We are in a global societal phase change and are living in a non-linear world. All of us know someone who is one year old, and most of us know individuals who are older than 100. Many generations now coexist—entwining families emotionally, intellectually, physically, and financially in unprecedented ways. Accountants have never been in the position of planning for and impacting so many generations at once.

A significant and fundamentally important planning challenge is how to grapple with the concept of competence—both sustained competence and diminished competence. For the owner of a family enterprise, these issues impact governance, ownership, and succession.

Sustained Competence

Sustained competence exists when an older competent family founder (“Queen Elizabeth”) chooses not to leave or step aside because she does not have to physically or mentally and because she enjoys the position. The consequence of this can be a “lost generation member” (“Prince Charles”), who has waited his entire life to become the next president and majority owner of the family business—and for whom that might never happen. Instead, at his age, his advisors and planners will be advising him how to transfer his wealth to the next generation, skipping him for leadership and ownership. If he is not financially independent and has been waiting his entire life for the title and the assets, trouble might brew as he might not be able to afford to step aside, financially or psychologically. Although current lost generations facing these issues might be too advanced in age to remedy, thinking about how to incorporate sustained competence in planning for future generations is advisable.

Practical Planning Steps:

• Implement intentional financial planning. Accountants are in a unique position—when they prepare income tax returns, they annually review the finances. As part of an annual review, discuss the net worth of family members to ensure that each generation is sustainable and not dependent upon the gifts or inheritances of another generation. In the past, a family member who knows he or she is receiving a significant inheritance might not be prudent with his or her own financial planning. With sustained competence, that expected inheritance might never arrive, and the lost generation member might not have the same sustained competence. Early development of sustainable personal financial plans (income and assets) is fundamental and useful.
• Understand that in an economically entwined family, every action causes a reaction; and
• Open communication among family members is essential. When the family co-owns a business together (and perhaps also shares investments), clear and open communication is critical. It is important for the family to understand the succession management of these common assets: who is to receive income and assets, as well as when and why.
• Explore creative solutions, such as entrepreneurship. Encourage family members who might never advance due to the sustained competence of the older generation to pursue interests of meaning and purpose at earlier stages of their lives. Treading water and waiting on the side lines for a day in the sun is not a prudent strategy.
• Have a board that understands these issues and is willing to put them on the table. Establishing a board of directors is good governance and allows for independence and oversight. This can be very important when the issues are as complicated as those dealing with competence.
• Life is a movie, not a snapshot. All plans should be reviewed on an ongoing basis. As life advances, personal, financial, and estate planning should be reviewed and adjusted.

Diminished Competence

Diminishing competence can have a very long runway. Human nature tends to focus on the days that all is going well—not the slow slide into diminishing competence, which can take weeks or months. There is no single definition of competence.  The issue of competence when it comes to leadership of the family enterprise, governance and succession is far more complicated than the standard test for competence. And the ability to perform normal daily tasks of life.

While there is no single definition of competence, as Dir. James Osher of Williams James College noted, “Sumner Redstone and Donald Sterling are recent litigation cases concerning diminishing competence. Complicating the picture is the lack of uniform definitions of competence. Competency is very specific to a skill. For example, an older executive might be deemed competent to manage his own personal affairs and yet not to run a complex business.” Dr. Sanam Herfeez noted, “There is no single test for competency and usually several tests are required to gauge a personals fitness or to manage the challenges of running a company. When it comes to determining whether a person is capable of running a Fortune 500 company being asked to spell world backwards or count backwards by seven is not enough”. 

In a trial concerning the competence of Sumner Redstone, his primary care physician stated he was mentally fit, but a geriatric psychiatrist found he lacked mental capacity. Perhaps both were right.

The question of whether or not someone is competent is a very tricky one within families. Decisions—such as when to take away the keys to the car—are very emotionally charged. Bringing up the issue of diminished capacity with someone who knows what the discussion means is fraught with emotional peril. It means discussing a loss of personal liberty and the beginning of a walk down a very long runway.

Frequently, there is no clear demarcation between competence and incompetence until the day when demarcation line is very clear and incompetence is certain. The challenge is to handle the issue when there is no need to. Human nature, being human nature, can be tricky. As Scarlett O’Hara said so eloquently: “I can't think about that right now. If I do, I'll go crazy. I'll think about that tomorrow.” 

When the owner of a family enterprise is facing diminished competence, there are also issues of privacy—when is it appropriate to reveal diminished mental incapacity to the shareholders? How should one balance the right to privacy with the fiduciary duty to co-owners? We are entering a time of increased moral judgments that will impact families and family owned enterprises at their core level.

Practical Steps:

• Plan for disability or incapacity. The accountant should be aware that it is as important as financial planning and traditional “what happens when I die” estate planning. The client should be encouraged to review all “boilerplate” clauses in estate-planning documents to determine who will be in charge if your client becomes disabled or incapacitated—and what the trigger mechanism is (for example, whether certified by your personal physician or two physicians). Make sure all documents are up-to-date and recently ratified.
• Put checks and balances in place to deal with conflicts of interest. Is the person who will be making your client’s medical decisions the same one who will be handling his or her financial decisions? Is there a conflict between those decision-makers? For example, is the person next in line to succeed the business the same person who also has the health care proxy or the person who will handle financial affairs in the event of disability or incapacity? Is the person who is designated to handle the business issues (such as signing or renewing the business lease or applying for a business loan) the same person who is designated to handle the personal issues (paying bills or staying at home)? The skill sets are quite different—and yet when different people are designated for different roles, it can become quite complicated. For example, do the people designated for different purposes share your client’s value system and goals? Should your client set up a private mechanism to handle any conflicts? Is there a role for independent individuals in these fiduciary and legal capacities? Be sure your client has updated legal documents, including a health care proxy and a durable power of attorney. Disability or incapacity could last a long time, and those initially named might predecease your client or be unable to continue to serve in those capacities. Be sure your client has thought through who the backups will be and the mechanism for appointing any successors. In the durable power of attorney, your client also has the opportunity to nominate the person who would be his or her guardian or conservator if protective proceedings were commenced. This is an often overlooked but very important clause—the nominated person has legal standing in any court proceeding concerning incompetence and must be given notice of any proceeding.
• Review HIPPA rights. Consider carefully who should have the right to your client’s medical information and waive the right to the Health Insurance Portability and Accountability Act of 1996 (HIPPA). Should it just be people who are authorized to handle your client’s medical affairs? Should it also include those who will handle your client’s financial affairs?
• Review your fiduciary choices. For those individuals with the authority to handle your client’s financial affairs if he or she is disabled or incapacitated, to whom are they legally accountable? To whom should they have to report their actions? Who has the right to review, approve, or object to their actions?
• Form a Board or Review the Existing Board’s Composition. Have a board that understands these issues and is willing to put them on the table.

In sum, it is crucial that accountants and all key advisors work as an interdisciplinary team, expand their thinking, and understand the challenges and planning strategies around new threats to leadership and succession planning for family enterprises in this seven-generation world.

This article has been reprinted with permission from the author, Patricia M. Annino. Copyright  2018.

Patricia M. Annino, Esq., JD, LLM (taxation) is a nationally recognized authority on estate planning and taxation, with more than 30 years of experience serving the estate planning needs of families, individuals, and owners of closely held and family owned businesses.