Create a Successful Family Dynasty

Learn From Those Families Who Have Been Prosperous For Generations to Ensure the Multigenerational Economic and Social Success of Your Own Family

This Preventive Law Study was written by:  John Goodson, Colleen Manley and Christine Goodson Forakis.

Summary

Why is it that some families maintain their health, wealth, and property from one generation to another? Their children are not spoiled but are industrious? The parents and grandparents are respected? Why does the family grow in number and power and continue to contribute generation after generation to business and government?

These questions have intrigued us. As attorneys specializing in business, estate, tax, and financial planning for over 40 years, we have “tutored” one large family after another and observed their pluses and shortcomings. From our observations, we have seen patterns and correlations emerging

Some families become entirely self-sufficient like the Japanese corporate families. In Japan, groups of corporations called “Zaibatsus” informally merge — a banking corporation, an insurance corporation, manufacturing corporations, and others. Within these corporate groups, they supply services, goods, and information to each other. The manufacturing corporations borrow money from the banking corporation, buy the insurance from the insurance corporations, and obtain customers from the other corporations in the group. Such a corporate group is more competitive and will survive hard times better than non-structured corporate combinations.

The United States has been returning to family corporations that network with other family corporations. More than 50% of the businesses in the United States are now “family-owned.” The families that operate these businesses are beginning to structure themselves for survival and self-sufficiency like microcosmic Japanese corporate families or “Zaibatsus.”

As estate, business, and financial planners, we must note this trend and assist these families to help them better survive and prosper.

In this article, we want to share with you some of the characteristics that we have observed in the most successful families.

1. Dynasty Families Operate a Business Within the Family. For long-range survival, Dynasty Families operate a family business that produces income and provides jobs for family members. The family business is the boat in which the family sails through the winds and waves of economic changes. In our practice, we have found that whenever a family sold the family business or family farm, they usually regretted it in the end. Only 1 in 25 of our clients who sold their family business was happier after the sale. Two families repurchased their businesses at a higher price when they realized that the hard work of the family business was more fun than the feelings of insecurity and lack of purpose that arose after its sale. The Dynasty Family is its own boss!
2. Dynasty Families Own Their Own Business Property and Residential Property. The property occupied by the family business should be owned by the family inside of Family Limited Partnerships and Family Limited Liability Companies to avoid paying rent to outsiders and being subject to the caprice of an outside landlord. Further, such ownership allows the family to enjoy the rental income and the appreciation of the property. Recently, wealthy Dynasty Families have also been buying residential property that will be used by their children and grandchildren—realizing that suitable real estate is appreciating to the point where future generations of young married couples will be financially unable to buy their own homes. This way, all members of the family are assured a living style without landlords. The Dynasty Family is its own landlord!
3. Dynasty Families Develop Their Own Cache of Safe Liquid Funds. The survival-oriented Dynasty Family establishes and maintains (a) safe Irrevocable Trusts for children, grandchildren, and great-grandchildren; and (b) Family Limited Partnerships and Family Limited Liability Companies. These entities generate liquid funds in low income tax brackets. These funds are available to lend to the family business and to the family members in need. The family business, therefore, does not have to depend on the caprice of banks and financial institutions. Instead, the family business borrows from the Family Banks. This family lending arrangement also allows the family trusts, Family Limited Partnerships, Family Limited Liability Companies, and other lending entities to receive high interest rates with the corresponding interest income in the safe legal receptacles taxed at low rates. In turn, the family business gets to deduct the high interest expense from its tax returns.
   
   For example, a grandchild’s trust may be gifted $10,000 and lent another $12,000 with a non-interest loan (The annual exclusion for gifts made in 2007 is $12,000). The $20,000 total is lent to the family business on a secured loan at 15% interest, producing an annual revenue of $3,300 in interest to the grandchild’s trust. The annual income tax paid by the trust on the $3,300 interest is a low tax bracket of 15% (assuming the family is using a payout, pay back income distribution system that we have developed with the low tax bracket children beneficiaries). This allows the trust to lend $22,550 to the family business the second year, and over $25,930 the third year (and more if we use “discounted gifting” with Family Limited Partnerships and Family Limited Liability Companies).
   
   Even though most large families try to finance their businesses within the family, they still maintain good relations with their bankers and once a year fix a line of credit, even if they do not need to use it. The Dynasty Family is its own best bank!
4. Dynasty Families Have a Family Leader and a System of Succession. Like Indian tribes, successful families that are prepared for survival all seem to have a leader (matriarch or patriarch) who makes the ultimate decisions for the family. A characteristic of Indian tribes was that every tribe had a chief and a system of knowing who was the next chief in line if the current chief was killed in battle. The chief always counseled with the elders, but if the elders could not arrive at a consensus, there was no doubt as to who made the ultimate decision.
   
   In some modern families, the brothers and sisters are equally educated and experienced. The siblings act as co-leaders of the family on the death of the parents, functioning in the same way as a corporate board of directors who select “officers and managers” of the family holdings. These officers and managers may be either family or non-family with appointments being either long-term or on a rotational basis for a certain period of time.
   
