Nearly a century ago, an immigrant with a knack for car repair bought a Buick dealership and grew it into an automotive empire that he eventually passed down to his son. The business continued to thrive after his death, but the same can’t be said for his descendants' relationships.
By the third generation, the family found itself embroiled in a court battle for control of the business and the wealth it created — an American dream turned nightmare that could have been avoided with better estate planning advice.
The case, Morgan Stanley advisors say, shows how infighting and confusion all too often take the place of gratitude and cooperation as significant wealth is grown and shared, especially when the first generation’s vision is not reassessed to reflect changing business and family dynamics.
But it doesn’t have to be this way. The right advice can help families avoid such tensions when the founders of highly successful businesses dream of passing its control down through the family. It’s a noble vision, but the ideal often runs up against the more intransigent parts of human nature. Sentiments like jealousy, exclusion and entitlement can tear families apart.
The only surefire remedy is clear-eyed estate planning from a multi-generational perspective.
The advisors shared this warning during a recent webcast titled “Power, Control, Chaos: A Family Battlefield.” The speakers included Charline Burgess, senior wealth education specialist; Deanna Cascella, wealth and estate planning strategist; Victor Diune, family office resources generalist; and Glenn Kurlander, head of family governance and wealth education.
During the hour-long discussion, the quartet explored a case study about an immigrant from eastern Europe who founded an exceptionally successful chain of car dealerships and sought to pass its leadership down to one of his four children. Some of the details were fictionalized to protect the deceased clients’ privacy, but the core and conclusion of the story are all too real.
The Scenario
Mendel, the founder of a car empire, immigrated to the United States as a child in 1903, the Morgan Stanley experts recalled.
As he grew up, Mendel landed a job as a mechanic at an early Buick dealership in Detroit. When the owner eventually died without any heirs, Mendel pooled his resources and bought the enterprise.
Over time, Mendel aggressively reinvested in the business and started to buy up a significant number of car dealerships in the Detroit region. He had five children, including a son, Samuel, who entered the family business as his father’s apprentice and heir apparent, along with four daughters.
When Mendel died in 1950, Samuel was named as the sole trustee of the five separate trusts that had been set up for the benefit of each of Mendel’s five children. Samuel also named himself as CEO of the dealership empire, majority control of which was put solely into his trust. The remaining minority shares were distributed equally among his four sisters.
Samuel continued the business' strong growth, and he repeated his father’s tendency to prioritize reinvesting in the business over paying out dividends into the trusts for distribution to the siblings — a move that his sisters respected out of deference for him and their late father.
Eventually, Samuel died in a private aviation accident, and this is where the problems really began. Rather than considering how the family had grown and evolved — and how the business had changed into a highly dynamic and complex enterprise — Samuel had simply repeated his father’s estate planning strategy of leaving full control of the business and family trusts to one individual. In this case, his son, Isaac.
How Dreams Become Nightmares
It was Isaac’s “understandable but ill-advised” decision to continue operating the business as his father and grandfather had that ultimately led to disaster, the Morgan Stanley experts said. That is, he elected to not pay dividends out to the five trusts and instead reinvested aggressively in the business, moving to acquire both more car dealerships and now motorcycle dealerships.
This grew problematic as Isaac and his immediate family benefited from his position as CEO of a major automotive empire. He took home a handsome salary and other performance incentives while the families of his four aunts received essentially no liquid wealth from the success of a now-massive auto business, despite being substantial minority shareholders.
As CEO, Isaac had sole control of the business proceeds. While the aunts continued to defer to the will of their late father, late brother and nephew, the same wasn’t the case for their own children, who themselves had never had a strong relationship with either Mendel or Samuel.
As a result, resentment started to develop, especially when Isaac’s foray into the motorcycle industry failed to repeat the success seen on the automobile side, resulting in significant losses for the business during the 1970s. Eventually, a number of the aunts’ children and their spouses had had enough, suing Isaac and accusing him of negligence as a trustee.
What Could Have Been Done Better
The Morgan Stanley experts offered a range of suggestions for how this “nightmare” ending could have been avoided. Simply maintaining the same estate planning strategy and business management philosophy from one generation to the next is often a recipe for disaster.
Both the business and the family grew substantially over time, and that in itself is an argument for rethinking the control structure of the business and trusts. It’s also a good reason to consider “democratizing” control of the business and the balance between generating liquid wealth via dividend payments versus reinvestment.
“That’s the big takeaway for me,” Kurlander said. “If Mendel and Samuel had instituted more accommodative dividend policies, that could have ameliorated the fast-growing disparity in wealth among the different family lines. That disparity is really where the core of the resentment came from, along with the sense that Isaac’s siblings should have been given a stronger say in business operations. They were simply cut out.”
Another pressure relief value could have been trust investment policies that permitted more diversification and the redeployment of liquid wealth by minority shareholders.
“Isaac’s brothers and cousins were never going to be happy about Samuel’s decision to name him as the sole successor, but there are structural mechanisms that could have been used to create liquidity and the opportunity for the brothers and cousins to build their own business ventures,” Kurlander said.
What both Samuel and Isaac failed to see, the panelists agreed, is that the younger generations did not have the same deferential relationship to Mendel, the “patriarch figure."
“It’s common to see this play out,” Kurlander said. “Over time, the number of stakeholders for the wealth can grow significantly, and their degree of connection with the original wealth creator and their original vision for the future grows increasingly remote. It creates a vacuum in which resentment can grow and fester if it is not addressed and proactively managed.”
One way to address this, the panelists agreed, is to establish family councils and voting or advisory bodies that give the increasingly diverse set of stakeholders a meaningful seat at the table as big decisions are being made. Another idea is to consider bringing in independent professionals both as business leaders and as dispassionate trustees.
“One person or one family line may retain more control at the end of the day, but it will avoid a lot of conflict and resentment if everyone at least feels like they have a voice and a say in the matter,” Kurlander said.
Pictured: John Manganaro
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