In this white paper, Rick Raybin and Eric Von Berg discuss the challenges successful entrepreneurs face when trying to leave a legacy, the consequences if estate planning and succession issues are ignored, and the ways successful families have addressed these challenges.

1. The Legacy Trap

2. The Legacy Trap
eric Von Berg, a commercial property mortgage banker, and rick raybin, a wealth management expert,
have several clients in common. Over the years, they both have seen, too often, the acrimonious and costly
lawsuits that sometimes follow a developer-dad’s passing. These lawsuits dismantle and divide the family trust
containing the parents’ commercial real estate portfolio, and, at resolution (and after $1 or $4 million in legal
fees), none of the children are happy and they are no longer speaking to each other. a suit to reach family
estate settlement is akin to a messy divorce. But in these cases, it is often the surviving parent who is caught in
the middle and has to hear the vitriol, mistrust and accusations between her children.
however, all is not lost. From their different perspectives, eric and rick
will discuss the challenges successful entrepreneurs face when trying to
leave a legacy, the consequences if estate planning and succession below are comments on this
issues are ignored, and the ways successful families have addressed subject from two of eric’s
these challenges. mortgage banking clients,
both survivors of sibling
When is trying to leave a legacy a problem? divorce—messy law suits to
eric von berg: When you mix money and children you face potential break up the family trust and
problems. Let’s look at a typical profile. A successful developer or divide assets among siblings.
deal maker created a fortune in his lifetime. he wants to leave a their comments are below,
legacy in property but he also wants to see his family business carry with names changed.
on. his daughter is in the business but the patriarch is currently making
all important decisions. Let’s say he has three other children. One bill: “complex estate planning
daughter is a stay-at-home mom, the other daughter is a doctor, and originates from the fear of
the only boy runs kayaking trips and has never been able to save or paying estate taxes.”
earn a dime.
michael: “real estate
What brings a successful real estate entrepreneur to the entrepreneurs have been
realization they need a plan for succession? given many tax advantages.
rick raybin: I would like to say my persuasive arguments motivate a under irs status 6166 if at least
desire for planning and change, but the desire to craft a succession 35% of the assets are in family
plan usually comes from a combination of two things: (1) an real estate holdings you can
attachment to a real estate portfolio with a desire to see it maintained pay the estate tax liability
as a family legacy, and (2) some outside event; a health problem, an over 15 years at a favorable
economic setback, or the death of a spouse or partner. interest rate. you can structure
the ownership of the property
e: Most real estate entrepreneurs take care of estate tax issues but to significantly reduce the
don’t really put together a proper succession plan. I agree many value used for calculating the
owners are very attached to their portfolios and these properties are estate tax. these are huge
their babies. So, maintaining the portfolio is the priority. advantages.”
What Would be the goals of such a client?
r: Succession planning is just one element of effective estate and
legacy planning. The true work of estate and succession planning
is often subtle, and can be summarized as overcoming the age-old
pattern of “from shirtsleeves to shirtsleeves in three generations.” It

3. involves considering a host of issues involving your family’s relationships,
values and goals, including:
• Imparting your values to offspring and descendants
m: “most people wait until
• Building an enduring family culture their kids are out of college to
• Keeping family―and family values―intact do any succession planning.
• Easing business succession and establishing the role of the next and that is too late to impart family
future generations values.”
• Transitioning from a role as creator and deal maker to a position as
executive/patriarch
Why is a planned succession so important?
e: If your legacy is to survive, you need to make sure your portfolio can
be run without you. hopefully, you can see it running well under a new m: “transferring control is
chief when you are around to give advice. complex as the business
leader’s self esteem is
If you have brought a son or daughter into the business, you need to
connected to his success and
work on handing over first the operations and later the deal-making
position in the community.”
role. This is always hard, but there are ways to ease the transition,
including creating a board of directors, bringing in consultants, defining
roles, and setting a time line for shifting duties and decision making to
the next generation.
If you intend for your children to rely on third-party management, this
process is easier. But, remember that asset management is a separate b: “you have to be careful
role from property management. asset management can never be in letting experts craft an
fully contracted out unless you convert your holdings to stock in a well- estate plan. complex estate
managed reIT through an up-reIT process. planning is sometimes so
complex that no one really
r: as a successful entrepreneur, you’ll want to leave a real, lasting understands it. and because
legacy―not just your assets―to your children and their descendants. To mom and dad don’t really
do this, you need to think through your family’s unique issues and the understand it they do not
potential consequences of your decisions. you’ll need to be honest explain it to their kids.”
with yourself about your family dynamics and your children’s interests,
skills and shortcomings. This kind of comprehensive planning will help
guide the outcome to what you think will be best for your family.
While a succession without planning is possible, it is unlikely to be
successful. Instead, it’s critical to take concrete steps, including
m: “to begin to shift control,
considering how to provide for different needs among offspring and
you need to shift focus away
descendants and avoid strife; strategies for protecting the estate from
from wealth creation. there
creditors (including divorce); and whether to continue to focus on real
are far more people who can
estate or pursue a broader diversification of your wealth.
manage wealth than can
create wealth.”
What is the biggest mistake?
We both agree, waiting too
e: Most successful real estate
long to think through and
developers and investors love
plan for a smooth transfer.
deal-making. The hunt for the next

