Shirtsleeves To Shirtsleeves In Three Generations
20th September 2013 Tom Hubler
Fewer than one-third of families who gain wealth maintain it to the grandchildren. This is even more astonishing when you learn that all of those families have a wealth preservation plan.
'Shirtsleeves to shirtsleeves in three generations' is an old bromide that's often true when it comes to handling wealth. James Hughes, author of several books, including Family Wealth: Keeping It in the Family, states that 70 percent of families fail to maintain their wealth through the third generation. Let me say that another way: Fewer than one-third of families who gain wealth maintain it to the grandchildren. This is even more astonishing when you learn that all of those families have a wealth preservation plan.
What happened? I believe families lose their wealth because the emphasis of financial planning is on money. Wealth is considered a transaction rather than an interaction.
Families who perpetuate their wealth to future generations treat money as an interaction. They build the emotional equity of the family while working to preserve the wealth. Parents prepare their children for wealth through nurturing, family traditions, family values and development of the individual. This emotional development, rather than wealth transfer, is central to their legacy.
This significant point is missing when one looks at a definition of legacy. My edition of Webster's Dictionary defines legacy as '...money or property left to someone in a will' or 'Anything handed down by an ancestor.'
I prefer the model developed by Laura Nash and featured in a Harvard Business Review article, 'Success That Lasts.' Nash views success as investing in four 'buckets': happiness, achievement, significance and legacy. Each bucket contains the same subcategories of self, family, work and community. One must invest in each of these subcategories for the sake of all four buckets. This means, for example, you don't have to wait until age 65 to contribute to your legacy.
With this as the premise, Nash defines legacy as 'a way to establish your values or accomplishments so as to help others find future success.' You invest in the future by nurturing and developing your values throughout your life to help your family have a successful life.
This admittedly emotional understanding of legacy is backed by hard data. The 2005 Allianz American Legacies Study by Allianz Life Insurance Company corroborates these findings.
There are significant gaps in what baby boomers and their parents define and expect as 'inheritance.'
Nonfinancial items that parents leave behind (ethics, morals, faith) are ten times more important to baby boomers and their parents than the financial aspects of inheritance.
Legacy gaps exist between baby boomers and their parents because they are not having productive, in-depth conversations about legacy and inheritance even though they say they are having such conversations.
The Allianz study also describes the core of a true legacy as having four pillars:
- Values and life lessons
- Fulfillment of final wishes and instructions
- Personal possessions of emotional values
- Financial assets and real estate
Building on the Allianz study, I use a modified model for legacy planning in my work with family-owned business clients. The model shown is adapted from the Family Legacy Foundation.
The WealthCare section is the traditional focus of wealth preservation. It includes working with financial advisors to prepare family wealth and being good stewards of the family's assets. The section also includes creating a will, tax planning, creating a trust and maintaining assets.
The key to maintaining family success across generations is wealth preparation planning - in other words, "preparing" for wealth. This preparation emphasizes living the family's values and understanding its heritage. It involves recognizing how the family engages in community service and philanthropy. These qualities represent a family's most valuable assets relative to its wealth. In addition, there is the legacy of the business itself and how the family operates it.
Picture this: The Jones family experienced what is known in business circles as a "sudden liquidity event." Their grandfather died last year. His estate discharged about $15 million in equal shares among three adult grandsons and their mother. The father of the three boys, Mr. Jones, was not a recipient.
Prior to the gift, the Jones family considered themselves upper middle class. They had accumulated some assets. The parents, in their mid-50s, needed to work to maintain their lifestyle. The oldest two of the three children were starting their professional careers. The youngest son was in college. The family asked for my guidance to help them perpetuate the assets of the inheritance and preserve family relationships now that their family wealth had increased significantly. They wanted to know what was necessary to achieve this
Prior to the inheritance, the Jones family already had competent financial planners. They had a plan for their assets that ensured a modest retirement income. They were also already working with their attorney to create prenuptial agreements for their sons' future spouses. They were aware of the concept of wealth as a transaction. My job was to help them recognize the money as an interaction through family heritage and values, personal development, community service, and philanthropy.
With the large inheritance, the Jones family needed to clarify their family values concerning money and wealth so they could apply those values to guide future years. It was also important for them to identify and articulate their grandfather's values so that his legacy continued to live in the family.
Family traditions promote its heritage. I encouraged the Jones family to create and hold family meetings not only to discuss their values about money and wealth but also to identify and preserve family traditions and keep them current as the family grows and changes.
Psychologist Mihaly Czikszentmihaly writes, 'Now that the integrity of the family has become a matter of personal choice, it cannot survive except for the regular infusion of psychic energy.' (Finding Flow: The Psychology of Engagement with Everyday Life, Basic Books, April 1998)
Czikszentmihaly's point reinforces the argument that holding regular family meetings is critical to family (and business) success. Families with new wealth are often at greater risk and must work to implement family meetings to preserve their relationships.
I use the term 'family self' when talking about personal development with a family vision. Each member of the Jones family needed to recognize his or her life perspective within the family purpose. I offered several excellent resources, including Richard Leider's The Power of Purpose and Greg LaVoy's Callings. To help individuals think about their purpose, Callings asks, 'What is the one question you were born to answer?'
The Jones family understood that living a purposeful life is akin to happiness. Money does not create happiness, but living a purposeful life does. I promoted Jones family meetings because they also help develop emotional equity in the family and provide support for each other.
Community service and philanthropy
In The Congruent Life, C. Michael Thompson writes, 'Service is on the outside what prayer is like on the inside.' Service and philanthropy is the antidote to consumption in our culture. A family uses the family meeting to discuss how their gifts should be used to benefit the community and how to give back.
The power of a common family vision
All of these family aspects - heritage, self, service and philanthropy - draw from a common source: the family vision. A common family vision helps the family accomplish their goals and maintain positive family relationships. It unites the family. It is so critical that it requires the same serious consideration as wealth management, consultancies and planning. That's why I encourage families to create their vision and recite it every day.
The common vision draws from family values and is crafted to voice an ideal future. It is stated personally as 'I am, we are.' The family vision contains several key aspects, including a prayer for loving kindness, an individual vision and kything. Kything is a developed skill of consciously living in the loving presence of others. It is also formed into a statement.
Wealth becomes a legacy and is available to achieve the goals when families recognize money for its interactive purpose. Family meetings can build the emotional equity of the family so that all can lead purposeful lives because they understand that service and gratitude are the essence of happiness.