“Shirtsleeves to Shirtsleeves in 3 Generations.” James Hughes best describes this time-worn phrase in his book, Family Wealth: Keeping It in the Family, by picturing the classic progression: from the creator of the wealth who wears shirtsleeves (rather than a business suit), works hard and lives frugally; to his children, who study at the university, wear fashionable clothes and live in good style; to his grandchildren, who grow up in wealth and do not work but spend all the money. So the fourth generation, again in “shirtsleeves,” must go back to work to rebuild what the third generation spent.
Surprisingly, the real culprit isn’t estate taxes, though it contributes to the issue if left unplanned; other countries without transfer taxes tell similar shirtsleeves to shirtsleeves stories. Why do even solidly structured estate plans, prepared by competent advisors, fail? In his book, For Love & Money, Roy Williams gives us 3 insights: 1) Lack of trust and/or communication among family members account for 65% of the failures, 2) Heirs not prepared to manage wealth accounts for 25%; and 3) Lack of succession planning, or out of date plans, account for 10% of the reasons estate plans fail.
What are families who successfully transfer wealth to the next generation doing differently? How do children grow from owners to great owners? At the core, it’s all about communication. According to Roy Williams:
- There is a noticeable degree of trust, openness, cooperation and mutual respect among the family members.
- The heirs have spent a number of years working full-time in the family business or managing family assets, and feel well prepared at the time of succession.
- They prepare and follow through on a formal succession plan, including plans to train successor, and they have effective working relationship with professional advisors.
As parents, why not consider how your children could grow from future wealth owners to great owners. Here are some questions you can think about:
Are we the kind of family we want to be?
What are we teaching our children about money?
What do we really want to do with our financial wealth?
What do we want our family to look like in 5 years?
What does our family need to work on now?
How do we invest in the life journey of our children over time?
Have we articulated our family Values, and what we stand for?
Another step parents can take, to begin to grow their children from owners to great owners, is to avoid “hierarchical thinking” about financial capital. How can you as parents rethink your family capital and aim for an age-appropriate peer relationship with your children? By understanding that the family’s assets are more than money. They include intellectual, emotional educational, experience, moral, spiritual, social and financial capital.
At USAG, we use a couple of models that assist family members in better understanding how the family structure supports the family’s larger picture goals and enhances the probability of Family Sustainability. We often use the metaphor of the three legged stool, where the three legs supporting the family platform include: 1) Family Resources, 2) Family Taxing Policy, and 3) Family Sustainability or “Governing structure”. While some of this goes beyond the scope of this article, it is important to understand the family resource leg of the stool. Family Resources go far beyond “financial resources”. It includes both Human Capital as well as Financial Capital. Human capital includes spiritual, intellectual, experiential, and familial capital.
One of the important first steps fully understanding the family’s human capital. According to Harvard’s Charlie Collier, successful families:
- focus on the family’s entire capital,
- stress the priority of each family members’ individual pursuit of happiness,
- work on enhancing family communication,
- measure success over a long timeframe,
- tell and retell the family’s most important stories,
- create mentor-like relationships using family trusts and business entities,
- teach children the competencies and responsibilities that accompany wealth
- strive to really know each family member,
- give younger family members responsibility as soon as possible, and
- write a family vision statement (We refer to this as the Family Touch Stone Statement).
So far, we’ve reflected on the Family Financial Law of Gravity: “Shirtsleeves to Shirtsleeves in 3 Generations,” and the Family Financial Law of Aerodynamics: What are families who successfully transfer wealth to the next generation doing differently to overcome financial gravity?
Now, let’s look at the processes as well as the characteristics of children who are growing into great owners and consider initial steps you can take.
We begin by recognizing, as parents, the four big questions:
- How much is enough?
- When do I tell them?
- How do I tell them? And
- How do we avoid the Shirtsleeves to Shirtsleeves trap?
Children who are growing into great owners are self-aware of their capability, competency and confidence. These blessings are bestowed mainly by mentoring parents, who recognize children have God-given attributes to become great owners; attentive parents, who instill essential experiences into their children by catching them in the act of saying and doing things which are praiseworthy; coaching parents, leading children over unhurried time through financial seasons of success and failure, in all economic weather and teaching them to discern between wise and unwise counsel and advisors.
You can launch your children’s journey to becoming great owners by first recognizing your own excess wealth. This is accomplished by understanding the difference between “Core” capital and Family “Excess” capital. Core Capital includes the amount of resources needed to safely perpetuate the lifestyle for you and your spouse through life expectancy, plus real estate to support that lifestyle, plus an emergency pool of liquid assets to handle the unexpected. The balance of the family’s “wealth” may be thought of as the family’s, as opposed to what you and your spouse need to live off of. Assume you have enough assets to sustain your lifestyle during your lifetime. If so, is it advisable and even tax-wise to begin to distribute your excess wealth to your children now? This pool of assets is, after all, the family’s financial legacy. Communicating expectations, responsibilities and accountabilities in the stewardship of these assets is often your goal for your children, so how do we build the knowledge bridge spanning the generations? And, Do not confuse control with ownership! The notion of the virtual “Family Bank”, directed by the Family Council is often something clients find extremely helpful in both their planning and mentoring goals.
Collaborating with your children on a family financial vision statement establishes a life transforming framework for wealth distribution. It includes the values that reflect the family’s character and what the family believes important, and also puts forth what the family is about as a strong cohesive body. Aft that, a process of mentoring, with guidelines already on the table, can occur. Here is an example of what this might look like:
Family Touch Stone Statement
“We believe each family member becomes a family wealth owner by birth or marriage. Our aim is to teach each member to become a ‘Great Owner’ __a team of capable, competent and confident wealth managers.
