A conversation with a trust & estates expert

Summary: Willkie Farr & Gallagher trust and estates attorney Dave McCabe sat down with Banyan to discuss the realities that many people find hard to come to terms with: death and taxes. For family business owners, it’s essential to have a plan. Dave shares his expert advice and real-life examples from years of working with family business owners and high-net-worth individuals.

Dave McCabe is a partner in the private client group for Willkie Farr & Gallagher LLP. He works with clients all over the country, focusing on effective estate planning. He joined Banyan editorial director Karen Dillon for a conversation on preparing for the uncomfortable, but inevitable, disruption of death in a family business. Worst case scenario? Fear of dealing with the concept of death means you don’t prepare – and that can jeopardize your entire family business. The below is an edited transcript of our conversation.

Banyan: What are the most common obstacles for people preparing for estate planning?

Dave McCabe: You know, I never took a psychology course in college but I feel I have the equivalent of a psychology Ph.D. now from doing estate planning for 38 years. There are five barriers to effective estate planning.

The first one is an issue for first generation business owners in particular, and that’s the ability to cede control. Am I prepared to step back and let somebody else run the show? Is anybody else capable of running the business? That is an enormous barrier to effective estate planning. So the client might do a Will and they might do a revocable trust. But if they’re not willing to start transferring a portion of the business to the Next Generation and just as importantly, start planning for succession at the business, the Will and revocable trust are not going to save the company. Failure to do life time gifting of company interests is poor estate planning. It not only has adverse tax consequences, but in the family business it has the consequence of possibly destroying the value of the company for future generations. If I have a $50 million family business and I’ve done no estate planning and no succession planning, then nobody knows who is going to run the business. When there are multiple children that want to run the business and no real direction there will be fighting among the heirs which often is a major problem.

The second is the question of how much to give away and still have enough income.

The fear of the senior generation that they will give too much away and that they won’t have enough to continue to live the life that they’ve lived is a universal fear, and is particularly true of family businesses.

The third is a play on the second, which is how much control to give to the Next Generation? It may be complicated by too many choices or not enough choices. They don’t want to choose one child because it may alienate the others or there are no children in the business. In that case are they prepared to have outside people help run the business? And what does that mean to the family? We have stories of family members that are inside and family members that are outside that are in a war from the time Dad dies until the company dies, because the ones in the company feel the ones out of the company are too lazy and not contributing and the ones outside of the company think the ones in the company are ripping them off. I’ve seen this numerous times.

The Fourth is the fear of creating “trust fund” kids. Am I going to destroy the entrepreneurial spirit of my child by giving them too much wealth before they are capable of handling it?

And the final one is the cost and the complexity of the planning. I don’t want to downplay that element because if I’m doing my job well, I am adding a level of complexity. When we talk about family offices that are outside of the family business we are creating another business. Or if I’ve added philanthropy including a private Foundation that may feel like another business. In these instances I have added complexity and attorney’s fees, accounting fees, appraisal fees and so on, and I’ve taken their time away from the business. That’s a real barrier. But if that planning is successful the client may save millions of dollars in taxes for the next generation. That big savings should be worth the cost and complexity. However that success is hard to envision at the start of planning.

Banyan: So how do you go about starting to think about estate planning?

McCabe: Family businesses are not cookie cutter, every family business is different. Every family relationship is different. And so, you really have to look at the senior generation and see what they’re prepared to do. I try to be very straightforward and be honest with people about it. I start off by saying, you know, no matter what you feel, nobody gets out of this alive. So failure to do this planning, really is failure to your family.

You have done this wonderful thing of building this business or you have inherited a business that you have continued and you have grown. And now, you’re throwing that all away because you can’t face up to your mortality and fail to plan.

When I started out in the practice, the common view of clients was, I don’t want to tell my kids anything. If I tell my kids anything about my wealth and what I’m doing, they’ll stop working because they’ll just wait until they get money from me. There was a Sopranos episode where the daughter Googles the father to find out he’s a mob leader. And I had a client who said to me “My kids really don’t know how wealthy we are. They just know that we’re comfortable.” And I went home that night. I Googled him and I came to our next meeting and I handed him the page that showed he was worth billions of dollars. I said this is what your children know about you. So now it’s up to you to tell them the truth and explain to them what it means to have this kind of wealth.

