Australia: Where There's a Will .... it can all go horribly wrong!

Article written by Sue Prestney for 'Charter', the magazine of the Australian Chartered Accountant
Sue Prestney is a Senior Partner with MGI Melbourne.
Article reprinted with the permission of the Institute of Chartered Accountants in Australia.

There is nothing like a Will to create tension in families and it can be even more fraught when there is a family business involved.

While a Will is very personal and its contents are solely up to the Willmaker, discussing it with the family as part of a succession planning process may prevent situations arising like the one that developed when Alan died.

David worked in the family business with this father Alan for twenty years.  David assumed Alan would leave the business to him and investments to his sister Alison.  As it turned out on Alan’s death, he had left all his assets to be shared equally between the two children with no provision for the executors to allocate specific assets.  Alan had done this on the basis that the business and other assets may have fluctuated in value prior to his death so that allocating specific assets to the children may have resulted in an inequitable division of his estate and left the Will open to challenge.

This is a perfectly rationale approach however, as a result of leaving the assets equally between the children, Alison became an equal shareholder in the business with David.  David was then unable to pass a shareholders’ resolution without Alison’s agreement.  Alison had anticipated receiving her inheritance in readily realisable assets and expected to be able to use these to repay her sizeable debts.  Neither sibling was happy with their position.

The obvious solution was for David to buy Alison’s share of the business using his share of the investments to fund the acquisition.  However, because David and Alison had not been prepared for the position they found themselves in, they had not formulated any rules as to how the business would be valued.  Each appointed their own valuer who, not unusually, came up with quite different values – David’s valuer at $1.5m, Alison’s at $2.5m.  Having received values that suited their respective positions, Alison and David (and, in particular, their spouses) embraced these values with enthusiasm and little inclination to compromise.

Lawyers were appointed and expensive legal proceedings ensued.  The lawyers negotiated a settlement neither Alison nor David was happy with – each having been assured of the correctness of their respective valuation.  The dispute bred mistrust between the siblings, somewhat encouraged by their spouses who were keen to maximise their own financial position.  Mistrust turned to anger and bitterness – both felt the settlement cheated them out of the real value of their inheritance.  The siblings became permanently estranged and the business suffered from David’s pre-occupation with the conflict with Alison.

Alan could not have foreseen that his decision to share his estate equally between his children would permanently split his family.  He thought he was being fair.  The irony is that both David and Alison said that, if Alan had told them of his intention to leave his estate in that way, they would have advised him that they would be happy for David to have the business and Alison to have the other assets.

Parents tend to avoid discussing their Wills with their children, often because they don’t believe it is healthy for children to focus on their inheritance and sometimes because they fear the children’s reaction to the allocation of the estate.  However it is often far preferable for the matter to be aired and discussed while the parents are still around and can explain their decision, rather than left until the beneficiaries are grieving and having to cope with perceived and unexplained inequities.

Going through a business succession planning process will naturally bring estate planning issues into focus.  Where, as is preferred, the family all participate in that process, there is the opportunity to discuss and explain how the ownership of the family business will be dealt with.  Succession planning also requires consideration of the potential for future buy-outs between siblings, allowing rules to be set for triggering events, valuation principles and payment terms.

This gives children a forum for voicing their views that is formal and professionally facilitated.  Views that they may not feel comfortable raising directly with their parents can be addressed through the facilitator whose role includes gaining an understanding of each individual’s opinions and concerns and making sure that these are aired in an objective non-confrontational manner.  Even if a child’s view is not ultimately reflected in the succession and estate plans, the knowledge that the view exists enables the succession plan to cater for the potential for conflict which this different view throws up.  In the case of Alan, Alison and David, the plan would have included buy-out rules and valuation principles that would inevitably be required as a result of Alan’s decision to leave his assets equally to the children.  On the other hand, if Alan had been aware of the children’s views he may have changed his Will to leave the business to David and other assets to Alison, or he may, at least, have given his executors the option of doing this.

While family business owners tend to resist formal succession planning, the cost of this resistance can, as in Alan’s case, be more than most families would ever want to bear.

MGI Melbourne is a member of MGI Australasia 

2010-07-02