Benefit of mediation in estate planning
A recent case in Illinois highlights the value of mediation in resolving estate-planning disputes.
The case involved a successful family business created by Daniel and Mary O’Brien. The business, valued at $125 million as of 2013, included interests in hotels, a nursing home, a golf course, gas stations, fast-food franchises and warehouses.
Most of the business assets were operated through limited partnerships, and the rest were held in revocable trusts, in S corporations or in the founders’ names.
The O’Briens had six children (four daughters and two sons) and 15 grandchildren.
When the oldest son passed away in 1989, the O’Briens transferred control of the family assets to their only surviving son, Peter, their youngest child. Five years later, Peter acquired a majority interest in the S corporations that owned the nursing home operations and control of the limited partnerships as a general partner. He was also appointed the controlling trustee of the revocable trusts.
When one of the daughters died in 2004, her interests were passed to two of the grandchildren.
The family then went through almost a decade of litigation, which splintered the children and grandchildren into two opposing factions.
Thanks to mediation, a number of pending suits in the case seemed to be resolved, however, the family members still couldn’t determine how to implement the planned settlement, resulting in a second mediation and arbitration.
In the case that landed before the Illinois court, the plaintiff was one of the grandchildren, who was part of a “faction” called the MMMD Group.
After arbitration, the group was not able to agree on dividing the assets, so the plaintiff filed suit against the rest of the group, seeking control of his pro rata share of the total assets that had been allocated to the group.
The suit eventually settled. He then tried to sue his lawyers for malpractice and fraud, but the suit was dismissed.
The years of litigation and turmoil were a major financial drain for the family, not only because of the astronomical legal fees, but because of the loss of time that could have been spent building the business while everyone focused on fighting and lawsuits. The experience ruined family relationships.
The story underscores the value of early mediation.
The issues eventually were largely solved via mediation and arbitration. If the family had entered mediation when they made the decision to transfer their business assets to their children and grandchildren, a lot of problems could have been avoided.
For a family business, mediation can help with dividing business interests and avoiding acrimonious disagreements among family members.
In another case, a couple, Richard and Judy, had a large estate that they wanted to divide among their adult children.
With the help of attorneys, accountants and financial advisors, each family member was able to propose a recommended plan. Unfortunately, the conversation wasn’t open enough for everyone to properly share their interests, and there was no way to look at the totality of the situation.
When the conversations became so heated that family members were nearing battle, they engaged a mediator.
The mediator spoke with each family member individually, in small groups and as a whole group. This fact-finding mission allowed him to see the full picture.
After three months, the mediator reached a memo of understanding that all family members signed. The result was an estate plan developed by the parents’ attorney that satisfied the entire family.
The resolution was significantly better than the results of the O’Brien litigation, and demonstrates the value of early mediation in dividing estates, especially for family businesses.