If there is one thing I've learned in my 24 years in this business, is that working with clients on end-of-life and estate planning issues is rarely easy. It's often highly emotional and, frequently, quite contentious. When you add the complex issue of succession planning for a family business, you have a volatile mix that can make the entire process quite difficult-that is, unless you as an advisor, have a plan, stick to it and remain impartial in the midst of the politics.
This point was driven home recently as I worked with Robert and Lucille. They were a nice couple from upstate New York with a son and a daughter. They also had a manufacturing business that was started by Lucille's grandparents and run by Robert for the last 32 years. The couple had been my investment clients for years.
Robert started in the business years ago. In fact, that's how he and Lucille met. He worked his way up through the ranks and took over when Lucille's father retired. It's now a $15 million enterprise with 15 to 20 employees and Robert's pride and joy. Their oldest child, a daughter, is employed in the business, but not actively involved in working with Robert on corporate leadership issues. The youngest child, a son, was never interested in working for the company and chose to pursue a career as a social worker.
Lucille has always been a stay-at-home mom content with raising her family and letting Robert run the business. Through the years, Robert and Lucille accumulated a comfortable nest egg of savings, investments and real estate, while their children actively pursued their own interests.
Robert and Lucille's family functioned quite well within this framework-until Robert was unexpectedly diagnosed with cancer. As you can imagine, the diagnosis threw the contented family into turmoil. As the couple's financial advisor, I knew their investments were in order, but had concerns about their estate plan and the business.
As it turns out, so did Robert's son, who began pressuring his father to face some of these issues and make plans for the inevitable. At the same time, Robert's treatments made it difficult for him to concentrate on the complex matters involved. Meanwhile, Lucille started to endure some health issues of her own, in addition to her worries about Robert.
The dynamic between the two siblings was more tense than usual. His daughter, who is involved in the business, knows she will not succeed her father-a hard fact to face for any child. But, she is not necessarily ready to see the firm sold. She is worried about her own future. On the other hand, her younger brother clearly sees the necessity for the family to make some far-reaching decisions. After all, his father is slipping, his mother has never been truly been involved in the business and his sister is not in a position to take over.
Before the diagnosis, Robert had just started opening up to me about the company and its prospects. Although he was not prepared to retire, Robert knew that he needed to address the future of the firm given the lack of a clear successor.
We had also been discussing the uncertain tax situation in Washington and its potential to complicate matters, as well as the family dynamics that were likely to play out as he started making the difficult decisions that would determine the future of his company and the financial legacy for his family. Aside from the emotions involved, all of this had the potential to cost dearly. The intensity of our discussions increased dramatically after Robert's diagnosis. I quickly recognized that I would be called upon to play an even greater role as a financial consultant and informal advisor to the family.
That's when I initiated a difficult discussion with Robert about our relationship and establishing some clear ground rules between the two of us that would help me offer sound and impartial advice.
That was a hard step for me to take, but over the course of my career I had seen firsthand client/advisor relationships fracture during similar life and family challenges. When we talked, I told Robert I would make recommendations for actions and resources that he might want to consider. I also made it clear that he must do his own due diligence, be prepared to act, and most importantly be comfortable with the decisions he made for himself and his family. He agreed and we got to work.
Our first challenge was the company's defined benefit plan. It was underfunded, which created a huge burden for the company and a potential liability for Robert. I gave him the names of three accountants with whom I was familiar and who had handled companies of comparable size.
I also gave him the names of several actuarial experts to examine the pension plan and advise on conversion of the plan to a 401(k) defined contribution plan, or individual IRAs for each of the 15 employees. We also worked with our bond and research personnel at the Benjamin F. Edwards & Co. home office in St. Louis to perform a bond analysis on the pension plan which was held at another firm.
I then turned my attention to the couple's existing estate plan. Not addressing this issue could result in an estate tax liability that could force the sale of the company or other significant assets.
Much to my dismay, I discovered that anchoring the estate plan Robert and Lucille established 20 years ago, was an irrevocable life insurance trust funded by a non-guaranteed universal life insurance policy with Lucille as the insured. After consulting with our estate planning personnel at Benjamin F. Edwards & Co., we started searching for a new universal life policy with a coverage protection rider. We were successful and found a replacement policy, which has the ability to provide improved benefits at a reduced premium and the application process was started.
Once that was taken care of, I began to assist with positioning the couple's other assets for transition. As it turned out, Robert had a number of stock certificates in his possession, which we quickly converted to street name. In addition, both Robert and Lucille wanted me to help with the transition of Robert's business assets into appropriate investments that could establish a financial legacy for Lucille, their children and grandchildren. Working with his attorney we also updated the estate and business succession plans to create a sense of security for the couple and their loved ones. Through it all, the family dynamics have been challenging but manageable, thanks in large part to the ground rules Robert and I worked out at the beginning of the process. Having those in place enabled me to maintain my position as an impartial family advisor and be an information resource for Robert and Lucille and, as appropriate, their children.
Right now, Robert is in the process of converting his defined benefit plan to defined contribution plans for all of the current employees. Lucille is still going through the underwriting process to obtain the replacement insurance policy, while the children are coming to grips with the difficult decisions Robert is making and the changes that are occurring.
Robert, I am pleased to say, is in remission and spending as much time as possible with Lucille. He and I speak weekly.
The plan of action that I worked out with Robert and Lucille and their outside consultants is not standard for everyone, and please keep in mind that this is not a solicitation for any specific product. It is extremely important that a client's appropriate tax and legal advisors be consulted before any action is taken. When considering investments in securities and/or insurance products, please remember to remind your clients that these vehicles are not FDIC-insured, are not bank guaranteed and may lose value.
In the end, this situation illustrates the importance of talking to clients about those "hard-to-discuss" issues. Sometimes we have to remember that as we tackle these challenges, it often helps if we just take a step back from our roles as financial consultants and act as a compassionate listener. Doing so honors the trust we've built over the years, while giving clients time to deliberate and make the decisions necessary to help them and their loved ones move forward.
Neal Baumann is currently a senior vice president of investments
and co-branch manager of the White Plains, N.Y.,
branch of Benjamin F. Edwards & Co. of St. Louis.