   Even when families run their business affairs with a group of members acting as a “board of directors,” they usually try to concur unanimously on all major decisions. For example, if they run into a 2-to-1 vote, they will bring in advisors to arbitrate and mediate rather than to push the majority decision and risk a family breach. The king is dead. Long live the new king!
5. Dynasty Families Have a System for Settling Family Disputes. The “chief” establishes a method for settling disputes so that family disputes do not end up as serious family fights. Sometimes the leader of the family or an advisory group offers itself as a mediator or arbitration committee. In any event, all family members agree to settle their disputes in accordance with family procedures.
   
   Because disputes between family members are one of the most serious dangers to the family structure and growth, we have designed and licensed for nationwide distribution a legal contract form called the Integrity Agreement (Uniform Agreement Establishing Procedures for Settling Disputes).” We have tested this contract with our own family and with many of our clients.
   
   The Integrity Agreement binds the family members to discuss, negotiate, mediate, or arbitrate a dispute but to never take their disagreements to court. The Agreement makes resolution of the dispute an educational process rather than a destructive process. The dispute resolution process is all private within the family. We recommend that all of the members of our client families sign this Agreement since a family is never the same after a lawsuit or serious breach.
   
   We have had such good results with the Integrity Agreement that families, businesses, doctors, dentists, and lawyers from all over the country are contacting us to prepare Integrity Agreements for them.
   
   We envision the Integrity Agreement as a legal “vaccination” that everyone in the family will take to forever prevent the specter of a devastating family battle or lawsuit. The Dynasty Family has its own do-it-yourself private courthouse with the Integrity Agreement.
6. Dynasty Families Have a Confidentiality Agreement. Recently, we were asked to advise one of the wealthiest families in Arizona. Every day, they had guests, visitors, business persons, and scoundrels visiting their mansion. One of the first moves that we made to protect this family was to prepare a Confidentiality Agreement for everyone entering the mansion to sign where the signer agreed not to disclose the secrets and private matters of the family and not to bad mouth the family. The signer further agreed to allow disputes over breach of this Agreement to be resolved quickly under the Integrity Agreement. We can think of many Presidents who have wished they had a Confidentiality Agreement signed by everyone who worked in the White House.
7. Dynasty Families Have Well-Chosen Professional Family Advisors Who Serve the Family over the Long Haul. Dynasty Families that are surviving successfully have a group of long-standing outside professional advisors: an attorney, accountant, life insurance agent, property and casualty insurance agent, financial planner, investment advisor, doctor, banker, and possibly a public relations advisor or a computer advisor. These professionals are available to the family to provide objective, specialized advice for hybridization with the ideas developed within the family. The family meets at least annually with the advisors so that their own ideas and procedures do not become obsolete or too in-bred. The professional advisors give the family intellectual vitamins!
8. Dynasty Families Own a Family Farm or Ranch. To enable a family to survive in the “ultimate national disaster,” it is beneficial for them to own a farm or ranch that is capable of providing sustenance for all the members of the family for a prolonged period of time. Ownership of a farm or ranch also keeps the family close to the land so that they understand self-sufficiency. The farm or ranch may be sharecropped or managed by someone else if family members are not willing to operate it themselves.
   
   With long-range investments in animal breeding and orchard crops, the family farm or ranch also provides some outstanding tax shelters and tax deferrals for high income in peak years and postpones it to retirement years. The family farm or ranch is an educational playground for grandchildren.
9. Dynasty Families Insist on Maximum Education of Offspring. Dynasty Families make available and set aside funds sufficient for the maximum education of all children, grandchildren, and great-grandchildren. The family tries to steer the children and grandchildren into fields that do not conflict so that eventually the family will have within its own structure persons capable of providing professional advice in law, accounting, medicine, art, public relations, computer technology, business management, and other key areas. Care must be taken so that too many family members do not educate themselves for the same position or specialty within the family.
10. Dynasty Families Have Family Meetings and Ceremonies. Dynasty Families schedule times to meet on a regular basis to celebrate family traditions, discuss business, network ideas, and maintain relationships. These meetings and ceremonies must be carefully planned and orchestrated so that the children, grandchildren, and great-grandchildren will enjoy and remember these festive and interesting occasions. Many of these family meetings may be organized so that they may be income tax deductible! At our family meetings, we encourage all of the family members of all ages to share stories, speeches, and interesting communications to train future lawyers in the family. The play is the thing that will grasp the soul of the family!
11. Dynasty Families Have Image Statements, Objectives, Vision Statements, Value Statements, Budgets, and Strategic Plans. Frequently, and at least annually, Dynasty Families meet to discuss the family mission, vision and image statements, budgets, strategic plans, and the objectives of the family so that a consensus will be reached and so that the family culture is always clear to all family members. The objectives of the various branches and individuals of the family also are discussed so that other family members will be able to assist reciprocally all branches and individuals in reaching their respective personal objectives. Businesses have been incorporating these soul-creating techniques for decades with success. Why have our families been treated like “nobody’s” child and not been blessed with these management techniques?
12. Dynasty Families Encourage Arm’s Length Transactions Between Family Members and Family Business. Dynasty Families insist that all salaries, rents, loans, management agreements, and other arrangements among Dynasty Family members and family entities are set up on an arm’s length basis, using the current market rates at that particular time for the compensation. The agreements among the family members are documented legally and precisely to avoid misunderstandings and to permit an objective evaluation without mixing gifting with business.
    
