Conventional wisdom has it that the first generation acquires the wealth, the second enjoys it and the third loses it.
This is true in as many as nine out of ten families and has been the case throughout history, says Rodney Zeeb, co-founder and chief executive officer of The Heritage Institute and a man on a mission to change that statistic.
The goal of the Portland, Ore.-based institute is to teach wealthy families how to ensure the continued health of the family's finances and its unity through future generations. It is one of a number of firms that now offer wealth transfer consulting services designed to strengthen family relationships, pass on personal values and help heirs learn how to handle an inheritance.
Heritage grew out of a personal experience Zeeb had as an estate planning attorney: Soon after one of his clients died, one son's business fell into bankruptcy and the other son, who was Zeeb's friend, "drank himself to death." This changed Zeeb's perspective on his work.
"I didn't do all this planning just to end up killing my friend," Zeeb recalls thinking at the time. "What did I do wrong?'"
While working on a better plan for transferring wealth, Zeeb met Perry Cochell, who was researching the same issue. The two devised a program, then co-founded The Heritage Institute in 2003. They wrote a book about their research and their method called Beating the Midas Curse in 2005.
Zeeb says the reason most wealthy families wind up imploding has little to do with poor financial planning or recessionary economies. Instead, the family unit and its riches often disintegrate because heirs have not been prepared to deal with their inheritances and the emotional issues that accompany them.
The story of the Vanderbilts is a perfect example of what can happen. Cornelius Vanderbilt was a shipping tycoon and railroad baron who, at his death in 1877, was one of the richest men in the world: His estate was worth $100 million, the equivalent of some $2 billion today. He gave little to charity, leaving most of his money to son William and the rest to his wife and daughters. Less than 50 years later, one of Vanderbilt's descendants died penniless. By 1947, all ten Vanderbilt mansions on Fifth Avenue in New York had been torn down. And at the first family reunion in 1973, there were no millionaires.
Many wealthy people don't realize the importance of preparing their children both realistically and emotionally to handle an inheritance, says Zeeb, citing studies that bear this out. In one study, Family Office Exchange, which provides professional advising services to families, asked clients what they thought were the biggest risks they faced. The vast majority cited poor planning and investments, market fluctuations and taxes. Less than one in ten named family dynamics as a potential problem. But when Roy Williams and Vic Priesser, researchers and family coaches with The Williams Group, asked families that lost their wealth what they had done wrong, only 3% cited poor investment strategies or the market. Six in ten blamed their losses on a lack of communication and trust within the family and a quarter answered that unprepared heirs led to their downfall.
Zeeb says a lack of knowledge about family history and little or no appreciation either of how the wealth was acquired or what is necessary to maintain it contribute to a lack of preparation for inheritance in many families.
To address these issues, the institute teaches "The Heritage Process," which is as necessary as financial planning and estate planning to the survival of wealth through future generations, according to Zeeb.
Through this process, which usually takes between six and nine months, family members learn what it takes to be a successful family. They meet to share their stories and values. They learn to communicate effectively and elders work to mentor the youngest generation in how to handle money. Simply willing a child a sum of money or setting up a trust fund for him does not mean he will appreciate it and know how to manage it when he comes of age or inherits it.
As part of the process, a family sets up a family fund, or bank, whose funds in part are used to teach children how to manage money. These can be hard lessons with consequences that the family must agree to accept, but children often learn best from the mistakes they make. One family's lesson involved giving the children a certain amount of money to invest during the year, with the proceeds used to pay for a weeklong family vacation. The first year, the children invested in penny stocks and lost most of the money, so they wound up camping because it's all they could afford. The next year, they put all the money into a savings account and didn't lose any, but still didn't have enough for more than a basic vacation. It took a few years, but the children have learned important lessons, both involving how to invest and family life.
"When [the father] asked the oldest child what he learned, he said, 'Other people in the family are impacted by the decisions I make. You and mom had to go camping, too,'" Zeeb says in retelling the story. "It's OK for [children] to make mistakes in small, controlled amounts. But that's challenging for us as parents to allow."
