Restoring Trust to the Beneficiaries: The Value of a Multidisciplinary Practice

Richard Wolman, Ph.D.; Susan Miller, CPA; and David A. Hoffman, Esq.

A large family, descended from a successful San Francisco businessman, owned a vacation compound in the middle of the Rocky Mountains.  Originally purchased in the late 1800s, the land consisted of approximately 750 acres high atop a mountain.  Over the years, it had been improved with several houses, mountain cabins, stables and trails to streams filled with speckled trout.  Six generations of the family had enjoyed the use of this land, holding family gatherings, vacationing, and participating in the ongoing life of the compound.

The land was held in a trust, created many years before, that was scheduled to dissolve within several months, with all proceeds to be distributed to the beneficiaries.  The trust’s four trustees – each representing one branch of the family tree – were stymied.  They had the legal authority to decide how to allocate the trust’s approximately $20 million in land, improvements, and financial assets (mostly highly appreciated stocks and bonds); however, with almost forty income beneficiaries and many more remainder beneficiaries, they faced a potential law suit if one group of beneficiaries or another felt short-changed – indeed one group of beneficiaries was ready to file suit to force a liquidation of all assets.  For two years, the various factions within the family sought to break the impasse but failed to reach a consensus.

The trustees decided to mediate the dispute, and solicited proposals from several mediation firms.  Boston Law Collaborative’s proposal, which was accepted, involved a three-person mediation team consisting of the three of us.  David Hoffman was available as a resource for information about some of the complex legal issues of the situation and to guide the pace and direction of the mediation itself; Susan Miller could educate and inform the group about the financial and tax implications of the dissolution process; and Richard Wolman could attend to the interpersonal and family dynamics that had already threatened to scuttle the entire process.

Our first task, as mediators, was to consult with the trustees about a negotiation process that would fit the ungainly alignment of parties.  Approximately 60% of the beneficiaries – they called themselves the ‘Mountaineers’ – wanted to retain the compound and form a corporation to own it.  The other 40% — they called themselves the ‘Covered Wagons’ – wanted cash, and did not want their interest diluted by what they considered the purely theoretical capital gains tax exposure of the Mountaineers.

The Covered Wagons and the Mountaineers were also conflicted over the fair price for each share.  In addition, because the beneficiaries had widely differing financial circumstances, some were willing to accept appreciated securities as payment for their interest in the land and others were not.  If the trust were to sell securities to raise cash for the Covered Wagons, a decision had to be made as to how that substantial tax liability should be allocated among the beneficiaries.  The trust documents contained no dissolution methodology, and, as a result, the acrimony between the two camps had intensified.

We proposed a two-day mediation session, to be preceded by a conference call with the trustees.  That call prepared the way for a pre-mediation exchange of comprehensive dissolution proposals by the two groups of beneficiaries – first from the Mountaineers, and then a week later from the Covered Wagons.  The proposals and various explanatory memos and spreadsheets (showing tax effects of the proposals) were posted at our web site in a confidential, password-protected area that only the trustees and beneficiaries could access.

On the first day of the mediation, nineteen members of the family — including all four trustees and some of the beneficiaries – came to the table in Boston from as far as Seattle, San Jose, Denver, Santa Fe and New York.  After a brief joint session to discuss ground rules and logistics, we chose the “shuttle diplomacy” strategy of separating the two groups of beneficiaries into two rooms.  In this way, it was possible to address the issues between the groups in a private setting and also to deal with the conflict within the groups that could make resolution even more difficult to achieve.  Near the end of the first day, the withdrawing group requested a new offer from the continuing group, and indicated that they would likely leave the mediation and turn to court if the next proposal they received was not a substantial increase in the price to be paid for the Covered Wagons’ interest in the compound.

The Mountaineers arrived an hour early on day two of the mediation to prepare their proposal.  In discussions with us, they concluded that, if there were to be any hope of escaping the nightmare of a full-blown litigation, involving expensive tax and real estate experts and multiple legal teams, boldness was required.  By mid-morning a new proposal was presented, involving a cash-plus-stock buy-out and an escrow to cover potential (but not necessarily inevitable) tax consequences for the continuing group.  After several back-and-forth sessions with each group to refine the new proposal, we met with the Covered Wagons, who looked over the new proposal in detail, and, after crunching the numbers, finally nodded their heads in agreement.

We took the answer back to the Mountaineers, and were greeted by audible sighs of relief and applause.  Members of the family – some of whom had not been on cordial terms for many years – reconvened with a palpable sense of accomplishment for breaking through the years-long impasse.

While the relief over reaching a settlement was still fresh, we set out to help the parties draft and edit a settlement document.  We set up a laptop computer and LCD projector in a conference room, where the trustees and representatives from each group met for more than three hours, laboriously crafting, on a screen where all could see, a five-page settlement document.  At 7:00 p.m., when the last of the parties left our office, the trustees had a signed agreement.

As a follow up, we asked ourselves and the members of the family what elements contributed to the success of this unusual and gratifying cliff-hanging outcome.  Several variables stood out, including:

  1. The deadly threat of litigation. Until there was candid discussion in the mediation of what litigation in a case of this size and complexity might look like, some family members had not fully considered what the human and financial cost of an impasse could be.  Spelling out those costs in detail had an important influence on their willingness to negotiate.
  2. Personal investment in a successful outcome. Many of the participants had come a great distance at their own expense to participate in the mediation.  During the mediation sessions, and in the prior weeks during which settlement proposals were drafted, the participants invested a good deal of energy, time and money into the process with the expectation that a positive result would be achieved.
  3. Now or never. With the trust due to expire soon, and the amount of time necessary to dismantle a complex family and legal structure, there was a clear and realistic sense that this was the last chance for a facilitated negotiation to succeed.
  4. The parties’ expertise. In each camp, there was at least one individual who was adept with a calculator and spreadsheet, and who understood the relevant financial issues, so that the parties could accurately assess the various settlement options.
  5. Mediator as neutral expert. The parties had a wide range of views about the likely tax consequences of each proposal.  For example, many of the trustees wondered how the tax basis would be determined for a property on which so many structures had been built and re-built over the years – and with records going back only a few decades.  Susan Miller was able to provide information – from a neutral and independent perspective – about how the tax authorities look at such issues, as well as information about such arcane subjects as the effect of alternative minimum tax on the trust and the beneficiaries.
  6. New perspectives on the parties’ motives. One of the messages we were able to convey in our back-and-forth diplomacy was the perspective that neither group was trying to cheat or take advantage of the other.  We tried to help each side see the case from the other side’s standpoint, while at the same time looking for ways to reduce tax exposure and thus add value.  With a high level of mistrust and anger on each side of the dispute, we needed a full day of conversation just to achieve (a) a measure of connection and relationship with the parties in each camp, and (b) an understanding of what was fueling the mutual resentment.  One of the lessons for us was that it was not enough to understand each side’s proposals – we needed to know the history of pre-mediation bargaining, stretching back over several years during which antagonism had been fueled by perceptions of back-tracking and bad faith negotiation.  Mediation did not heal all of these wounds but did enable the parties to communicate more effectively by helping the parties contain their anger and focus on the numbers.

It is a rare case in which a three-mediator team is needed.  Only where the stakes are high and the issues unusually complex – as in this case – would we propose such an approach.  And while it is true, as we all know, that two heads are better than one, this was a case that required three.