By Patricia M. Angus – Originally published in Trusts & Estates, March 2014

Family business, trust and estate planners have been relying on a set of assumptions about client goals, family relationships and the definition of “success” for as long as the industry has existed. While many of these assumptions have served both advisors and clients well, some haven’t withstood the test of time. Indeed, in the past few decades, the reality of clients’ lives, especially as it relates to the evolution of family businesses, has shown the limitations of some of the assumptions at the core of the planning process. The Pritzker family enterprise story provides an excellent case study¹ to help debunk these myths and begin to re-envision the proper starting points for future planning.

After nearly a century of extraordinary under-the- radar growth, the inner workings of the Pritzker family enterprise² have come to light in the past few decades and are now accessible in a wide variety of public sources.³ Their story provides an interesting window into the challenges of one of the most complex American fam- ily enterprises. Their trust, estate and holding structures track the increasing sophistication of income and transfer tax planning in the 20th century. At the same time, their story provides a bird’s eye view into the ways that a family actually governs itself. That is, how does a family guide itself both in seemingly quiet times and through the difficult transitions that every family, especially ones with family businesses, faces? Because that’s where myth and reality collide, it’s the subject of this article and source of insights on how to improve planning for family enterprises in the future.

The “American Dream”

The Pritzker story is generally traced to Nicholas, who, at age 11, arrived in the United States with his family from Ukraine. Rising from humble origins, he set the cornerstone of the family’s business operations when he established Pritzker & Pritzker, a law firm in Chicago, in the late 1800s. He expanded the law practice to include investments and operating businesses with the help of his three sons, Harry, Abraham Nicholas (A.N.) and Jack. With A.N. at the helm, the family businesses grew even more dramatically during the first half of the 20th century. A.N. deployed cutting-edge tax structures to leverage the value of holdings on a global basis. In the 1970s, non-family grantors from outside the United States established trusts in the Bahamas to own significant portions of the family’s businesses. These trusts allowed the family to defer and often eliminate U.S. income and transfer taxes to a degree that’s unimaginable and, indeed, impossible, today. Intricate borrowing and repayment schemes further accelerated the holdings’ value.⁴ While the structures weren’t without scrutiny—especially when Castle Co., a Bahamian bank co- owned by Bruce Kanter, the Pritzker’s Chicago attorney, was under investigation as a conduit for drug dealers, leading to investigations of its affiliates by the Internal Revenue Service—the holdings survived and grew virtually intact. At a time when the value of the family enterprise was already estimated to be in the billions, at A.N.’s death, his estate tax return listed his estate’s value at $25,000. While the IRS initially rejected the value, after nearly a decade of litigation, the estate paid $9.5 million in taxes plus interest and obtained a broad agreement from the IRS that essentially prevented it from questioning the tax status of the off- shore family trusts in the future.

A.N.’s son, Jay, succeeded him as family patriarch, expanding the businesses to include, most notably, Hyatt Hotels and industrial conglomerate Marmon Holdings, which both grew into multi-billion dollar businesses. He too was extraordinarily skilled at identifying business opportunities and leveraging returns through tax structuring. A colleague stated: “What made the deal was the tax plan that Jay came up with. He found a completely legal way to buy a company and, even though it was in desperate straits, make money on the deal through tax credits.”⁵ His brother, Bob, oversaw operations and served at his side for many decades. By the last quarter of the 20th century, the family’s businesses totaled more than $15 billion, held in numerous trusts. They were active philanthropists, especially through the multi-million dollar Pritzker Foundation and the Pritzker Prize for Architecture.

The Patriarchs’ Plans

On June 5, 1995, Jay called together more than a dozen family members at the home of his son, Tom, in Chicago. Jay and Bob wanted to impart their vision of the future. Having led the family enterprise for several decades, they felt it their right and duty to chart the course for the generations ahead. The group included Jay’s wife, Marian, their four children, Bob, cousin Nicholas (Nick) and six nieces and nephews. Spouses weren’t invited, nor were Bob’s two youngest children, Liesel and Matthew, who were minors at the time.

Jay spoke briefly about his concerns for the family’s future and shared his reflections on how they ought to conduct themselves to preserve the vast fortune. After his remarks, he handed the group a letter co-signed by Bob. It started: “We are writing to clarify some of the confusion that may exist about the Family wealth and Family Trusts.” The letter then set out clear instructions for how the family businesses, trusts and other entities were to be handled. With respect to the trusts, including those established by A.N., it stated that: “[f]rom time to time” funds would be distributed to family members “to meet their reasonable needs” but declared that they should last until the end of their respective perpetuities periods. A separate memorandum provided a timeline for distributions to family members. The letter designated a “Triumvirate,” with Tom as leader and Nick and Penny, one of Jay’s nieces, at his side. Tom would serve as trustee of most of the family’s more than 1,000 trusts and oversee the family businesses. Nick and Penny would be responsible for parts of the family businesses in which they had excelled. Jay and Bob expressed their wishes that the holdings that had accumulated over the past century would continue intact for decades to come. The letter stated clearly that: “the Trusts were not intended for and should not be viewed as a source of individual wealth.”⁶

Behind the Scenes

While Jay and Bob used the 1995 meeting to openly share information, it was later revealed that actions behind the scenes indicated that there was discontent among some family members. Several had already expressed their objections to leadership by Tom and the Triumvirate. In addition, during the prior 18 months, certain family trusts for Liesel and Matthew had been re-configured without their knowledge. In 1994, Tom and another co-trustee resigned and appointed Bob as trustee of trusts for Liesel and Matthew after a contentious divorce between Bob and their mother.

