Happy ending need not be a fairy tale – Fraser Scott
As the Disney saga shows, planning is required when it comes to passing on family wealth, writes Fraser Scott
When Walt Disney decided to go into business with his brother, Roy, in 1929, he must have done so with a degree of optimism. Not just optimism that they could achieve economic success, but that they were capable of working constructively together. Their respective strengths in business were complementary; Walt had the artistic spark and could exert effective oversight of the creative side, whereas Roy looked after the business side. This is undoubtedly one of the reasons why their fledgling business grew into the successful Walt Disney Company.
So often in business, it is this key relationship between the owners that will determine if the business will succeed. Never is this more important than in the context of family business owners. Family owners bring prior, personal experiences of each other into the new business. Whilst this may mostly be positive, inevitably there will be aspects of the relationship that could grow into negatives. To use a Disney example, Snow White might work well with Happy and Bashful, but develop resentment towards Grumpy and Sleepy. This is a reason why a deterioration in the personal relationship is a real threat to any family business.
Dysfunctional family business owners often ignore the negative aspects of their relationship (the Dumbo in the room?). This does little more than provide space for issues to fester and become toxic, threatening to poison the whole relationship. The can lead to a deterioration in communication and trust amongst owners, both professionally and personally.
Steps can be taken to protect against this business risk. Family business owners that understand the importance of identifying unique personality traits, within themselves and their business partners, have a distinct advantage. This has the dual benefit of providing the opportunity to celebrate positive contribution, and develop strategies to mitigate the potential for conflict arising from negative traits. For some, this is achieved with help from non-executive directors who have an independent perspective, or by engaging an experienced family business advisor.
In recent years, the Disney story began to centre on legal issues and the impact of a family trust set up to protect family wealth. Walt was a committed father and, despite the demands of his Hollywood career, provided his children with a “normal” upbringing. He was particularly careful to ensure they were not spoiled by his wealth, when this eventually passed down to them.
It’s reported that Walt’s younger daughter, Sharon, was less successful in insulating her children from the destabilising effect of wealth. Wisely, she took steps to protect her assets on her death for the benefit of (and from) her children, by setting up three family trusts to hold a reputed $400 million. The trusts provided for the children to each receive significant payments from the trusts every five years from age 35 onwards. It is understood a condition placed on the terms of the trusts was that the trustees could withhold payment if a child failed to demonstrate the “maturity and financial ability to manage and utilise such funds in a prudent and responsible manner”.
Despite suffering from alcohol and heroin addiction, Sharon’s first daughter, Victoria, received sums of around $20m. This seems only to have exacerbated her health problems, and she died in 2002. Her remaining share transferred to the trusts for Sharon’s surviving children, twins Brad and Michelle. However, perhaps having learned lessons from Victoria’s circumstances, the trustees decided to withhold payment to the twins, citing Brad’s alleged “cognitive impairment”, and Michelle’s history of drug addiction and health problems following a brain aneurysm. Michelle eventually received a payment after pursuing the matter in court, but Brad hasn’t yet received his. Brad has since raised proceedings against the trustees – and his sister – demanding funds be made over to him.
The problems arising from the trustees’ decision to withhold payment highlights the importance of anticipating the downsides and risks when it comes to passing assets down the generations, particularly in the context of a family business or a family trust. Family trusts are relatively common in Scotland and England. Set up properly, they can be used to protect assets and give families some control and balance on the distribution of hard-earned business assets.
There are lessons to be learned where family businesses have gone wrong and, with poor planning, there is a risk that the family business will be unlikely to deliver the fairy-tale ending that owners may hope for.
Fraser Scott is a senior solicitor, Murray Beith Murray.