by Frazer Rice
In the second and third generation of wealth, each person will have different interests. Not everyone will be entrepreneurial or financially motivated, but success may come in different forms. One may choose to be a social worker and advance the human condition through their work. If that’s a respected family value (and I think it should be), it should be as equally valid an endeavor as being a venture capitalist even if it doesn’t generate more financial wealth for the family. Again, conflicts here will be mitigated by a clear understanding of the values behind the legacy wealth and a clear understanding of what needs to happen for the wealth to be maintained and grown.
Understanding Strengths and Weaknesses
Similar to a coach understanding the strengths and weaknesses of each player on a team and building a game plan around them, there’s a benefit to understanding the strengths and weaknesses of each beneficiary involved in future decision-making. If your son is terrific with numbers and interested in investments, and your daughter is empathetic and empowered with communication skills, there’s an advantage to understanding how those two skillsets can work together and lead to a better outcome than if each one is managing the wealth decisions independently. The son who is numerically talented may not be sufficiently empathetic toward the siblings affected by the wealth, and the sister could help greatly in the facilitation of communication and agreeable decision-making.
While the empathetic person may understand everyone’s feelings and needs and how to distribute the wealth accordingly, they may run the risk of spending the wealth too quickly. That’s where the expertise of the financially savvy person can be tapped, and the two different strengths can be combined and used for the collective benefit of the entire family.
Structuring Teamwork
To prevent family conflict and poor decision-making, it’s important to have a structure around your wealth discussions and decisions. Whether it’s a quarterly or annual meeting, it’s good to revisit issues, learn from others’ experiences, and communicate regularly. This necessitates a procedural and organized approach to decision-making and gently forces the heirs to communicate with each other. It may not always be a fun meeting, but it will accomplish a greater good in maintaining wealth if each participant feels heard and understood.
Regular meetings also provide the opportunity for learning. To earn and retain buy-in from all constituencies involved, everyone needs to understand the decisions being made around the wealth. This will help to build a sense of community toward problem-solving in the future. The famous boxer Mike Tyson once said that everyone has a plan until they get punched in the face. When that punch in the face comes—and it will come—that sense of community and family-wide buy-in will be critically valuable.
Stressful challenges may not emerge until the death of the first generation or until there’s a significant change in the family’s financial situation. Maybe the family business tanks, booms, or is acquired. Prior work and prior communication will bear fruit in those challenging situations.
It helps when everybody is able to access the same toolbox of knowledge in the management of wealth. This allows for more efficient administration and understanding when it’s time to make decisions. In making group decisions, you’ll be seeking a consensus among people who, while from the same family, may have different opinions based on different experiences in life and work.
When a high level of financial understanding is shared by all participants, their differing experiences and opinions can be used to make better decisions, instead of becoming as unproductive as sheep ramming their heads against each other. It’s difficult to have a conversation regarding wealth decisions if some of the participants don’t know the difference between stocks and bonds, or don’t understand why it’s not prudent to invest half of the family wealth in one volatile penny stock. A lack of shared financial knowledge can lead to unproductive debates with comments such as, “I heard from a friend at a cocktail party that we should be buying pork bellies!” or, “We should put half of our assets into bitcoin.”
If it’s not possible to get everyone up to the same level of education (or even get everyone in the same room), it’s a good idea to ensure that someone in the room represents the interests of those family members who are not up to the same speed. When everyone is represented, the differing opinions of family members can be productively used in decision-making, as opposed to becoming counterproductive obstacles.
Practicing Teamwork: Vacations
In the 2007 New York Times article, “Teaching Teamwork, but With Real Money,” there’s a great example of creating an experience to help children work together toward making intelligent decisions about money. The experiment gives children an amount of money to manage, with the goal of growing their investments to fund the next family vacation. If the investments did well, they would enjoy a more expensive option such as Disney World. If the gains were small, they would take a smaller trip. If the fund lost money, they would go on an inexpensive local trip.
This exercise is valuable for three different reasons: it gives the children experience with investing, forces them to work together to make decisions, and provides an environment of accountability for their investment decisions. They learn, collaborate, and experience the ramifications of their decisions in a small and safe environment. That’s excellent preparation for the much larger decisions of the future.
Family Foundations
A family foundation has similar benefits and precepts. The money involved in operating a family foundation is not the same as money required for living expenses, and foundations currently require 5 percent of assets to be paid out to qualified charitable groups each year. Therefore, it’s a solid environment for families to work together to generate the investment returns necessary to make the required payouts without losing the principal of the original investment.