By the following March, Bob had completely emptied out two of his children’s trusts. He had also reduced the value of several others by selling their assets to trusts held by their cousins for less than market value. In return [Liesel and Matthew, or trusts for their benefit], were given promissory notes.⁷

The Family’s Plans

Not long after Jay’s death, internal disputes among fam- ily members boiled over, and lawsuits were threatened against Tom and the Triumvirate. To avoid litigation, the family signed a confidential “Family Agreement” in 2001. In it, 11 cousins agreed to the division and distribution of the entire family enterprise. By the end, each would have a net worth, including beneficial interests in trusts, holdings companies and other family entities, of over $1 billion. Tom would no longer serve as trustee of most trusts, and the Triumvirate’s leadership of family business management would be dismantled. Over the next decade, the Pritzker family sold off most of the family holdings and restructured everything from trusts to philanthropic activities.

Not long after the family agreement was signed, Matthew heard from a family member that the value of Liesel’s and his trusts had been reduced and that they were left out of the family plans. By 2003, he’d joined his sister in a lawsuit against their father and other family members. The suit primarily alleged fraud against their beneficial interests in the trusts. Defendants argued the steps taken were justified because the trustee had made a discretionary decision to treat Liesel and Matthew as members of the generation below their own, due to the large gap between their ages and others in their generation. The case was settled out of court, with Liesel and Matthew receiving approximately $450 million each outright or in trust.

Forging New Paths

The years since the 1995 meeting haven’t played out as expected by Jay and Bob, nor, presumably, by the advisors who helped them set out their plans. Family members have pursued a wide variety of paths, and individual wealth now is the norm, rather than the exception. Penny was appointed U.S. Secretary of Commerce in September 2013. Her nearly 200-page financial disclosure forms list hundreds of trusts, companies and other entities in the family enterprise. It shows the transition of fiduciary responsibilities over time. Liesel has created the Blue Haven Initiative, “investing all types of capital to change the world” and is becoming a frequent speaker on family and wealth. Tom was quoted at the end of 2013 in a front page Wall Street Journal article as saying the past decade has been “probably the most intense, interesting experience of [his] life.”⁸ Despite the fact that his father’s plans have been thwarted, he stated: “I think my father would be proud.”⁹ Family members have been launching business and philanthropic ventures at a speedy rate.

Reality vs. Myth

While the Pritzker family benefitted greatly from the tax and legal structuring their advisors provided, there were some myths that drove the planning process and that were later trumped by reality:

1. A family business is a monolith. Often, it’s assumed that a family has a single family business and that planning can be focused on it as though it’s a single entity. In reality, though, few families have a single family business. Rather, most have a number of holding entities and legal structures and multiple operating businesses. Once the family moves beyond a single operating entity, it heads toward becoming a family enterprise, which can be exceedingly more complex for planning purposes. This transition occurs far faster now than it did in the past, when changes occurred on a generational basis. Now it’s not unusual for the evolution to occur within the same generation.
   
2. “Shirtsleeves to shirtsleeves” is inevitable (and terrible). Eleven billionaires in the fourth generation after the business founder is a far cry from the pithy assumption that families that build up great fortunes will lose them by the third generation. Further, it’s not clear that being in shirtsleeves, if that means having to support oneself financially, is such a terrible outcome. More importantly, the greater losses are often in human capital, with younger family members feeling crushed due to the weight of the family enterprise and management needs of tax planning structures that are meant to preserve the fortune.
   
3. Sale of a family business constitutes failure. It’s an almost axiomatic assumption that the sale of a family business, and especially the failure to keep the family business alive across generations, equates to failure. Indeed, family business literature and studies have long focused on this phenomenon. The Pritzker story shows that sale of family business(es) may not necessarily mean failure. They sold off billions of dollars’ worth of highly appreciated holdings through carefully orchestrated plans. Buyers including Warren Buffett, who purchased most of Marmon Holdings, and public shareholders who bought Hyatt shares after an initial public offering in the restructuring, have provided the family the opportunity to launch new ventures. Since the re-organization, fam- ily members have created numerous new businesses and philanthropic ventures. Once again, the Pritzkers might be at the cutting edge of the trend toward sup- porting entrepreneurship across the family, which essentially contradicts a longstanding myth.
   
