Appreciation of Client Family Dynamics: A Case Study

Editors: Steven F. Holub, CPA, MBA, and Mary Cathryn Green, CPA, M. Acc.

CPAs do their best to keep up to date with tax developments. Every year they enroll in tax update classes and review myriad tax changes. However, much of their job involves dealing with family dynamics, and often this requires skills related more to understanding and communication than technical expertise. In addition, practice management issues must be considered, especially when serving family members. Three useful points should be used to improve practice management when families are involved:

• Understand the perspective of each family member;
• Keep in mind who the client is; and
• Advise in the client’s best interest.

Differing Perspectives of Family Members

Betty, a surviving spouse, has two children, Sally and Constance. For several years Betty has engaged a CPA to prepare her individual tax returns. Now she has asked her tax adviser to help her prepare an estate plan.

A majority of Betty’s estate is in rental real estate. Her net worth is around $5 million. Betty does not want to leave money outright to Sally, because Sally’s husband has had two failed businesses, and Betty is concerned that he will burn through his wife’s inheritance. Constance has a degree in finance and works as a money manager. Betty would like to have Constance receive her share of the estate outright and to be the trustee of a trust holding Sally’s share. Betty also believes that the trustee should maintain the family rental properties for at least 10 years and sell them only if they are exchanged for excellent properties in the same neighborhood.

To determine an estate plan, the CPA meets with Betty’s children. Sally claims privately that her mother has been extremely ungenerous and constantly belittles her and her husband.

Constance is concerned that being in charge of Sally’s trust will cause a rift. She confirms that Betty has not been generous. She also tells the CPA that the rental properties have significant amounts of deferred maintenance and she is too busy to manage them properly, so she would prefer to sell them after her mother’s death. Constance’s husband does not get along with Betty and refuses to go to any family functions where she is present.

Interviewing the various family members becomes a crucial part of developing an estate plan. Without this information, an adviser could easily create an unworkable plan that does not achieve the intended objectives.

Who Is the Client?

Often multiple members of a family—even multiple generations—will be a CPA’s clients. However, for purposes of developing an estate plan, it is important to keep in mind who the client is. In these situations, the CPA must deal directly with and focus on the needs of that person. In the above example, Betty is the client. Although it is good practice to talk to the children as part of overall estate plan development, all recommendations need to be delivered to the client.

Therefore, while it is proper for the CPA to discuss Constance’s and Sally’s key concerns regarding the estate with Betty (without sharing personal remarks made in confidence), it is not proper to disclose Betty’s wishes to her children. What if the trust is created by Betty, and Constance, as trustee of the trust, wants to consult with the CPA regarding her concerns? Conflicts of interest must be avoided. The relationship and the success of the planning depend on the client’s trust and on the CPA’s communication skills. (For more on conflicts of interest, see Horwitz, “Conflicts of Interest,” 42 The Tax Adviser 776 (November 2011).)

Advising in the Client’s Best Interest

The perspectives of the family members in this case do not match up well with Betty’s intentions for her estate. How could a tax adviser get Betty to reevaluate her plan while remaining discreet and diplomatic? Using open-ended questions is useful. For example:

• How does Constance feel about being trustee of Sally’s trust?
• How would managing real estate fit into Constance’s lifestyle?
• How does Sally feel about Constance being her trustee?
• Is there anything Sally could do to improve Constance’s opinion (and the CPA’s) about her financial management skills?

The objective is to get the client thinking about other perspectives and perhaps new approaches to dealing with the issues. This is also the time for the CPA to offer concrete suggestions that may benefit everyone. One significant issue in this example is Betty’s desire not to sell the real estate outright and Constance’s preference to do just that. In this case, after analyzing the reasons for Betty’s (and her decedent husband’s) faith in real estate, it becomes clear that there would be little or no capital gain if the property were sold after Betty’s death. Once this is established, the parties can discuss any emotional issues to create a plan that works for the entire family.

Another issue is Betty’s wish that Constance serve as trustee of Sally’s trust. The adviser should be able to offer an impartial view of whether having a trust makes sense, and if so whether it would be better to use another family member, a trusted family friend, or an institutional trustee. Based on experience, the CPA can probably point to cases where a “good child” serving as trustee of a “bad child” has led to significant family problems.

Ultimately, the greater the concern and empathy the CPA demonstrates by asking thoughtful questions and listening to the answers, the more successful the outcome.

Appreciation of Client Family Dynamics

Case studies are inherently fact-specific. Clearly, some of the concerns discussed in this column may not be relevant, depending on the particular situation. Good practice management dictates that family dynamics must be considered. After communicating with family members and coming to understand the group’s dynamics, then applying tax law expertise, the CPA can usually find a fresh and workable strategy to fit the client’s wishes.

Though the CPA does not write the trust instrument, he or she can present recommendations to the family’s attorney. The ultimate goal is to help unburden clients of financial concerns. A positive experience is likely to deepen the professional relationship. In addition, this integrative approach involving family members may result in the heirs choosing to become clients as well.