A foundation is an excellent environment for people to learn how money and markets work, and it’s also a powerful way for family members to understand what values and causes are important to each other. A family foundation helps incorporate the values of the first generation of wealth, while identifying the individual interests and values of subsequent generations.
If you want to set up a foundation and have multiple family members managing it, a good starting point would be an investment of a million dollars or more. With anything less than that, you’ll be spending a significant percentage of your investment returns on advisor fees for investment management, accounting, and other necessary services.
If you’d like to simulate a family foundation before investing millions of dollars, it could be done on a smaller level, similar to the family vacation idea. You could give your children or family members a certain amount of money (or votes) and ask them to decide which charity should receive it. They’ll then need to work together and learn how to make that decision as a team.
Family Banks
Family banks can also offer similar benefits in the collaborative management and growth of wealth. Certain family members share stewardship over a designated portion of the family wealth and operate like a bank. A committee is formed to create structure around the release of money, and family members will need to apply to the bank committee to access the money for business investments or other projects.
I think this process can be helpful and instructive, especially for the third generation of wealth. When starting a business, it’s good for entrepreneurs to go through the exercise of putting together a business plan. It helps in learning to articulate the business idea and vision, the plan for execution, and the plan for garnering resources. The process of earning approval from the family bank increases the likelihood of success for the business, and it’s an excellent experience-builder for all family members who go through the exercise even if the bank doesn’t go along with the plan.
Additionally, it helps families create a history of success and helps to fight off the “shirtsleeves-to-shi
rtsleeves” phenomenon. Instead of passively spending down the legacy wealth, the third generation learns to invest the money and build enterprises that preserve and grow the wealth, oftentimes for the benefit of the whole family. This success expands into additional opportunities for family members to share entrepreneurial experiences and investments with each other.
You Can’t Predict Everything
No matter what your situation is, it’s important to think about your legacy as a living, breathing, evolving plan. Circumstances can change, and you’re allowed to change your mind. Against that backdrop, you do the best you can initially, then regularly review what you’ve put in place. As life intervenes and different eventualities pop up, you do your best to deal with them. There is no perfect estate plan for any person or family.
You shouldn’t expect one plan to solve for every contingency going forward. You can’t plan for every eventuality. There may be a divorce in the family, an unexpected death, a bankruptcy, or any type of severe emergency that alters your plan. You simply harken back to your principles, values, and goals; analyze how they’re affected by the particular fact pattern of the eventuality; and bring in the expertise needed to work through that problem and create the next iteration of your legacy plan.
For large families, the complexity increases over time with the introduction of more people into the situation, whether by birth or marriage. Families will have different needs based on the number of children they have and whether special needs arise. Managing legacy wealth is about the management of people. Success relies on the ability of the leaders and decision-makers in the family to understand and communicate about each person’s strengths and weaknesses and the interpersonal dynamics of how they interact with each other.
With the birth of each child into the family, you should make sure to review what your wealth can and cannot support. I use a back-of-the-envelope estimated calculation that the cost of providing for each child can exceed a million dollars over their lifetime (and that might be low!). Kids and grandkids can deplete wealth quickly, especially if you’re paying for their education, weddings, houses, and other expenses. Therefore, it’s a good idea to review your plan with the birth of each child.
For wealth intended to provide for multiple generations, long-term planning should be structured with flexibility. You’ll want to provide some discipline around how the wealth can be accessed but also provide the flexibility for the future situations that are hard to envision. From college tuition to healthcare expenses, future needs can change quickly.
From a healthcare perspective, people are living longer, and healthcare expenses are becoming more acute in the later stages of life. According to the 2009 article “The Cost of Dying” on CBSNews.com, 75 percent of Americans spend their final days in a hospital or nursing home. One doctor estimated that up to 20 percent of patients spend their final days in an intensive care unit, which can cost upward of $10,000 per day. Assisted living care expenses could also rise further in the future, and you could find yourself spending $200,000 annually for assisted care and another $100,000 per year on treatment and medication. That’s a burden you might not want to shift to your children.
The lack of planning can lead to financial carnage. Unintended consequences can arise if these types of issues have not been thought through. According to a May 2016 Gallup poll, 56 percent of Americans do not have a will in place. Dying without a will can lead to chaos, especially if you have business interests and partnerships. If your business partner dies without the proper planning in place, then you’ll be in business with their spouse as your partner. Not only is that person the reason your business partner never wanted to go home from work, but the spouse also knows nothing about your business. This could destroy the value of the business going forward.
