Michelle Christison knows what successful family communication looks like when it comes to wealth transfer issues. A potential client approached her with a problem — she had money she didn’t need. The woman had inherited $2.5 million when her parents died, but she already had a healthy income of her own. She wanted Christison to advise her on how to invest it responsibly so she could support causes she believed in. Later, the client’s brother, heir to the same amount, also became a client and wanted similar advice. He’d been independently successful and didn’t need his inheritance.
Christison was struck by what their parents had achieved separate from amassing a fortune. “They raised responsible people who work hard, budget, aren’t out spending for instant gratification and are conscientious about the meaning of their money,” says Christison, co-founder of Bloom Financial Solutions, a multi-family office that works with high-net-worth families to achieve their goals for their money across generations.
But the siblings’ story is the exception. Many families with fortunes don’t succeed in transmitting the values that made them wealthy in the first place or in communicating goals for their wealth. In a 2012 survey by U.S. Trust, nearly half of respondents older than age 67 said they didn’t talk to the next generation about money because they were brought up to believe discussions about wealth were inappropriate.
That stoic silence usually backfires. Experts who work with high-net-worth families say maintaining wealth across generations requires more than sound money management. The more important task is addressing the value of that money, or better communicating what the family wants to achieve with its good fortune over generations.
WITHOUT A PLAN, FAMILY WEALTH DISAPPEARS
The truth that family nest eggs tend to vanish in three generations spans time and cultures. Americans express it in the adage “shirtsleeves to shirtsleeves,” the Irish call it “clogs to clogs,” and the Japanese say “rice paddy to rice paddy.” The Biblical story of the prodigal son is about an heir who’s ill prepared for sudden wealth.
The saying survives because it reflects experience. A 20-year study of 3,250 high-net-worth families by the Institute for Preparing Heirs, which trains wealth advisors, found that in 70 percent of these clans, most of the family’s wealth was gone by the second generation. By the third generation, the wealth had vanished for 90 percent of families. The specific reasons vary —heirs overspend, hire untrustworthy advisors, pick up addictions and expensive hobbies and make a variety of other poor decisions, says Christison. But almost all can be traced back to a lack of shared goals for the money.
Family businesses suffer similar outcomes. More than 80 percent fail by the third generation, says Christopher Glassman of Leadership One, which specializes in business transitions. Most of the time, they collapse because the owners haven’t developed an intergenerational family vision for the business or put together a succession plan, he says. Indeed, a 2008 U.S. Trust survey found that only one third of family business owners have a succession plan.
Those fates don’t have to rule the day. Successful families get help in doing two kinds of planning. “Above-the-line” thinking pushes the family to create a sense of mission for their wealth, says Colin Grahl of wealth advisory firm Westlake, Grahl, and Glover in Granite Bay. And “below the line” planning creates and implements a strategy for turning that mission into reality.
CONNECT MONEY AND MEANING
Grahl compares above-the-line planning to designing a house before building. It’s the process of talking through the dreams and the vision. “The more time we spend above the line, the easier the below-the-line tasks are,” he says. High-net-worth families typically use one or more skilled facilitators to guide them through a process of developing a mission and vision for their money. The process can take a few meetings or a few years, depending on the facilitator, the level of family wealth and the family’s wishes.
Before convening the clan, the facilitator may meet with individuals. Learning the personal goals of family members helps the advisor identify issues that might arise in the larger group, says Tony Cooper of Davis-based Shirlaws business coaching. In other cases, the advisor meets initially with the first generation alone.
The bigger group then meets to identify the family’s mission, vision and goals. Issues they tackle may include how much money the first generation wants to pass down and when, whether and how to give philanthropically, the purpose of the family’s wealth and how individual members’ life goals fit with that purpose. These meetings also are designed to strengthen family culture by letting the older generation tell stories about how the family’s wealth came about, for example. And Christison emphasizes the importance of getting buy-in from younger generations by welcoming their ideas and questions.
The process also might include an educational component. Cooper says his firm provides training designed to ensure that, as age appropriate, children learn how the financial world works, how to set attainable goals for themselves, and how to develop a process for making joint decisions and handling conflict.
All of that face time brings about an end product — a shared understanding of what the family wants the wealth to achieve.
CREATE AND LAUNCH AN IMPLEMENTATION PLAN
The below-the-line phase involves crafting a blueprint that turns family goals into reality, and here the family or advisor typically brings in a team of experts. The team may include an investment specialist, accountant, estate planning attorney, insurance professionals and business coach, as appropriate. If the family has collections like art or horses, they also should bring in a specialized expert or appraiser, says Suzy Peterfriend Ross, CEO of Family Legacy Advisory Services and author of “Mommy, Are We Rich?” Christison also advises families to include a “financial quarterback” who oversees the team’s performance and whose compensation doesn’t depend on the purchase of specific financial products.
While firms work differently, Grahl’s first task is to assess the family’s financial position. The team reviews everything: investments, business and real estate assets, debts, existing trust and estate planning documents, taxes, insurance coverage and more. Next they discuss cash flow needs, Grahl says. These arise directly from the family’s desired lifestyle they want and what that costs. That means not just the parents’ expenses, but “whomever the parents write checks for.”
Sound numbers in hand, the team then puts together a tailored implementation strategy that, at minimum, includes estate and investment plan components. The estate plan ensures that assets are properly protected with trusts and insurance and titles, says Jim McCarthy of investment firm Legacy Capital Management Inc. in Roseville. And the investment plan, in addition to reflecting the family’s goals, should usually reduce the number of entities and accounts to cut money management fees, he says.
The team typically also helps the family set up an infrastructure to oversee implementation. The family might, for example, set up committees that do everything from monitoring the estate and investment plans to taking charge of family celebrations, says Cooper.
If a family business is involved, implementation also needs to address a succession plan and a governance structure. The succession plan is designed to answer key questions if children want to stay in the business, says Glassman: Are they the right people to manage it? If not, can someone serve as a mentor until the children are ready? And the governance structure might take the form of a family council, says Mark Ingram of Continuity Partners, a Sacramento-based multi-family office. The council establishes roles and responsibilities for family members, monitors the state of the business, implements the family’s employment policy (whether and how family members will work in the business) and determines how ownership will be held by family members not involved.
Once a plan is launched, the expert team meets with the family regularly to monitor how the plan is working and update its components as needed.
Whatever system the family sets up with its advisors, families need to stick to it. Charles Lowenhaupt, a third-generation advisor to high-net-worth families and author of the 2011 book “Freedom from Wealth” says, “It’s the process that takes out the human frailties.”
The biggest mistake people make is waiting too long to start working with professionals on a plan, says Jeb Burton of Sacramento’s Burton Law Firm, which handles estate, business and tax issues for high-net-worth families. “The longer you push it out, the less wiggle room you have.”