We humbly and honestly acknowledge there are different types of family investment capital, having absolutely equal value in terms of how they affect the success of the family business, or other investments, financially and otherwise. Family capital consists of spiritual capital, intellectual capital, emotional capital, educational capital, experience capital, moral capital, social capital and financial capital.
Using this truthful and encompassing definition of capital means we see each family member as an investor who can earn a managing share of the family investments.
And, although each family member is loved equally, we relate to each family member uniquely.”
Family Wealth Preparatory School
Excess distributable wealth (that is wealth beyond the needs of the parents during their lifetimes), quantified by the parents, can be the funding source for a Family Wealth Preparatory School which is actually a subset of what we sometimes refer to as the Family Bank. This could include financial curriculum, instructors from the financial, tax, legal, nonprofit and counseling professions, and an investment partnership or other family entity, funded with gifts from the parents to the children. The partnership is an important “lab” for nurturing family relationship, family capital, and preparing children for future inheritances and roles in family wealth management. Letting children also enjoy age-appropriate discretion over an outright, unrestricted portion of the gift may be wise and instructive, too.
A multi-year school is preferred, involving retreats, reading materials, exercises and practical experience though the family business, philanthropy, projects and site visits. The model for the school is the actual Family Bank, which is described later.
Xtreme Estate Planning
Let’s conclude by highlighting some Xtreme estate planning concepts and asking some “Pin Drop” questions. These questions have helped parents ensure unforgettable conversations with their children and determined their readiness to help their children grow from owners to great owners.
Parents often ask, “How much money is too much money to give my kids?” Is there a tipping point with the metamorphic power to change a child’s character? Adult children who have experienced decades of character formation are unlikely to change much. Their values are formed through experiential learning. The issue, however, is not that money changes behavior. In fact, it does not. It does, however, amplify it. What they children are, today is what they will become without proper guidance, yet on steroids. That may or may not be a good thing. Why not reflect on your child’s character? Is your child honest, teachable, humble and dependable, with solid work ethics? Your answers may determine whether you’re dealing with a child who lacks character, or is only lacking financial experience. Our experience shows us time and time again that money does not change behavior. It amplifies it. So if concerns are there, think “amplification”. Kids that act out, act out more so. Marriages that are shaky, get shakier. Good behavior as well as bad become more pronounced where money is now pumped into the bloodstream. The question is: Are they prepared?
Using the metaphor of “Xtreme” sports, Xtreme estate planning transcends important wealth transfer issues, including control versus ownership, tax planning, charitable giving and the stewardship of affluence. Xtreme estate planning assists you with your stewardship of influence. You cannot pass your values or character to your children. You can try to change or control a child’s behavior, using powerful estate planning techniques and threaten to withhold an inheritance. However, most parents really want to positively influence their children and have continuing influence after they are gone. Back to our three legged stool. The third leg, “Family Sustainability”, or “Family Governance” speaks to the issue of family structure, including guidance, responsibilities and accountabilities in a sustainable governing body. While Mom and or Dad are alive, a monarchy or perhaps dictatorship structure of authority exists. When they die, in the absence of a successor model, there is no structure, and nature abhors a vacuum. Anarchy prevails. Creating a smooth transitory structure would be most people’s desirability. Be it lassiez- faire, or some form of a more structured democratic body, it is for the family to look into itself and decide how it wishes to sustain itself, create that body, and learn to understand what it means to be one with the family under it’s vision, legacy and way in which it chooses to show up.
So, when we think of people, living or dead who influence us, how do they do this? Isn’t it their walk, talk and writings? Xtreme estate planning challenges you to think beyond just having control and instead to becoming more influential. Children are collaborators, not spectators, in Xtreme estate planning. Hopefully, the following questions will help you become an effective steward of your influence.
Pin Drop Questions – This would be indicative of what we might talk about at our initial get together.
- What’s most important to you?
- How much money do you need to live a worthwhile life?
- What is your family’s definition of success?
- What is your experience in receiving a financial inheritance? (Many of us have never received an inheritance and are exploring uncharted territory!)
- What would your children not learn on their life journey if they were protected by your money?
- How will you prepare your children for a financial inheritance?
- If you include your children in the decision-making around your ultimate estate allocation, how do you think that will serve them on their life journey?
- Could you give your children a say in their financial inheritance?
- How do you teach your children to develop and strengthen their own values and character?
- What kinds of relationships do you think your children will have with each other as they grow older?
- How do you mentor your children financially, business-wise and teach them the role professional advisors play?
- How have you prepared your children for “wealthism”, inoculated them against “affluenza” and taught them philanthropy?
- What charitable giving activities are you currently involved in (either with money or time)?
- What causes, issues and activities are you most interested in, or passionate about?
- What motivates your charitable giving activities? Do you want to make an impact, create or facilitate change within your community? With specific populations? Around specific issues?
- How would you like to be remembered? What kind of “legacy” do you want to leave?
- Have you discussed your charitable interests, plans and activities with family members?
- Have family members been involved in any of the charitable giving decisions thus far?
- Given your other commitments, how much time do you have to devote to your philanthropic endeavors?
- Who else (besides yourself) do you want involved in managing or administering your philanthropic activities?
- Are there specific values you would like to incorporate into your estate or financial pan or your investment strategy?