In another case, the elders in the family gave their children money each year to donate to charity. They brought their grant requests to the family committee-parents and grandparents-for approval. When they started, the children were ages 8 and 10. Within a couple of years, they were doing detailed research and had developed very sophisticated reasoning. One child told the committee he had nixed his previously preferred charity because, as Zeeb relates it, "they keep way more than they give to people; they are supposed to give that money away." Instead, he chose an organization that used most or all of the donations it gets for its cause, providing a greater benefit to those in need.
"It's amazing what children will do when you give them a challenge," Zeeb says.
In order to really succeed, the process has to be about more than money, he says. The family history is a key part of the process. Heritage staff spends hours talking to elders to hear their stories and put the information into a family history book. Keeping this updated with new stories and life lessons is key. Zeeb says he worked with one family in which the eldest members came to Oregon via the Oregon Trail. When he asked the youngest children what they wanted to learn from the process, they said they wanted to find out about their great grandparents' experiences travelling on the trail.
"To get those stories down in a format that is going to last, even if that's all a family does, it has value," Zeeb says.
One generation often doesn't realize what the other values.
The Allianz American Legacy Study conducted in 2005 found that 39% of elders believed it was very important for them to pass on a financial inheritance to their children, but only 10% of the heirs judged receiving money or real estate from their parents to be very important. By contrast, 77% of the children, all part of the baby boom generation, said receiving their parents' values and life lessons was very important to them.
Zeeb says that while it may take an enticement to get heirs to attend the first family meeting-telling them their inheritance will be discussed-they won't keep coming, or learn anything from the process, if they are not willing participants. So Heritage staff tries to gauge the interests of the younger generations-children, grandchildren, nieces and nephews-to find out their interests and what they hope to learn.
"We see a lot of instances where the children walk into the room, their arms crossed, legs crossed; they sit leaning back in their chairs," Zeeb says. "We have to spend time with the kids, see what is it they want out of the process."
Holding regular meetings, at least once a year, is often crucial to creating and keeping a sense of family unity. These meetings should be fun, provide family members with opportunities to grow and conduct family business. Heritage staff guides a family through the process the first time, conducting initial interviews, preparing the family history, conducting the first few meetings. Then the family members themselves need to continue to meet to keep communicating if the family will be successful at staying together and keeping its wealth in tact. Zeeb says it takes as many as five years before the process becomes ingrained.
The meetings should be conducted with adult-to-adult communication, which can be difficult both for adult children, when speaking to their parents, and for the parents, when addressing their adult children. Sometimes neither wants to relinquish the traditional roles of parent and child.
Like maintaining a successful business, keeping a thriving family together takes a lot of work, Zeeb says. But it is also well worth the effort.
Zeeb practices what he preaches and has passed down his planning wisdom and business to his son Ryan, who is now the president of The Heritage Institute. Both father and son continue to work with a limited number of families directly on the process. They also teach professionals across the country how to implement the program. Most of their clients are in their 60s and 70s, with children in their 30s and 40s.
One of these families is Don and Maureen Roth of Fort Wayne, Ind. The Roths have no children of their own, but decided for their 50th anniversary to start the Heritage Process with their extended families, including 17 nieces and nephews plus their spouses, to help prepare them for their inheritances and roles in the family business, Sauder Woodworking Co.
Now celebrating its 75th year of business, Sauder is currently under third-generation family ownership. Don Roth had read Beating the Midas Curse and the statement that wealth rarely survives three generations had stuck with him. He says he was pleasantly surprised at the initial results of the first meeting, particularly the way the younger generation viewed the process.
"Number one, they wanted to hear our story," Roth says. "Number two, they wanted to know our values … They said, 'Thanks for talking to us.'"
A highlight of the anniversary reunion was a talk by Myrl Sauder, who is the son of founder Erie Sauder and worked in engineering research and development in the company. Myrl Sauder told the story of the company's birth and growth into one of the nation's largest furniture manufacturers. And, according to Roth, what could prove critical to the future strength of the company is that Sauder's talk provided more than family history.
"He absolutely transfixed that group," Roth recalls. "It's a very, very interesting story, a fun story, that stresses so many good values. If those aren't articulated to the younger generation, they'll lose them."
