The $5 million gift tax exemption has really pushed the wealth transfer issue to the forefront of family discussions, says Patty Chantler, tax partner, head of estate and trust group at Sensiba San Filippo.

The $5 million gift tax exemption has really pushed the wealth transfer issue to the forefront of family discussions, says Patty Chantler, tax partner, head of estate and trust group at Sensiba San Filippo, but the issue is a delicate one requiring careful handling.

The Silicon Valley accounting firm has been based in the Bay Area since 1980, and the bulk of its customers have closely-held businesses, “so the biggest dilemma we have is: how do you transfer that business interest and wealth?” explains Chantler. Before the expanded gift tax exemption, “we couldn’t really go to the next step and make that substantial gift,” she says, but now it’s “let’s get this transferred now.”

This is a good thing, in her view, as she is a proponent of discussing wealth transfer before one of the wealth holders passes away. “Once the matriarchs go – all those little issues come out at that point,” she says.

Power struggles

And this can be from unexpected sources of discontent within a family. For example, something she’s seen is that one sibling who may have been quiet while a parent was still alive suddenly starts talking, or that a sibling’s spouse suddenly urges him or her to speak up over grudges that have lasted a lifetime.

There’s a chaotic element to wealth transfer too. With money, in most cases, comes power. The Greek origins for plutocracy link the terms “money” and “authority”, and in families it’s often the case that the sources of wealth become centers of power. As money is passed around, questions over power inevitably arise and this raises the issue of who the advisor actually works for.

“You can only have one boss,” says Chantler, and at the point of passing on money the dynamics of power are suddenly thrown up in the air. Because of all of this, “the more they talk about it before, the better things are in the end.”

However, there’s resistance to this discussion. For a start, parents are always concerned about outliving their own assets, and secondly, people don’t often like to think about dying. It often takes something to urge them into action.

“When one of them [the matriarch/patriarch] does pass, they really start thinking about transferring family wealth,” says Chantler.

And when they get to this point: “Parents always want to be fair – they want children to get along after they’re gone, but they also want to protect legacy assets.”

It’s a delicate balance of “protecting assets versus protecting relationships” and raises difficult issues as to what is fair.

“Everything being 50-50 doesn’t always work.” Instead, she recommends trying to separate things “in their natural flow.” So, if there is one child who has thrown themselves into the business and another who’s paid no interest, it might make more sense to devise a plan that gives the interested child the business and compensates the other one accordingly. 

But a unique challenge is when the business is still in growth mode, and you have one child working hard at it who wants the whole business. The question of compensating the other child then becomes more of a value judgment.

Other situations that may require specific planning are when a child has special needs, or a child has shown themselves time and time again to be financially irresponsible; there are also bound to be cases now and again of negative, repetitive behavioral patterns, which are often linked to addiction.

This where specialist vehicles such as trusts providing income for life, but that are designed to protect capital, come into place. This also helps with credit protection. It raises another problem though. If the trust is created to protect an asset from a descendant who is not in the right frame of mind to protect it him or herself, then it’s important to think carefully about who the trustee will be. “They have to make sure the trustee is someone who can deal with that person,” says Chantler. “That’s where we can help to make those kinds of gifting suggestions to ensure smooth transfer of wealth.”

The hard truth is that people may not always see – or want to see – their children as having these problems. “Being a third party and knowing your client – they listen,” says Chantler, although of course such issues have to be broached gently.

Watching for warning signs

Essentially, if you deal with issues proactively - preferably while all the family are still around to express their opinions - a lot of trouble can be headed off. Chantler says she makes her client base “very aware” of these issues.

The media, of course, focus on the bad cases, such as the Gina Rinehart dispute currently going on in Australia, where the country’s wealthiest family is having a very public battle over money.

“You hear a lot of war stories,” she says, “but are you hearing about the exceptions?”

However, she knows that litigation is also inherent and no matter how much you plan you’ll have cases among clients where people are unhappy. Particularly, you have grievances people don’t even realize they have until a family member dies.

But, in general, she cautions: “The more mom and dad don’t address these issues, the more siblings and cousins will feud.”

There are subtle dynamics though that can lead to silence within families. On the one hand, if mom and dad feel the children are “trying to take over,” sometimes they can retreat into secrecy about the family’s business and affairs. Likewise, if the parents have had to bail one child out and have kept it secret from the other, and that then comes to light, then the more “responsible” child might feel resentful – breeding mistrust between siblings.

Interestingly, one of the techniques she uses is to discourage a sense of entitlement in the younger generation. Sometimes she just says, “Remember, it’s mom and dad’s money.” That can make people see the money “in a different light” and realize how fortunate they are to receive any wealth from their parents, adds Chantler.