By Robert H. Louis
A recent news report indicates that an effort will be made to sell or recapitalize the restaurant chain Hooters, as a result of a family dispute over the will of the majority owner of the business. (I’ve never visited one of these restaurants, but I see that their ads feature a picture of an owl, so I assume they have a library-like atmosphere.) The report illustrates several issues in the operation of family businesses, and how a failure to plan and to consider the effect of trusts and estates law on such businesses can lead to an unfortunate result.
Apparently, the decedent and some other businessmen purchased control of the chain some years ago, and the decedent was the majority owner. In addition, the decedent had married for a second time, and had a son from his first marriage who was actively involved in the business, a much younger second wife, and a young child from the second marriage. His will gave 30% of the estate to each of those children, another 10% to Clemson University (carrying on the decedent’s long years of philanthropic giving), and other amounts to friends and associates. He left $20,000,000 to his wife, payable $1,000,000 per year. The decedent and his wife, who were not living together at the time of his death, were residents of South Carolina, which has a provision in its law allowing a surviving spouse to elect to “take against” the will to the extent of one third of the decedent’s estate. Pennsylvania law has a similar provision. The widow made such an election, and the decedent’s older child challenged this election, in part because he contended it was unconstitutional. After some legal wrangling, the parties settled for an undisclosed sum, and now the older child is looking at various options to either carry on the business or sell it.
It seems clear, from several reports on this case, that the decedent wanted the older child to run the business. He had retired from active involvement and placed his older child in charge. However, he made no arrangements other than in his will for the transfer of the business to that child. This was clearly a mistake. Planning for the business transition could have been completed before the decedent’s death in ways that could have protected the older child’s management of the business. The second wife should have been asked to sign a prenuptial agreement, very common these days, especially in second marriages, to limit her rights against the estate. The wife could also have been provided for through insurance or other planning techniques.
It is possible that these possibilities were considered by the decedent and didn’t work. But in the world of family businesses, a much more common occurrence is to defer consideration of family business issues, in no small part because they require difficult conversations. It’s easier to do nothing and hope that “things” sort themselves out. But that doesn’t often happen. An important service that lawyers can offer to business clients is to help them address these issues and, if other types of professionals are needed to facilitate the process, to recommend hiring such people.
Robert H. Louis is a partner and co-chairman of the personal wealth, estates and trusts department at Saul Ewing. His practice includes estate, tax and retirement planning for individuals and closely held businesses. He is a fellow of the American College of Tax Counsel and a graduate of the Wharton School and the Harvard Law School. Louis can be reached at firstname.lastname@example.org and 215-972-7155.