Accenture (2012) suggests that a "great transfer" from the Depression-era generation to baby boomers is taking place now, but a second and even-larger wealth transfer from boomers to their heirs will continue over the next 30–40 years (see figure 1).
Figure 1: U.S. Investable Assets Transferred by Year
Source: Accenture (2012)
This all seems like good news, but many of these wealth transfers ultimately will be unsuccessful and will reinforce the maxim of "shirtsleeves to shirtsleeves in three generations." Experts agree that the main reasons for this unhappy record are lack of planning, lack of preparation, and poor execution.
A 2013 U.S. Trust study of high-net-worth families found that 72 percent of wealthy families do not have a comprehensive estate plan. But the need for preparation and planning extends beyond financial, tax, and investment strategies. It extends to preparing the heirs—the recipients of intergenerational wealth transfer—to ensure they are well-equipped to receive it. Countless examples (and much literature) illustrate how money has created havoc in families by creating disincentive to work, family conflict, and anxiety.
Consider the contrasting stories of the Vanderbilt and Rothschild families. In the late 1800s, multi-billionaire Cornelius Vanderbilt employed legions of accountants and lawyers to create tax-efficient estate plans for his wealth. But he did not prepare his children to receive the massive fortune. Instead, he left a history of family bitterness (he left 90 percent of his fortune to one son and 10 percent to his wife and other children), overspending, and poor self-esteem. At the family reunion in 1973, no millionaires remained.
Banking magnate Sir Nathan Rothschild took a different and more successful path. He ensured the requisite tax, estate, and investment planning was in place, but he also intentionally prepared his children (and future generations) to be independent, self-confident members of society, apart from their family wealth. He created robust organizational and decision-making processes in the family that included family communication and a solid set of shared values. His tools included a family bank to encourage entrepreneurial activities, mentoring of the next generation, annual family reunions where shared values were taught, explicit expectations for family participation in group activities, and active charitable engagement within the community. The family continues to thrive to this day (Zeeb and Zeeb 2009).
So what are the important lessons for a family that is managing wealth and contemplating an intergenerational wealth transfer? Families that incorporate three components into their planning—understanding and passing on family culture, developing and communicating family goals, and intentionally preparing the next generation—will increase the odds of meeting their goals and ensuring a successful transfer.
Understanding and Passing On Family Culture
The first principle of wealth transition is understanding where a family has come from, where it wants to go, and how it wants to get there. This includes the family history, the origins of the wealth, cultural values of the family, and patterns of governance and personal relationships, as well as a vision for the future.
For instance, some families may have particular religious, cultural, or philanthropic values that should guide their wealth planning. Some will see the next generation as ultimate "owners" of wealth and some as "stewards" of wealth for future generations. A family that aspires to be stewards is likely to take a longer-term perspective on the management and transition of wealth.
There is no right or wrong, but it is essential for families to have a conversation about their philosophies of wealth as they begin to think about the legacy of their wealth.
Developing and Communicating Family Goals
The second principle is setting goals for the family and its wealth. An effective family wealth-planning process starts with the end in mind. It states clearly the objectives of the family and sets out to achieve those goals with the highest possible probability of success and the least amount of risk. Most investors, prodded by the media and financial industry, still focus on the elusive search for the highest current return or try to beat a particular well-publicized benchmark.
A helpful approach to goals-based wealth management is the lifetime and legacy approach. It categorizes families' objectives (and the assets required to meet those goals) into two broad categories: lifetime and legacy.
Lifetime needs are those that will be need to be funded during the lifetime of the owners. Typically, they also will be the highest priority and more near-term goals and can include maintaining current lifestyle, keeping an emergency reserve, funding children's activities, and the like.
Once the lifetime objectives have been provided for, the balance of the capital is available for other purposes and to meet needs arising after the wealth owners' lifetime. Legacy goals typically include funding children and charities, the key destinations of the expected wealth transfer.
Of course, effective execution is critical. Families must make reasonable assessments of expected returns on assets to fund liabilities and incorporate good tax and estate planning, wise investment policy and careful management of a whole range of risks.
Preparing the Next Generation
The third principle is preparing and supporting the next generation in the wealth transfer. Families can prepare heirs in at least three ways—education, engagement, and experience.
Intentional education and development of financial literacy is a key component of successful wealth transitions. This can range from dinner-table conversations about the value of money and the importance of budgeting to formal educational programs. The goal is to help the next generation, and those that follow, to be able to gain the skills, confidence, and independence they need to become functioning members of society and to be able to manage whatever wealth they ultimately may earn or inherit.
A number of courses, books, and articles are available on the various elements of wealth management. Family Wealth Management (Daniell and McCullough, 2013) may serve as a good overview of the key aspects of family wealth management and transition planning.
Another key aspect of beneficiary preparation is engagement of the next generation. Engagement is the degree to which individuals choose to spend time, invest effort, and feel a sense of ownership in the management of family wealth.
Unfortunately, for many heirs wealth management is an area of little expertise and daunting complexity. Family leaders who are well-tuned to the attitudes and interests of the younger members can help make the activities more fun and interesting.
The next generation also needs real-life experience. Allowing younger family members to work with an advisor to manage their own money, to participate actively in family meetings, to join an investment committee, and to direct some philanthropic funds all can contribute to good experience in family wealth management.
Failure is also an important part of experience. Far too often great wealth deprives individuals of the experiences they need to grow into mature and independent adults; wealth all too often overprotects individuals from the real and the meaningful.
All of the research shows that there has been a substantial underinvestment by families in preparing the next generation for wealth. Family leaders might ask themselves two simple questions:
- Over the past year, how many hours have you spent managing family financial wealth?
- And how many hours have you spent preparing the recipients to be good owners of wealth?
Families who pay close attention to preparing both 'the heirs for the money' as well as 'the money for the heirs' will increase the odds of success in a priceless, challenging pursuit.
Tom McCullough, CIM, CIWM, CFBA, is chairman and chief executive officer of Northwood Family Office in Toronto, Canada. He is an adjunct professor at the Rotman School of Management at the University of Toronto and co-author, with Mark Daniell, of Family Wealth Management: 7 Imperatives for Successful Investing in the New World Order. He earned an MBA from the Schulich School of Business at York University. Tom also teaches in Rotman's Family Wealth Management Program, www.rotmanexecutive.com/familywealth, that runs at the Rotman School. Contact him at email@example.com.
Daniell, Mark Haynes, and Tom McCullough. 2013. Family Wealth Management: 7 Imperatives for Successful Investing in the New World Order. Singapore: John Wiley & Sons Singapore Pte. Ltd.
US Trust, 2013 http://doingmorethatmatters.com/wp-content/uploads/2013/09/2013-UST-Insights-Wealth-and-Worth-Full-Report.pdf
Accenture, 2012. The 'Greater' Wealth Transfer https://www.accenture.com/fi-en/~/media/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Industries_5/Accenture-CM-AWAMS-Wealth-Transfer-Final-June2012-Web-Version.pdf
Zeeb, Rodney, and Ryan Zeeb. Guidelines for Effective Family Governance. In Daniell, Mark Haynes, and Tom McCullough. 2013. Family Wealth Management: 7 Imperatives for Successful Investing in the New World Order. Singapore: John Wiley & Sons Singapore Pte. Ltd.
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