“Things ain’t what they used to be and never were.”
—Will Rogers
Many wealth creators and business owners share the dream of perpetuating family relationships and family wealth for many generations to come. That’s no easy task. Despite numerous structures, plans and processes designed to ensure the sustainability of a family’s wealth, many estate plans and business succession plans fail to achieve a family’s desired outcomes. So in this inaugural column of an ongoing series, we will address the myriad factors that play into successfully maintaining wealth across generations.
We define “family wealth continuity” as success at preserving both a family’s material assets—such as a family business, a family foundation or other financial assets—and good family relationships. It is certainly possible to create structures that are likely with a high degree of probability to preserve assets over time—they can be locked up in trusts, family involvement can be minimized and long-term growth can be emphasized without regard for short-term benefits to family members. This approach may be good for the assets, but it’s probably not good for the family—they may see no purpose in spending time together, they may lose “positive feelings” about their legacy and, indeed, they may even come to resent it. On the other hand, families might do everything necessary to ensure peace and harmony among family members and to secure good relationships across generations, but an emphasis on “peace at all costs” can prevent relevant matters from being discussed openly, leading to a breakdown of both wealth continuity plans and family relationships. Our intention in this and subsequent columns is to draw from our professional experience, available research and other resources to explore and advise on the best approaches for families, wealth creators and their advisors who wish to preserve family assets and good family relationships for future generations.
A Case Study
An entrepreneur in his late 60s approached one of us some time ago, requesting our advice on establishing a family office. He and his sister had inherited significant wealth from their parents and he was intent on keeping their money invested and growing together and on securing the entire family as active partners. He viewed a family office as a vehicle for achieving both goals. Moreover, he thought his 35-year-old son would be a natural leader of the family office.
We then had a discussion with him about his plans for his son:
“This sounds like a good idea. What is your son doing now?”
“Well, he’s unemployed. But he’s studying for his MBA.”
“Oh. How much longer until he graduates?”
“Well he hasn’t quite started yet.”
“What does your sister think of this plan?”
“I’m not sure.”
“Why not?”
“Well we had an argument a year ago and we haven’t spoken since.”
Preserving family and wealth across generations must start with a dream—a dream of continuity. But that dream must not be a fantasy—it must be rooted in reality. This entrepreneur we described above dreamed of wealth continuity, but he lived in a fantasy world: He wanted to preserve something that may never have existed!
While a family office might have been an excellent structure for preserving this family’s wealth and keeping the family together, the absence of any meaningful communication between the two principals and the lack of preparation of the anointed leader of the family office are clear indications that this family’s dream of wealth continuity may not be properly rooted in reality. This is not an uncommon scenario: Wealth creators and family members dream of continuity and are frequently advised to create structures such as estate plans, dynasty trusts, family offices or family foundations, but the family itself—the family culture, history or capabilities—may not support the financial structures. This vignette illustrates the need for a fundamental first step in developing a plan for family wealth continuity: Deciding whether continuity across generations makes sense for the family.
Here are a few questions that should be addressed in considering the viability of a wealth continuity plan for your client family:
The Purpose Of Wealth?
Preserving wealth and family relationships across generations is a noble undertaking, but it is not necessarily the only or the best undertaking for a family. Supporting future generations is one possible purpose of a family’s wealth, but it’s not the only one. And even if supporting future generations is the purpose, there are different ways to get there.
A recent article noted that an inheritance of $1,000 could be made to last in perpetuity, with annual distributions of $100 a year, rather than being spent all at once. “Given the choice … a lot of grandparents would prefer that scenario compared to the check and oblivion,” Scott Martin wrote on thetrustadvisor.com website in November.
Although these are modest sums, the implication is clear: Money that lasts a lifetime is preferable to a one-time gift. That may be true in some or even many scenarios, but is that always the case? Is a budding scientist really better off with annual $100 distributions than having the capacity to purchase a $1,000 microscope? Indeed, a one-time gift of a microscope to a young beneficiary might one day result in the creation of far more wealth than yearly distributions—and bring far greater satisfaction to the life of the beneficiary.
There are no “one-size-fits-all” solutions when it comes to family wealth continuity. If you are planning to perpetuate wealth over generations, it’s a good idea to have a deep understanding of the purpose and goals of that plan and to be able to communicate them to the family members affected.
Whose Dream Is It?
If wealth continuity is only one person’s dream, then there is relatively little likelihood of the dream persisting over time.
The owner of a $500 million company approached us some time ago and asked whether we might assist with business succession planning.
But there was a problem he needed to discuss with us:
“Our company has been a wonderful success. Our customers and employees love us,” he said. “Our family [members] have grown rich both financially and spiritually and I want this to continue after I am gone. I’ve been planning and preparing and dreaming for years that my oldest son will take over after me. He is terrific.”
“That sounds great. What’s the problem?”
“He just quit to become an investment banker.”
The son had his own dream, a fact the father ignored or was unaware of. Wealth continuity is most likely to be successful if the dream is shared by other family members of multiple generations.
Here are a few ways to share the wealth continuity dream:
• Have regular and open communication about individual and family goal.
• Share stories about the origins of family wealth.
• Ask family members and inheritors about their dreams and wishes for the future.
• Identify common areas of interest where the family wealth can be deployed through philanthropic giving, investment, etc.
Giving Family Members Choices
We worked with a fourth-generation, multibillion-dollar family business where multiple trusts had been created providing distributions to five cousins. The distributions were held in individual investment accounts and the family patriarch made it clear that the only acceptable investment for the cousins was in the family business. The cousins were responsible beneficiaries and were concerned about concentration in a single stock. However, they understood their grandfather’s view of diversification and they were reluctant to raise the issue with him personally or in family meetings. Their dilemma led to significant unrest in the family.
When, finally, family advisors encouraged the cousins to put this issue on the agenda at a family meeting, grandfather surprised everyone by agreeing to the principle of diversification! Perhaps not surprisingly, once the cousins knew they had a choice, the issue went away and they all continued to purchase stock in the family company. However, by reaching an agreement with regard to a wealth management approach, the family was able to arrive at a joint purpose that included multiple generations. Collaborating in managing financial assets strengthened the family’s relationships. All family members shared ownership in the decision, generating a feeling that all contributions were valued and respected. This increased the likelihood that the family’s relationships and financial assets would be preserved.
David Lansky, Ph.D., is a principal consultant with the Family Business Consulting Group Inc. His new book, “Family Wealth Continuity: Building a Foundation for the Future,” is available at www.thefbcg.com.
