Consider an ‘Out Clause’ to avoid a family feud

Consider an Out Clause to avoid Family Feuds

Sibling rivalry is normal in virtually every family across the globe. One child might feel neglected by their parents, another may need recognition from their parents or siblings as they are less academic, whilst another may feel they are more entitled to more of an inheritance. This kind of rivalry can be exacerbated in blended families, where children of different ages and backgrounds come into the picture, creating inheritance controversy.

After the death of the patriarch or matriarch, sibling rivalries can intensify, creating feuds that may rip a family apart and lead to costly lawsuits, diminishing the family fortune.

One of the ways to reduce the risk of a family feud is to create structures that address the goals and interests of each heir. For instance, rather than divide the ownership of a successful family business among three siblings, the patriarch could convey operational control of the company to a third party, a professional manager, who in turn assigns goals for each of the siblings focused on their individual strengths. All of the siblings should be given an “out clause”, where they only benefit from the family assets and not the salary and bonus from the firm. This would allow them to receive a flow of income and reduce potential damage to the family business. Meanwhile, the siblings involved in the company can make decisions related to their area, reducing long consultative processes due to family dynamics that could delay an effective response to fast-changing market conditions.

A similar approach can also be helpful when considering how to structure a family office or family foundation. After all, one of the siblings may have a greater interest and ability to make financial decisions than the other heirs, who may also appreciate having an “out clause.” While all the heirs should have full and transparent access to the family office or family foundation professionals, this approach can reduce strife among the siblings and avoids compromises or hard feelings when making long-term financial decisions. 

An experienced outside advisor can help families navigate these challenging emotional issues, by speaking with each family member about his or her goals in life, experience in financial matters and desire to be involved in the family business, office or foundation. In most cases, there will be some siblings who prefer an active approach to financial matters, while others would rather be in a passive role, focusing their interest in other directions. Neither is right or wrong – but it is wise to recognise those differences before they become points of contention in the future. 

The outside adviser can also look at personal values, as well as issues of ethics and integrity. A child who has taken out heavy loans from the family business with no intention of repayment, for example, should not be allowed to participate in the business as that could be detrimental to the other heirs. How one implements this can also create issues, so communication and finesse is essential.

These are some of the ways that an “out clause” can prevent conflict in the family business, office or foundation, just as there is a difference between the managing partner and the limited partners in an LLP. Everyone understands their role, responsibilities, and the family as a whole will most likely be better off with this type of approach.

An outsourced advisor can play a pivotal role in preventing future conflicts and is far more cost-effective than trying to resolve a family feud after it escalates into a legal battle, with all the related financial and emotional turmoil. Understanding when to include an out clause can go a long way to creating a sustainable financial structure for future generations.

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