4. deal, negotiating leases and creating value keeps them young. But,
too often I see my clients transfer the reins of their empire when they b: “siblings want to ask
are on the way to the hospital for the last time. The assets collected questions about their parents
during their real estate career are often not a fit for the next generation plans for succession, but
and the “child” taking over the business is in his or her 50s or 60s. at this don’t because they fear the
point, it’s a bit late to start to command the respect of employees, answers.”
vendors, investors and lenders. Unfortunately, it is also too late for the
new boss-child to gain the trust of the siblings who are not in the family
real estate business.
r: Successfully transferring the business you’ve worked so hard to build m: “parents avoid discussing
to the next generation doesn’t happen overnight. If you envision your succession plans with their
children taking over the management of your company, you need children because they do not
to start planning for that long before the actual transfer of control want to air family secrets nor
occurs. even if your children won’t be actively involved in day-to-day to they want to point to a child
business operations, you still need to address concerns about how your and say; ‘i don’t trust you or i
wealth will be distributed and how your legacy will be maintained. This don’t trust your spouse.’”
isn’t always easy to do, and the process can bring old resentments or
previously unrealized feelings to the surface―both in yourself and in
other family members. But, in my experience, avoiding these sometimes m: “When you bring a child
difficult planning issues is a recipe for legacy planning failure. into the family real estate
business you need to give him
hoW do you bring the children or a child into the business? or her a way to make it their
r: you can’t assume that sharing your passion for your business will be own.”
enough. Instead, your children should learn by working in the family
business. For a successful transition to happen, you must prepare
your business for a time when you will no longer be making the key m: “the patriarch needs to
decisions. embrace this need for change.
he needs to put as much effort
First, one must realize that creating a successful real estate firm is very into developing a sustainable
different from sustaining one. The roll-up-your-sleeves approach to legacy as was invested into
making sure everything gets done―your way―does not work well in a creating the wealth in the first
larger organization with employees. Instead of being dominated by place. the patriarch also
one individual who made certain what needed to get done was done needs to embrace having a
now, a sustaining firm will rely on people who are well organized and child central to the business.
have good attention to detail. Most will not tolerate the “drop what finding ways to change
you’re doing now” approach. gracefully opens an exciting
Second, what you needed to do when you started your firm may no opportunity to work together
longer be sufficient. During the last 30 years the competitive landscape and develop skills. if the
has changed. The sophistication, breadth and scope of issues facing founder cannot teach his
real estate owners and developers have increased dramatically. What techniques and inspire with the
one person could handle before often requires two or more today. vision that started and grew
the company, he will never
Third, many successful families have learned that they don’t have all be comfortable letting the
the answers and send their children to work in other successful real successor find his own way.”
estate organizations before returning to run the family’s firm. I have
worked with families without that experience and found significant
shortcomings in one or more of their approaches.

5. but i love deal making. do i need to give this up?
e: No. But do not get wedded to your specific assets. It is time to begin
making changes. recognize that assets that take effort (i.e. assets that
need renovation or ongoing value-creation) usually do not fit with the m: “blood is thicker than water
goals of everyone in the next generation. It only takes one disgruntled and money is thicker than
child to throw a monkey wrench into the workings of the estate. Once blood.”
the value has been created in an asset, think about trading it for one
that does not need as high a level of effort and expertise.
If you have a child in the business who is a good deal maker, able to
take risks and able to create value, try to set that child up to do deals
when you are gone, without risking the assets of his or her brothers and
sisters who may not be risk-takers. This often requires separating assets
and creating two or more trusts.
r: My advice to the next generation taking control: One of your great m: “hiring third-party talent
strengths is doing what you love to do and doing it well. rather than when the patriarch is still on
trying to learn a new skill set, especially if it means doing less of what the scene is difficult. There is
you do well, I recommend that you hire the talent, whether it’s an usually a lack of trust and a
employee or contractor, to handle the other duties. strong fear of losing control.”
but my kids love each other.
Money issues are the biggest
Why should i plan my affairs
threat to family unity.
as if they Will fight over my
Wealth?
e: The objective is to head off strife. If I tell you the horror stories I’ve
witnessed, you will claim that such fights could never happen in your
b: “as the patriarch, you
family. But ask yourself: My kids get along now, but will they in 10 years
need to face your worst fear:
time? Will their spouses trust the child I left in charge of my portfolio?
that you have created a
generation of entitled siblings
r: If you have taken one or more of your children into the real
waiting for the parents to pass
estate business, that son or daughter has a special status due to
so they can cash in their lottery
their knowledge, responsibilities and their own contribution to value
tickets.”
creation. Unfortunately, that status may not be trusted or understood
when you’re gone. you should anticipate that the child with special
status will not get the respect from his siblings that you enjoy as their
parent. Planning for conflict now may be unpleasant, but it will make
it easier for your family to deal with a disagreement if one does arise
after you’re gone.
What changes should i make
Shift real estate asset from b: “legacy is just another word
to my real estate portfolio?
wealth-creation to income for ego.”
e: If you are like most successful, generation in the latter stage
self-made real estate investors, of your career.
your focus has been on building
wealth. you have been ready

