoever is passing on the wealth must be able to describe the technical aspects, which is usually not the case. This results in unintentional obscurity and the possible avoidance of how the structures work. Avoidance, vagueness and partial information are interpreted as concealment of information.
In reverse, some highly sophisticated planning includes language that is foreign to most. If a family member begins speaking confidently about the transition plan, and the inheritor is left confused, the inheritor is hesitant to say, “I am confused.”
Elevating the entire family to a basic level of understanding of terms used in the estate planning and corporate structure is key.
Questions to ask: “Before we begin going through the estate structure and transition plan, can we go over the terminology together? I want to be sure I understand what we are talking about.”
3. When all the planning documents are implemented simultaneously, will the intended outcomes of the late family member take place?
In many cases, shareholder agreements, complex estate plans, insurance strategies, wills, powers of attorney, trust agreements and other well intended strategies can counter each other or lose effectiveness over time. They also may have been completed by different professionals in different decades. It is best to bring the inheritors together and map out “what comes next” in the context of a loss in the family. What role(s) will each family member have? Once the roles are clarified then further questions may present themselves.
Additionally, the legal documents involved in estate planning may have taken several years to put together and were built by a variety of independent specialists. In a long planning process, small details in large documents may create unforeseen difficulties. One great method to assess outcomes is to forecast 25 years after the estate plan has been triggered and determine what the most likely outcomes will be. Consider this process a fire drill and a seatbelt check with a parachute attached.
Questions to ask: “Has anyone in the family or group run a ‘what happens’ scenario for the first 90 days, 2 years, 10 years and 25 years from when these documents come into play? If yes, let’s discuss the projected outcomes. If not, let’s begin the forecast.”
4. Who is looking for the unintended consequences?
Advisors to the family are often in a tough position. They may have strong professional relationships with one or a few of the family members yet are setting up plans that impact people they may not have met. Unintended consequences happen when a family’s advisors build structures for people they have never interacted with. The human dynamics, communication, past childhood squabbles and other issues can become overwhelming when everyone is experiencing a family loss. It is important to know you can’t solve for everything, but a little effort can reveal important outcomes.
Questions to ask: “Although the estate and transition documents are likely legal and tax effective, do they take into consideration how everyone in the family interacts? Does everyone understand and feel okay with the intent and structures? If not, how do we get to a good place with the decisions that have been made when most of them are out of our control?”
Who is resisting the conversation, communication, proactivity and momentum of understanding the inheritors’ questions?
Resistance to communication can come from a variety of places. Consider why someone may resist talking about transition. Is it cultural? Does the topic evoke unwanted thoughts and emotions? Is it a fellow inheritor who would prefer not to ask? Does it stem from a trusted employee who struggles with change? Once you have identified who the resistance is coming from, place yourself in their situation before approaching them. Sometimes, even within close families, the reasons for resistance are misunderstood. Seek answers without judgment and determine if resistance can be transitioned into co-operation.
Questions to ask: “What harm will come from transparency and clarity regarding what has been planned and will eventually be implemented? We will have to talk about it someday. Why not now?”
Family office professionals and family enterprise advisors are positioned to help everyone within the complex and dynamic group connected to transition. Carefully asking questions without saying, “Hey, what’s in the shareholders agreement and estate plan” can result in gaining the same information while balancing family unity and enterprise harmony.