There are other horrible consequences of dying with no will in place. Each state has different defaults as to where assets go, and there may be unintended consequences and extremely bruised feelings if your wealth doesn’t have a sufficient will, trust, or overall structure in place. Fighting and disagreements between family members can deplete the legacy wealth intended for them, especially if lawyers need to be hired to fight for each person’s interest. That’s not a good use of money, and it’s avoidable with some forethought and planning.
The Storm Is Gathering Force
It’s starting to get gusty out there. Before this storm arrives upon your family’s shoreline, let’s check in with our organized client and answer the questions she posed at the beginning of the chapter, regarding how to best prepare for her hurricane of wealth:
What can we do to protect our lifestyle in retirement?
How do we protect our wealth for our kids? And protect our kids from our money?
How do we educate our kids on the ins and outs of money?
How do we get our kids interested in our legacy and philanthropy?
When is it appropriate to get our kids involved with our wealth?
Is there anything else we should be thinking and talking about?
When it comes to protecting your wealth and providing a healthy and lasting form of legacy wealth for your children, it’s crucial to establish the values that are important to you. Write those down and use them as guiding principles in understanding what your money can and cannot do for you and your children. Use those values and principles to establish the scope of what you’d like to accomplish for yourselves and your children, and clarify how you’ll limit or structure resources to help them become productive people.
If you go through the exercise of clarifying your values and use them to analyze your planning, you’ll increase the chances of achieving your goals and reduce the odds of a hurricane of wealth destroying everything you’ve built. You’ll be better able to impart to your children the wisdom and principles that will lead to a productive, healthy life.
Not only will you help your children be productive and successful in the endeavors they choose, but you’ll also be able to help them further your legacy and understand the charitable goals you wish to accomplish with your wealth. If you had a family member who died of Alzheimer’s, for instance, you might want to build or support a foundation to benefit Alzheimer’s research. You may want to build a park or endow a water well in Africa. It can be any goal you wish, and it can be managed in a foundation operated by your children.
As you plan for future generations and the legacy of your wealth, it’s impossible to predict the future. Because of this, it’s critical to establish your principles and goals and have them understood and embraced by your family as you plan for the disposition of your wealth. This is vital in helping plans adapt to changing circumstances while meeting the challenges and protecting against the threats you can predict.
Oscar Wilde once remarked that anyone who lives within their means suffers from a lack of imagination. While it’s fun to have characters and outsized personalities in your family, you can really set yourself up for problems if future generations develop a “caviar taste” far too early in life. You’ll need to set up fail-safes to ensure spending stays under control and help protect future generations from external threats to wealth. Financial predators, divorces, and other external events can change someone’s balance sheet quickly and permanently. You can’t save all the puppies in the pound. However, you can try to avoid general mistakes, while also building a structure that won’t detract from your family’s ability to enjoy the wealth you’ve created. You will have weathered the hurricane, will be able enjoy the future, and can continue using your resources to build your legacy.
Chapter Three
3. How Much Do You Cost?
This is the question that almost got my jaw broken. However, this question may be the most important one you can ask and answer.
It all started when a good friend of mine and I were catching up after work one day. We began to discuss our recent pasts, and it was nice to hear about his
accelerating career. Unmarried and in his mid-thirties, he had the world at his feet. It was fun to see. Suddenly, however, our discussion veered toward his frustrations with getting ahead financially in New York.
“Frazer, you know me,” he said. “I’ve got a lot going on. I just made partner at the law firm, I’m thinking about getting a new apartment, a friend of mine wants me to get in on a plane with him, I’m still able to do half marathons…I’m still a big deal.”
“And you clearly have no issues with self-confidence,” I said with a smirk.
“Ha ha, yes—confident too. I’m all of those things, so I don’t understand why it feels impossible for me to feel secure in Manhattan.”
“Secure?” I asked. “You’re going to have to give me more than that before I put on my math hat.”
“Math hat?” he asked.
“That’s right,” I said. “What are the kinds of things you need to be happy? What kind of means do you need in order to do the things you want in life?”
“I’m not sure what you’re getting at,” he said.
Gritting my teeth, I readied myself to absorb a left jab or the splash of an indignant glassful of vodka soda. Then I asked the uncomfortable question.
“Well, how much do you cost?”
No drinks or punches were thrown, but I did get a sharp glance.
“What the hell kind of question is that?” he said.
“I realize that sounds a bit rude,” I replied. “What I mean is, how much does your lifestyle cost? Being able to answer that question will save you a lot of heartache and mistakes.”