Financial Planning

Sustaining family wealth across multiple generations is difficult. So difficult, in fact, that there are numerous proverbs from cultures around the world that describe the problem: “Shirtsleeves to shirtsleeves in three generations” (U.S.), “from barn stall to barn stall in three generations” (Italy), and “wealth will not go beyond three generations” (China). In Scotland, the old saying is, “The father buys, the son builds, the grandchild sells, and his son begs.”

These proverbs reflect the common global experience that family wealth often is exhausted within three generations. The failure to maintain wealth can be due to various business and economic conditions (e.g., market risk, capital risk, interest rate risk), poor management and vision, failure to train and mentor second and third generation business owners, sudden death, lack of succession and estate planning, taxes, and “affluenza” – that general malaise that may take hold in the third and fourth generation due to the lack of fulfilling, purposeful activity which is necessary to develop self-esteem, self-worth, motivation, self-confidence, and a personal identity.

While it is natural to share in the bounty of success, sharing without preparing the third and fourth generations for wealth is likely to be the undoing of that wealth. In fact, one study suggests that 60% of the failures of multi-generational wealth transfer resulted from lack of communication and trust (as opposed to 3% resulting from tax or financial planning mistakes)*. In many cases, the first and second generations are identified by and gain meaning from the activity of accumulating wealth whether it is in a business or as a professional. The third and fourth generations may have a difficult time fitting in or finding “their own way”. Unfortunately, these differences may create a communication divide that exacerbates the wealth transfer problem.

So much of wealth transfer planning is focused on preparing the money for the transfer, (i.e., trust and estate planning, tax planning, prenuptial agreements, etc.). These preparations are essentially focused on what will happen to the wealth, not the person who is inheriting and perhaps ultimately managing the wealth.

One technique to address family wealth succession is to apply investment management and family wealth management planning as a lever to initiate the family legacy and education discussion, which is essential to successful multi-generational wealth transfer. Engaging in a discussion about family wealth succession should cover these three essential areas:

Investment Management

• Investor goals, time horizon, and risk tolerance
• Investment strategies and asset allocation
• Active management and monitoring

Wealth Management Planning

• Lifetime, retirement, and estate planning
• Selection of trustees
• Asset protection
• Business succession planning
• Insurance analysis
• Tax analysis
• Implementation and active monitoring

Family Legacy Education and Planning

• Family education in financial literacy, investment management, and wealth planning
• Family history and values
• Charitable activities and philanthropy
• Family communication
• Family governance and understanding fiduciary roles

Investment management and wealth management planning services are what most people with sizable wealth will likely pursue with the help of professionals to ensure that their financial situation is in good order. However, the third leg of the stool, family legacy education and planning, is essential and is often the most difficult to incorporate into family wealth succession planning. One technique to begin this discussion is to include the second and third generations in the investment management and wealth planning discussions. In many ways, these discussions help to discern and crystallize the family legacy planning for the family. By incorporating all three techniques, the goal is to develop and implement a holistic family wealth succession plan which empowers the next generation rather than assuming (or hoping) that they will be ready to “take the reins” when the assets are eventually inherited.

*Source: Forbes.