THE FINE ART (AND PITFALLS) OF CHOOSING THE RIGHT EXECUTOR
Article | May 2019 | by Robert Gould
Lessons learned from working with Canada’s top business families
The founders and principals of Canada’s wealthiest (and most accomplished) business families have unique characteristics that few others share. But there’s one trait they all have in common with the average Canadian – the urgency (or lack of) to plan their affairs for after they’re gone. Most people don’t like to think about death or the issues that might impact their family or business when they’re no longer here.
For this reason, the heads of business families often spend far more time choosing the next CEO of their company than they dedicate to selecting an executor for their estate. It doesn’t have to be this way, as the choice of an executor can play a more profound role in the management and growth of wealth after the founder’s death than the choice of a business leader while they’re alive.
Here are CMG, this is our message to the business founders we’re privileged to support:
Your wealth is substantial – and that means your estate is complex. By developing a detailed estate plan, choosing the right executors to suit the plan – and even ‘rehearsing’ estate actions in advance – you can preserve and grow your wealth (and influence your legacy) long after you’re gone.
While appointing a good executor might seem like a logical first step in the estate planning process, there are several important ingredients that should come first. Skipping these steps – or not taking the time to choose the executor(s) wisely – places undue stress on the executors, the family, and the wealth.
In our experience, there are five common pitfalls that can derail the estate goals of even the wealthiest and most successful business families.
A will is table stakes – and while members of most wealthy families have one, the real planning goes far beyond a will. Proper estate planning is a process centred on leaving very clear instructions to both the family and the business – and talking in advance about what the issues are. It defines everyone’s role, especially the responsibilities and standards related to executors.
It also describes a process for sharing details of the plan with key advisors and executors and “rolling the film” – a dry run of who does what after the founder/principal has died, and the estate process has gone into action.
While it takes a dedicated focus, it doesn’t take as long as many founders think. The entire process can be completed in several discussions held over the course of a year.
The estate plan will be unique to each founder’s business and family goals – and they will want to ensure that executors have the skills that match those goals. Once there’s a comprehensive estate plan, the best business families clearly define the skills required by their executors to execute it.
Will they have to make financial decisions related to the family? What level of business acumen is required to carry out the founder’s wishes and steer the business through a time of transition? Are there international assets that might require an executor to understand legal and accounting resources they might need? Will they need to communicate with wider branches of the family?
In essence, there needs to be an executor job description that’s specifically customized to the unique needs of the estate plan. Just as a founder wouldn’t hire a CEO without the right skills to run the business, he shouldn’t select an executor lacking the skills to do the job. You want to provide your executors a clear role they can agree to – or decline.
Founders and principals of business families need to select their executors with the same discipline as they deploy in their operating business in recruiting executive talent or board members. The responsibilities are often as great, or even greater. Too many executors have little clarity of what they are walking into. As in any executive hiring, a candidate profile should be developed to match the executor job description – including age and types of experience, capabilities, qualifications, professional credentials. From there, a suitable list of potential candidates can be identified.
It’s possible that different profiles are necessary for different executor roles. For example, a founder might choose a friend as one of their executors because of their close connection to the family and their ability to communicate with family members. In such cases, that friend’s role needs to be carefully defined and matched to this need.
Many founders believe they should give executors wide discretion to make business and personal decisions on their behalf. While some discretion is advisable (circumstances can change), the role of an executor is to literally “execute” the plan that’s in place based on the specific instructions outlined in the plan. No one has more experience than the founder in overseeing their business – and any goals for the business or family wealth should reflect his wishes, not the executor’s.
In the best plans we’ve seen, founders leave clear plans and instructions outlining what they specifically want accomplished in the first year after their death. The more specific they can be, the better.
In some cases, an executor doesn’t even see or read the will for the first time until after the funeral. And even if they have seen the will, they usually haven’t seen a documented plan of objectives and steps that they’ll need to fulfill. When they assume their role, everything is a surprise – with no opportunity to identify gaps, ask questions, and preplan. A simple example is, do your executors know which assets are to be used for specific estate requirements?
A great executor is a prepared executor, so there’s an incentive for the founder to do a thorough job in disclosing and discussing their estate plan with his advisors, business leaders and executors. A critical step that’s often overlooked is undertaking a “dry run” of what takes place in the days and months immediately after the founder’s death. Ongoing stakeholder reviews every few years are also helpful for ensuring that the plan still meets the founder’s goals and that everyone knows their role. This level of advance preparation is an essential element of successful estate planning.
Plan before you choose
Planning may not make perfect when it comes to estates – the variables of human nature are often too great. But proper planning and care in choosing your executor can get you as close to perfect as possible. More importantly, it incorporates important safety checks for preserving and growing your family’s wealth and business long after you’re gone.
A tale of two dinners:
Choosing executors wisely (or not).
Here’s a short comparison of how selecting the right executor can go well… or less than ideal.
Less than ideal.
Lucas had created his will and completed some estate planning. His lawyer then advised Lucas to pick three executors so that he’d have an odd number to break ties. Lucas gathered three of his closest friends for dinner. He provided an overview of his family’s business and his beneficiaries. And then Lucas asked his friends if they had any questions. There were none.The friends were honoured to be asked.
Months and years passed. Lucas so no need for following up with his executors to review the will or the plan. In reality, the plan evolved over the years, but Lucas never saw a need to keep his executors informed. He wasn’t dead yet.
But then he was. After Lucas passed away, his executors were stunned by the number (and complexity) of decisions they faced – and the sheer number of people involved. They’d never met the leaders of the business, nor certain members of Lucas’s family. They attempted to make decisions based on what they thought Lucas would have wanted, but they lacked the business experience needed – and other people around the table didn’t always agree with their views. The results were acrimony, a loss of capital, and lasting damage to Lucas’s family, business and estate.
It didn’t have to be this way.
A better way.
Lawrence and his advisors had worked for the past year on an estate plan. They’d defined roles, set a clear succession plan for the business – and were now working to ensure Lawrence’s children were prepared for their emerging wealth and that his wife was financially secure.
Because of this planning, Lawrence knew the skills and characteristics of the executors he was looking for. He’d even identified three individuals who he thought could not only fill the roles, but do a thorough job in executing his plan. Lawrence asked the three individuals to dinner.
Lawrence started the conversation by describe the qualities he was looking for in his executors, the skills and capabilities required to line up with his plan, the time and effort needed to do the job, and why he had chosen each of them to consider the role. He offered a thorough review of his estate planning to date – and the importance of succession in his family business.
The conversation then turned to the specific details of the plan. The three potential executors were interested and engaged – and they also had questions. Lawrence expected this. In fact, he hoped for it. Lawrence and the executors agreed to meet at least two more times fully hear the questions, answer them appropriately – and ensure all three of the men were comfortable in their proposed roles.
Six weeks later, they were. They each agreed to accept their role. Lawrence was satisfied that each executor was fully aware of his estate plan, the time commitment required, the tools available to fulfill the role, the people they could count on to help execute the plan, and any potential conflicts they might be facing.
Years later, when the three executors were “called to duty,” they already knew the players, they were confident in the plan and the advisory team, and they’d already build a confident level of trust with each other and with Lawrence’s family.
The right people were in place and, in the aftermath of Lawrence’s passing, the transition was successful for both his business and, most importantly, his family.
Bob Gould is a partner at CMG. His particular expertise is understanding how owning a business affects family relationships.