6. to reinvest if it creates value. I have many clients who made tens of
millions but lived frugally for most of their lives. assume that one or more
of your children or their spouses will be more focused on receiving a
steady income from the portfolio than seeing that portfolio managed
to maximize the creation of wealth.
r: In my experience, I’ve found that the disruption of steady
distributions is one of the most common issues for strife in family-run
portfolios. at the risk of spouting heresy, I am a proponent of broad
diversification. Although you may have created your wealth through b: “When one sibling is cho-
real estate and never enjoyed much success with other types of sen to run the business, the big
investments, there are significant benefits that come from diversifying question is always: if mom and
your wealth. Diversification reduces your exposure to an unsuccessful dad loved us all equally, how
succession or the squabbling over the family fortune. also, it is come the sibling in charge of
unrealistic to expect that real estate will continue to outpace other the business is getting more
investments. comparing the returns reported in the NcreIF property money than the rest of us? it is
Index with other asset classes bears this out. I have found the key to an uncomfortable subject for
successful diversification is avoiding investment programs that favor both parents and children, so it
the sponsor at your expense. Fortunately, there is a growing cadre of festers below the surface until
financial products and advisors who can help you successfully diversify. the parents are gone.”
Why does the single entity
Because, rather than solving
estate planning solution
differences on an asset-
create so much strife?
by-asset basis, the only
e: Most developers have built a solution is a break-up of the
real estate portfolio of which they single trust. Think of this as a
are proud, and they hate the contentious divorce between
thought of it being dismantled. as your children. The lawyers
a result, they gravitate toward a do well but usually no one
m: “preventing family strife is
single entity solution, which is also wins or is satisfied with the
an honorable objective, but
easier on the estate planner. This outcome.
it can only be accomplished
expert, usually a cpa or attorney,
with insight, cooperation and
is primarily focused on minimizing estate taxes. The continuity of your
continuous management that
business or avoiding family strife is not usually an area of expertise.
is open to adjustment for life’s
r: To avoid strife, think about creating separate entities for each asset changes and eventualities.”
or at least two entities. One might contain the “coupon clipping” real
estate and one would contain the assets that will need reinvestment
or redevelopment. To do this, it helps to work with a professional who is
experienced not only in estate planning, but also has a background in
real estate and creating legacy solutions designed to avoid conflict.
Lawsuits over estate issues usually happen when the flow of checks
stop. Separating assets out of a single pool will allow for a child who
cannot or refuses to make their capital call to sell out or be squeezed
down in ownership in that one asset, without jeopardizing that child’s
ownership and cash flow from the other assets. Several small problems
are easier to solve than one large problem.

7. What else causes the most The role of the sibling(s)
sibling strife? active in the real estate
e: The parent often splits the business is not understood,
estate evenly between the appreciated and/or
children. an even split is the easy compensated.
solution.
If some siblings go on to professions or careers and one or more
stays behind to help run the real estate business, that sacrifice is
seldom understood, appreciated or compensated by the siblings
who are not in the real estate business. So where is the reward for the
child running the assets for the benefit of his brothers and sisters? A
property management fee is usually not enough. even so, a property
management or asset management fee paid to the sibling in the
business is still often resented by the other siblings.
r: Besides money, control can be a problem. Many trusts vest control
proportional to ownership in the trust. Because the siblings outside the
business don’t understand the vicissitudes of commercial real estate,
they mistrust the advice of the active brother or sister.
Ongoing mistrust too often leads to accusations. and accusations can
lead to a messy lawsuit that breaks up the estate. These lawsuits are
by design confrontational, and this confrontation too often leads to
estrangement among family members. The last thing most successful
entrepreneurs want is to see what they’ve built destroyed because
their heirs can’t work together in a constructive way to continue the
family legacy.
As a financial advisor, my goal is to try to prevent family strife so that
the wealth that mom and dad worked so hard so to accumulate
allows their kids―and the generations that follow―to be happy and
successful.

8. rick raybin, cpa eric von berg, cmb
a principal with the lifetime capital group. a commercial property mortgage banker with
newmark realty capital, inc.
I am a financial advisor specializing in cross-
generational wealth transfer. I started my career I started my mortgage banking career with
as a cpa. From 1979 to 1990, I was the cFO of clients who were 20 to 40 years older than me.
the rreeF Funds (now the real estate investment Now I am working with these same families as
management business of Deutsche Bank’s Asset the assets move to the next generation. I have
Management division) and also served as the first seen too much family strife that could have
president of NcreIF. as ceO of Lifetime capital been prevented. reworking a real estate
group, I help successful individuals and their portfolio takes planning, time, skill and financial
families build financial security by serving as their engineering: I enjoy working as part of an
personal chief financial officer. My work includes estate planning team as the real estate and
legacy and estate planning for families with finance expert. I attended good schools, but
significant real estate investments my real expertise—both in real estate and estate
matters—comes from watching my clients’
mistakes.

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