Educating the next generation is important. The New York Times had an article in the last two years about a young woman who had no idea of the level of her parent’s wealth and when they died they left her two hundred million dollars. She was furious at them. They hadn’t prepared her at all. She had no idea what to do. Every Tom, Dick and Harry was coming out of the woodwork to “help” her invest her money and had great ideas for her and she said she wished they had talked to her. “I’m intelligent, you know, talk to me about this and prepare me and steer me in the right direction to the people that helped you so that they can help me.” That’s what I say to my clients. You are never too young to start planning. I will tell them that my clients who have done the most successful of planning started young because we can have tremendous success over time.

Banyan: I like that point that you just made which basically is that estate planning is not simply legal documents and structures and knowing details of where the money’s going when, but it involves beginning to educate your kids about what’s happening. Especially since, as you say, we live in the age of Google and kids know so much more than we think.

McCabe: Tightly controlling the Next Generation is not the kind of advice I give to clients. There was a guy who became very popular about 20 years ago marketing Wills that were based on incentives. If you do this, you get that. If you do this, you get that. And it was actually covered by the front page of the Wall Street Journal, so I got a lot of calls from people. And I said, look, you know, if you want a Will like that, I’m not the guy to do it for you because you don’t know how life evolves. You want to create optionality and the way you do that first and foremost is in the way you raise your children. I can’t give you a silver bullet in a Will to make your child a good person or prevent them from being a bad person. You have got to raise your children. I think how you raise them and the education process and the communication in a family business is incredibly important because the possibilities for conflict in a family business are so much higher than in most estate plans.

Banyan: So how do you start to talk to your kids and at what age? I assume you don’t open up your bank accounts and show them the balances and say “One day this will all be yours!” How do you start down the path of having those conversations?

McCabe: I focus less on dollars. The amounts are not as important to the discussion. It’s about what are you looking for out of your family? For some clients, we spend much of the time focusing on cohesiveness of the family, not about dollars. The emphasis at all times is what do we need to do to stay together as a family. How do we create an environment where family members want to be part of and respect the family enterprise, even if they are not actively involved in the day-to-day of it. What are the family values? Is there something about our family that we think is important? You really need to know your family first and what it is you want to achieve and pass on. Then it’s really about making the children understand the value of the family and in the context of a family business this might be a mission statement for the family business. What has made this business successful and then communicating that to your children.

The senior generation also has to find out who’s interested in the business, who really wants to work here.

One of the most difficult things in a family business is being honest with yourself and your children about whether your children are interested in the business and if interested are they qualified to run a business.

I remember having a conversation with a friend of mine who owns a business and he sent his son out to run a factory in Michigan. He went out a couple of months later and one of the supervisors came up to him and said listen, “With all due respect, your son has no idea what he’s doing and he’s really affected the morale here and I think it’s really making this factory less productive.” My friend’s response to the supervisor was “Whose name is on the door? Shut up and go back to work. My son’s running this factory.” That’s a very bad business decision, but for him that was the decision that he was making. He was saying that even though my son’s not qualified I’m going to have him to do this. It might affect the value and long-term viability of the company but it also might give him the chance to say to his son “We’ve given this a try and you need more training. So you’re going to come home and you’re going to work under me so that I can get you better prepared for going back to run the business.”

Banyan: What about people who have “checked the box”. They did a will 20 years ago and they think they’ve taken care of their planning.

McCabe: That’s a form of denial. They have a Will, but maybe they got married again, had more children, or something happened in their life and their documents are out of date with their estate planning goals. The negative consequences of having out of date documents can be enormous.

Banyan: What if you’re in the younger generation and no one has come to talk to about this yet. Can you trigger a conversation?

McCabe: That is an interesting question. In my generation having a conversation with my parents’ generation would have been impossible. Their wealth and estate plans were none of your business. But I think my generation is more open to discussions with their children. However people do struggle to talk about their planning. I represented a group of partners of a Wall Street firm, and a father and son were both partners. I did estate planning for all the partners. I did the estate planning for the father and then they asked me to do the same for the son. The father insisted on being part of the meeting with the son. As I was talking to the son, I said “Well, you know, if you die…” and I start down the typical conversation I have with a client starting to plan. The father jumps up, knocks his chair over and says, “If you say my son is going to die one more time, I’ll knock you out!” Some people that just can’t talk about death. They can’t talk about planning.

I encourage my clients to talk to their children and not to make their children ask them. Tell your children you have a plan in place. And then tell them who they should call if something happens to them. Tell them where your copies of the documents are located. There should be no secrets about that. This is not mysterious.