    If family members need gifts or other financial help, the transactions are clearly marked as gifts or loans rather than as sweetheart deals in salary, rent managements, and other legal relationships. By doing so, reality does not become distorted. Nor do non-family individuals who work for the family business become discouraged by seeing unrealistic economic relationships and accounting numbers when the business deals with a family member. Business is business! Gifting is gifting!
13. Dynasty Families Insist on Minimum Standards Among Its Members. Dynasty Families set certain minimum standards of honesty, integrity, personal habits, and physical fitness. Regardless of the amount of love of one family member for another, the family members must meet certain minimum standards. Even with loving support and counsel, the remiss member may be temporarily excluded from the family group at large. Someone within the family may be appointed to monitor the family members “in exile,” assisting them to change their ways, to re-establish themselves back into the family. Forgiveness is always encouraged, as exemplified in the parable of the prodigal son. Bad apples must be taken out of the box and put in the refrigerator!
14. Dynasty Families Have a System for Indoctrination and Integration of “Blood Brothers.” Many Indian tribes included skilled, non-blood warriors who fought with the tribe and whom the tribe integrated as “blood brothers.” Many family businesses have trusted executives and other loyal employees who are treated like members of their extended family. On occasion, children of the employees even join the family business. The family cannot prosper on blood alone!
15. Dynasty Families Will Not Tolerate Negative Gossip. One of the fastest ways to break down a family or impair the image among its members is to tolerate gossip — that is, talking derogatorily about certain family members to outsiders or to other family members. The family must have an agreement not to gossip, even though such gossip sometimes provides an easy, relaxed subject of conversation. If any family member is critical of another family member, he or she must agree to convey his or her discomfort in private to the family member concerned under the terms of the Integrity Agreement. When this rule is violated, the gossip intensifies by reciprocity as one family member “gets even” with another. Gossip destroys families!
16. Dynasty Families Have a Risk Management Master Plan. Large families usually engage one life insurance advisor and one property and casualty insurance advisor to serve as their agents of record. These insurance experts determine all likely risks to the extended family and recommend whatever insurance is needed to minimize every insurable catastrophic loss. Because all insurance is purchased through the same sources, the family has greater bargaining power with its rates, coverage, and recoveries.
    
    Estate tax losses are insured against by having the younger generations buy life insurance on the older generation to provide the funds for payment of estate taxes on death. This insurance protection allows the family wealth to pass intact to the next generation. Death of a family member will produce additional wealth through life insurance rather than losses!
17. Dynasty Families Are Segmented to Prevent “Domino” Destruction. Large successful families do not operate as “general partners,” exposing all branches to a disastrous lawsuit if a catastrophe occurs.
    
    We once advised a large Chinese family with a combined estate of over $20 million. They operated a business as a general partnership in which all family members were general partners. We told them that, if any family member ran into a bus load of brain surgeons while delivering merchandise, the entire dynasty wealth would disappear into the proverbial sunset.
    
    We then proceeded to disband the family general partnership and to restructure each branch with its own corporation, limited partnership, limited liability company, revocable trust, and irrevocable trust with a grouping of legal fortresses — a Family “Zaibatsu” — with arm’s length contracts between branches and individuals for employment, management, leasing, loans, and sales. This process is called “segmenting the family.”
    
    In counseling with our large clients, we recommend that they compare their families present characteristics with this Chinese Family and take similar actions to segment into protected parts.
18. Dynasty Families Have Family Foundations. Families which operate Family Foundations for some reason live 10 years longer on the average then those who don’t. The Family Foundations allow the families to end up with more personal cash flow, more wealth, more prestige and more power—for generations. Foundations lift the family “out of the peasant class.” They will always be esteemed in their communities. By strategically using a Family Foundation with life insurance a family will be able to “disinherit the IRS” and expand their beneficial influence in every generation.
19. Dynasty Families Have Well-Organized Multi-Generation Wealth Protection and Enhancement Plans. These plans consist of protective trusts in all generations, businesses and investment interests in protective corporations, limited partnerships and limited liability companies, and smooth transition plans from one generation to another. These comprehensive plans covering all generations of the family are updated annually with the families’ professional team.

In many respects, the families of this country are like clumps of “bunch grass” on a desert hillside. Its deep roots, expansive clumps, and tight and tangled roots allow it to survive the worst of drought, flooding, and overgrazing. The many tight-knit families of our culture hold and will continue to hold the rest of our society together in the same way that the bunch grass safeguards the soil of the desert hillside from erosion.

To create these protective structures, we must analyze the Dynasty Family’s circumstances with a preventive law approach — like an international chess player examines all likely areas where checkmate may occur — and prevent checkmate by following the guidelines of this article along with expert estate, business, legal, and accounting advice.

For additional information, please call (602) 252-5110.

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