Wealth transfer requires trust and communication. When we hear the family names of Rockefeller, Vanderbilt or Kennedy, we usually associate them with vast amounts of wealth. We may think of their ancestors, who worked hard, built empires and were rewarded with wealth beyond imagination. As these titans of business and industry passed on, so did their wealth, often to the next generation.
THE CHALLENGE OF WEALTH TRANSFER
Effective wealth transfer has become increasingly important. The Center on Wealth and Philanthropy confirms a projected wealth transfer of at least $41 trillion in the United States by the year 2052. Clearly, more and more individuals are becoming wealthy. Despite the near-universal envy of the rich, advisors are quick to point out that wealth and its transfer have problems. Much like a two-edged sword, money’s power can be constructive or destructive. According to a Chinese adage, “Wealth never survives three generations.” So families who have long-term wealth preservation as their goal are looking for strategies and advisors to assist them.
And rightfully so. Wealth coaches Roy Williams and Vic Preisser, who conducted over 3,000 surveys and interviews with wealthy families over a 10-year period, found that 70 percent of wealth transfers failed from one generation to the next. Interestingly, only 3 percent were caused from poor investments or lack of estate planning. In most cases, the reason for failure was deficiency of trust and communication among family members, leading to poor preparation of heirs.
THE THREE FORMS OF FAMILY WEALTH
Every family owns three forms of capital — financial capital, human capital, (the family members themselves) and intellectual capital (the family’s knowledge). Because these three forms of capital are intertwined, the common goal is working together for the success of each individual and the family as a whole. This goal is enhanced by the knowledge each member cultivates. In her book, The Dilemmas of Family Wealth, Judy Martel points out that there is first a wealth creator whose intellect breeds the success that amasses the financial capital. From there it is the human capital of the family that must continue to be developed to sustain the unity and harmony leading to the acquisition of more intellectual capital. This cycle helps the family grow and retain its financial wealth. She further says, “If the family fails to sustain its human and intellectual capital, the financial capital usually plummets.”
TRANSITION —THINGS FAMILIES NEED TO CONSIDER
As a starting point for families in determining how ready they are to transfer wealth to the next generation, wealth consultants Williams and Preisser have developed a 10-item checklist for wealth transition from their book, Preparing Heirs. From Williams’ research he found that the more items families answered “yes” to, the better prepared they were to transfer the family fortune. This questionnaire is more of an assessment that can be used in devising a plan for the family as they move forward.
THE ASSESSMENT QUESTIONNAIRE:
1. Our family has a mission statement that spells out the overall purpose of our wealth.
2. The entire family participates in most important decisions, such as defining a mission for our wealth.
3. All family heirs have the option of participating in the management of the family’s assets.
4. Heirs understand their future roles, have “bought into” those roles and look forward to performing in those roles.
5. Heirs have actually reviewed the family’s estate plans and documents.
6. Our current wills, trusts and other documents make most asset distributions based on heir’s readiness, not heir’s age.
7. Our family mission includes creating incentives and opportunities for our heirs.
8. Our younger children are encouraged to participate in our family’s philanthropic grant decisions.
9. Our family considers family unity to be just as important as family financial strength.
10. We communicate well throughout our family and regularly meet as a family to discuss issues and changes.
PRESERVING THE FAMILY HISTORY
Families with wealth need to be as familiar with their history as they are with cherished photographs and stories of their ancestors. Many times the wealth was created as a result of a family business. Once the family sells the business, succeeding generations will not know the family history unless it is chronicled. The importance of the family history, as Martel points out, is that it serves as an anchor for the family — the story of the founder that provided the financial resources for the family to fulfill its legacy. Inheritors need to understand where the wealth came from and what the creator achieved in order to set the family on its path. The preservation of the family history serves as a connection for succeeding generations, who will gain insight and understanding into the struggles of the patriarch and matriarch in wealth building and the vision they held for their offspring.
Martel cautions that once the family business is sold, it is easy for the family to fracture into individual units,
each with a share of the pot, unless the history is preserved. It is only the families who have a commitment to a shared vision that will create conditions that allow members of succeeding generations to feel connected to each other even if they are not living geographically close to other family members.
GUIDING, GOVERNING AND PRESERVING THE FAMILY TO CREATE THEIR LEGACY
As families learn to communicate and establish their shared values, usually through family meetings, the mission statement emerges. This written statement outlines the way in which the family will live its values and includes commitments and priorities of the family. This statement often includes an action plan for ways to handle family situations and deal with differences that will arise. By creating a living document, families can thrive, survive and create a lasting legacy through mutual agreement. Just as in the story of King Midas of old, the gold that was created can be a blessing or a curse. Each family will decide the outcome for themselves.
Written by MICHELLE ONODA