If a younger person, says to me no one has talked to me yet, what should I do? I would at least confirm your parents have a plan. And it’s not a 20 year old plan. Twenty years old is not a plan. So many laws have changed in the past 20 years that I can’t even imagine what that document says. We write our clients every three years and say it’s time to review your documents. You know planning is not something you do once and put on a shelf and that’s it.

As I said, the most important thing about business planning is to have long-term discipline to move value to the Next Generation over time. This does not happen with one document or one event. It happens over a long period of time.

Banyan: So let’s talk about rules of thumb. I’m panicking because I’m realizing my husband and I created our will after my children were born. It’s not 20 years old yet, but we’re in a very different place in life. So I need to take your advice. How often should somebody review or update their will?

McCabe: The first thing we say is that “lifetime events” are a good time to review your estate plan. You get married, you have a child, your child reaches majority so you don’t need a guardian anymore, you move states, you change jobs, you have a liquidity event, or a significant increase of wealth. Those are all times to review your plan. We tell our clients to revisit their plan every two to three years. Revisiting the plan is not hard. It doesn’t mean you are necessarily going to change anything. For instance, I changed my guardian for my children four times while they were under majority. The last person we chose was my former sister-in-law (my brother’s former wife) because our thinking on childrearing, and who our children would be most comfortable with changed. Nobody was bad. They were all good choices, but she was just the best choice in the end. So, you know, I revisit my own documents all the time. And of course there are frequently legal developments to consider and the impact of those on your plan. So I would say a minimum of every two or three years you should look at your plan. You are going to make changes. You are going to realize that your brother-in-law is your executor – what was I thinking? Or decide I was giving everything outright to my children and I love my children, but that money will be gone in six weeks. So I think a trust would be a good thing to help them manage this wealth.

Banyan: Now I’m going to figure out how I get my estate plan updated! Do you do take your own advice? What have you done for your own estate planning?

McCabe: I’d like to believe that I have taken my own advice. We have an estate plan. The last time we updated it was 2018, but it’s being reviewed right now by one of my associates. We have a trust for our children that initially was an insurance trust. As a lawyer we’re very well paid, but we don’t have any capital. When I was younger and my family was dependent on my income, I bought enough life insurance so that there would be enough capital to produce income that might allow my family to live comfortably. That’s become less important as I’ve accumulated wealth over time and my daughters are grown and married. So we’re really looking at the use of that trust to hold our vacation home. I give an amount to my daughters every year. They have no expectation of it. I love to tell the story of my children when we were young. We were sitting around the dinner table. One of my daughters who was about 13 years old at the time said to me, “Dad, are we rich?” And I said, “I don’t know where you get this stuff. As far as I know, you have a couple of hundred bucks in the bank. You mother and I are okay, but this is our money. Don’t wait for it because you may never get it, and you’ve got to do your own thing. And if someday I can give you something, we will, but don’t make that an expectation.” And I really believe they took that to heart and they never have had an expectation. So, whenever we have been generous to them they have always been incredibly appreciative, because there’s no assumption or entitlement to any funds.

Banyan: Let me ask you one last question: If you were to give the top three tips for successful estate planning, what are your three best pieces of advice?

McCabe: First: you have to have a good lawyer. So don’t think the guy who did your house closing is the right person to do your estate planning. I’m not suggesting that everyone has to go to a firm like Willkie Farr & Gallagher. There are many great trust and estate lawyers that are sole practitioners or from small or medium-sized firms. So that’s the first thing you have to do is pick the right lawyer.

Second, encourage that lawyer and your other professionals to work together. That’s so important that they share their knowledge. They share the information that they have accumulated about you because you’re going to get better advice if they work together. Don’t allow one person to shut out the others. Make them work together.

The third is that you really have to address the planning. You have to acknowledge that it’s difficult. It is. Nobody likes to talk about death. Nobody likes to think about it. And I say that in all honesty. Look I’m just as afraid of dying as everybody else, but I’m just not going to leave my family in a situation where all I’ve done becomes meaningless because I couldn’t address the eventuality of death. The fact is that it is one of the two certainties of life: death and taxes. And in the family business context, try and move value of the company to the Next Generation in an effective manner because that is going to give the business the best opportunity to continue after you’re gone. If you do that while you’re still around and still providing counsel, there are lots of ways to do it without giving up control. That sounds like a lot of work, and it is a lot of work, but if you value your business and your family, you have to do it.

Banyan: That was terrific. Thank you, Dave!