Scott Peppet is president of the Chai Trust Company, the private trust company that oversees the family office for the Sam Zell family, as well as interim president of the Zell Family Office. A second-generation married-in family member, he has also had a consulting practice with other families and family offices. He discusses the issue of whether to tie family members to the family office:
Should family members be able to leave a family office?
Exit is always a tricky subject, because so much depends on the specifics of the family or the family business or the family structures. If you have an operating business together where people have ownership shares, exit can be really tricky, because often these families have rules that you can’t sell your shares to an outsider, which makes perfect sense. So, you’re left either stuck or illiquid, or you have to sell to the family itself. Hopefully you have buy/sell agreements to make it fair.
In family office systems where there isn’t an operating business, exit usually means, ‘I don’t want to use this family office anymore,’ or ‘I don’t want to use this trustee anymore.’ In either scenario, ultimately, you don’t want people forced to be in a system they don’t want to be in. You can try for a while. But if someone’s really unhappy in the family business or the family office or the family trustee, they are going to eventually find a way out. So, my view is, build them really clear exit ramps so that there doesn’t have to be a whole lot of conflict about it. It’s just, ‘This is how you take your chips and go home, or go somewhere else, and this is how you stay.’ Then make your system good enough that no one wants to leave.
People have asked me, especially with private trust companies, ‘How do you make it so they can’t take their trusts and go somewhere else?’ And there are things you can do. But very, very few judges are going to force a beneficiary to stay with a trustee that they despise or don’t trust. So, the question isn’t, ‘Can they get out?’ The question is, ‘How much damage do they do on the way out? And can the system, whatever it is — a trust company, a family office — be good enough that they don’t want to leave?’ So they think, ‘You can go to a commercial trustee or to a multifamily office, but why would you? You’ve got much better services and care here.’
