Monday, May 1, 2017

An Introduction to Stage 1 Planning: Who Gets What?

By Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman

We believe family business planning strategies currently fail primarily as a result of professional advisors giving disproportionate attention to helping families answer two questions inextricably tied to their wealth: first, “who shares in the wealth?” (which we refer to as “stage 1 planning”™) and second, “how much do they get?” (which we refer to as “stage 2 planning”™).  “Stage 1 planning”™ strategies are discussed in this week’s blog post.

The modern-day emphasis on financial planning is, to some extent, a by-product of the abolition of primogeniture in the nineteenth century, which allowed latter-born children to share an estate with the oldest child.  While the tradition of bequeathing estates to the eldest son remains common in some countries like Japan, this tradition came under attack in the United States, in part, because it was inconsistent with this country’s growing emphasis on equality. By the end of the nineteenth century, the general rule in the United States was that children (regardless of gender and birth order) shared equally in intestate property, giving rise to current forms of estate planning.

Although research suggests that family businesses are generally disadvantaged by automatically transferring the business to an eldest son, the system of primogeniture, at least, provided a clear and efficient approach to succession planning.  Without primogeniture in place, attorneys and other trusted professional advisors developed planning strategies to assist families in determining how to most appropriately allocate their estates.  These strategies—which we refer to as “stage 1 planning™”—include the use wills, trusts and, over time, other increasingly complicated estate planning instruments, with the aim of divvy up assets, including interests in a family business, as fairly as possible among multiple heirs.

We suspect that neither our early American legislators nor owners of businesses fully appreciated the multi-dimensional impact that resulted from an approach through which wealth was spread among more than one child. As a result, less attention seems to have been given as to how multiple heirs who, as a result of their shared ownership in a business, would constructively reconcile differing perspectives on the multitude of decisions every business faces. Because of such challenges, attorneys developed another aspect of “stage 1 planning™”—conflict resolution mechanisms. Today, attorneys routinely include “dispute resolution” mechanisms when drafting legal agreements between and among family members, often selecting mediation, arbitration, or litigation as the stipulated mechanism to resolving disputes if and as they might occur. Unfortunately, in practice, traditional dispute resolution mechanisms in a family business are often "too little, too late."

In short, notwithstanding the importance of “stage 1 planning”™ tools to families in business together, the emphasis on “financial planning” without a comparable attention to “people planning” has often come at great cost, as most failures are more appropriately attributable to intra-family mistrust and miscommunication. In next week’s blog post, we discuss the continued historical emphasis on financial planning and the development of "stage 2 planning"™ strategies to minimize estate and gift taxes. 


Scott E. Friedman, Andrea H. HusVar, and Eliza P. Friedman, Advising Family Businesses in the 21st Century: An Introduction to "Stage 4 Planning" Strategies, 65 Buff. L. Rev. (forthcoming May 2017).

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