4. Father knows best. For more than a century, Pritzker family and business leadership followed the traditional pattern from patriarch to patriarch. By the end of the last century, however, even Jay and Bob realized that a single male successor may no longer be appropriate, especially for a vast family enterprise. Their attempt to broaden leadership, however, fell short. Expectations of younger family members— male and female alike—have changed, and younger generations are no longer as willing to accept decisions by fiat. Input is expected and legal remedies will be sought if people don’t feel heard. Legal rights of trust beneficiaries must be taken seriously.
   
5. “No one will find out.” Tax, trust and estate planning have long been crafted around the assumption that private matters will remain that way, even within a family. The Pritzker story shows that isn’t the case. Not only did A.N.’s offshore structures get opened up to public scrutiny, so did the private actions concerning Liesel and Matthew’s trusts. Secrecy is an illusion and shouldn’t be assumed.
   
6. Tax planning will keep a family together. While there’s a movement afoot to expand the scope of estate planning, tax planning is still the primary driver for advisors, especially to ultra-high-net- worth families. When clients ask their lawyers about how to help keep the family together, trusts and other structures may not be the simple way to fix this so-called problem. The Pritzker story shows that tax planning can certainly expand the size of the family’s financial fortune. But, that alone won’t keep the family itself intact and together.

Insights for the Future

The Pritzker story provides a number of insights for anyone involved in business, trust or estate planning for a family enterprise.

• Focus on the process. The past few decades couldn’t have been easy for Pritzker family members, and unfortunately, that reflects the tendency to ignore “process.” A single family meeting to deliver instructions no longer works, especially when so many competent adult family members are involved. Advisors must think through how things will play out in reality and not just focus on technical structures.

• Foster a healthy environment. Looking at the environment that existed at the time of the 1995 meeting, it’s clear that many of the characteristics of a healthy environment for “governance” didn’t exist: Secrecy was the norm, individual family members didn’t feel that their voices were heard and there wasn’t much respect for rules. Advisors must help the family increase transparency, promote open communication, balance individuality with group needs and respect rules.
  
• Include other advisors. The Pritzkers received advice from some of the country’s best legal and tax advisors. Yet, the most sophisticated tax planning couldn’t overcome the reality of the internal forces within the family. By including other advisors with expertise facilitating family communication, translating legal structures and managing the process, they might have been more successful.
  
• Reach across generations. Patriarchal succession seemed to work well for the Pritzkers for nearly a century. However, by the 1990s, this approach was more difficult to maintain. Younger Pritzkers expected more involvement and were less likely to accept anointment of leaders in their own generation. Female family members are no longer as willing to defer to male leadership. The Pritzkers aren’t the only family facing these challenges. Advisors and family members alike need to be more aware and inclusive.10

• (Re-)Define success. To some, the Pritzker family enterprise story is an epic failure. In addition to the family conflict, carefully crafted tax benefits may have been lost and opportunities for leverage missed. However, to assess the outcome requires reflecting on one’s own definition of “success.” Is “staying together,” despite internal discord, “success?” Is it better to pro- mote individual freedom? When does the well being of individual family members outweigh financial goals?

Some commentators have said that Jay would be “rolling over in his grave” if he knew what happened to the family. Others, like his son Tom, are beginning to see that the course of events may have been inevitable and the most positive outcome any family member could have hoped for. Either way, the path taken was rocky at best. Will the lessons from the Pritzker story be learned by planners for other family enterprises?

Endnotes

1. This article is based in part on Patricia M. Angus, “Pritzker Family Enterprise: A Family Governance Case Study,” Columbia CaseWorks #140412 (Dec. 4, 2013).
2. For this article, a “family enterprise” is considered to exist when a family owns or controls multiple businesses with one or more holding companies, legal entities, such as trusts and limited partnerships, and engages in organized philanthropy. The term is intentionally broader than “family business.”
3. Publications including the New York Times, Chicago Tribune, Forbes and Vanity Fair have covered the Pritzker story in detail. See also www.oge.gov/ DisplayTemplates/201_Form/FilerDetail.aspx?id=8589936499.
4. See Stephane Fitch, “Pritzker vs. Pritzker,” Forbes.com (Nov. 24, 2003).
5. Shane Tritsch, “Tremors in the Empire,” Chicago Magazine (December 2002), www. chicagomag.com/Chicago-Magazine/December-2002/Tremors-In-The_Empire/.
6. Suzanna Andrews, “Shattered Dynasty,” Vanity Fair (May 2003).
7. Ibid.
8. Anupretta Das, “Inside the Breakup of the Pritzker Empire,” Wall Street Journal (Nov. 26, 2013).
9. Ibid.
10. See Patricia M. Angus, “The Family Governance Pyramid: From Principles to Practice,” Journal of Wealth Management (Summer 2003), pp. 7-13.