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You may have heard of the old adage from shirtsleeves to shirtsleeves in three generations, but is it really true? Research in America suggests that inherited wealth rarely endures. By the second generation, it found that 70% of family fortunes have the being depleted and by the third generation the figure was 90% – so maybe the old adage is true.

I chatted with Lisa Snyder of the Institute for Preparing Heirs from across the Atlantic in California recently so here’s her views on why the transfer of family wealth is so challenging and how to do it successfully.

 

The wrong focus

In my experience, some of my clients have passed on wealth whilst they’re alive and get a little frustrated sometimes by how it’s being spent.

The reasons for this include that when we engage in planning, we tend to engage on what we do for the first generation, we focus on those with the money. So professionals create the documents – wills and trusts for example – and our expectation is those documents are going to suit the whole family.

Oftentimes we think that those documents are going to be substitute for conversations that we don’t want to have, that perhaps they’re awkward. So when we’re gone, the documents will take care of it. And a lot of times those documents that we have, they don’t reflect us and our family.

What Lisa finds is she will sit with clients and talk about the planning they’ve done and it often goes, “Well, I went to the solicitor and we talked about what I was going to do and I didn’t really know. So I said, what do people like me do?” And the solicitor said, “This is what people like you do.”

So a plan is created that is based on their net worth, but we may need vastly different plans based on our own goals, values, and aspirations. Nobody’s asking them the questions that will enable goals and aspirations to be integrated into their estate planning.

 

 

Shirtsleeves to shirtsleeves

Let’s back up for a minute to talk about shirtsleeves to shirtsleeves. I understood that came from the North of England. What’s interesting though, is it’s a worldwide phenomenon. So it’s translated in multiple countries, in Japan rice patties to rice patties in three generations. In Italian, from the stables to the stars and back to the stables in three generations. And in Brazil it’s rich father, noble son and poor grandson.

It’s not confined to our part of the world. It’s everywhere. And the reasons that I have seen for wealth not surviving really fall into three categories and research shows this as well.

 

Three categories for wealth not surviving

 

  1. The money’s unexpected

First and foremost is the money’s unexpected. If you don’t know something’s coming, it’s not necessarily a good thing. It’s a surprise. And if you’re not having conversations about your wealth with your family and they’re not prepared for it, lots of bad things can happen.

On many occasions a family inherits money, mum and dad have passed away and one child says, “that’s not what I thought was going to happen. I thought that we were all going to share equally. Why did you get more? I thought I was going to be trustee. Why did dad choose you to be the trustee? Why are you my trustee? And you’re your own trustee?” And so it goes on and on.

This speculation tends to lead to litigation. And that’s how in many cases not only does the family wealth get lost, but the family unity gets lost.

When we talk about a successful wealth transfer, it’s not only the ability of the heirs to receive wealth and manage it in ways to develop lifetime goals, but it’s also that it is received and managed in ways that help maintain family unity.

Nobody wants to be surprised, so trust and communication are a big part of what is coming. Have that open forum for communication. The best relationships I have are built on good communication.

 

 

The importance of trust

Trust is another piece that comes along with that. There are really three kinds of trust; reliability, sincerity, and competence.

  • If somebody’s reliable, are they going to do what they say they’re going to do?
  • Are they sincere? Do they mean what they say?
  • And are they competent? Are they able to do it?

 

So when a client says, I really don’t trust my kids, what does that mean? It varies. It could be one, it could be all of those things, but inevitably it comes down to something. And if we can address those issues before they pass, if they can hear it from the lips of the first generation, it’s such an easier transition than if they’re sitting there in the dark. And that’s what I tell people too, that don’t leave your kids in the dark.

Think of it like a dimmer switch. You can slowly reveal information. You may never get to the actual amounts and you probably won’t get to where the lights are completely on, but don’t leave them in the dark.

 

2. The heirs are unprepared.

Let’s look at lottery winners. They come into money suddenly and typically they spend it pretty quickly and it disappears. Many end up where they started from.

You never hear a lottery winner say, “Oh, I’ve prepared my whole life for this. I was looking forward to this and I knew it was coming and when it came I was completely prepared.” Nobody ever says that. People are scrambling trying to figure out what to do.

So if we don’t tell our children, our grandchildren, that something’s coming, whether they know the actual amount or not, how are they ever going to be prepared for it?

And being able to share that with them. Being able to have conversations about what is it that you need to know?

Some people are reticent and say, “Well, I don’t want to tell my kids about it.” Or somebody will say, “Well, you know, my kids aren’t able to handle it.” And I think that there needs to be some exploration of what is it they need to know on a basic level.

I don’t think they need to be rocket scientists to do this. What I think is we need to help our children and our grandchildren be good consumers of professional advice. They don’t necessarily need to know how the watch is built, but they need to know the watchmaker and they need to be able to ask good questions to know if that watchmaker is doing his or her job.

People want to be engaged at different levels. So just because I inherit wealth from my family doesn’t mean that I want to go into and be responsible for the investing. I don’t necessarily want to have day to day oversight of it.

I need to decide what is it that I want to do, how do I want to engage.

Think of it like a car. Do you want to build the car? Do you want to drive the car or do you want to be driven? The point is we have to really talk to our children and our grandchildren and understand how is it that they want to be involved in this and it may not be the same way that we want to be involved.

 

 

3. Understanding the purpose of the money

If there’s no family mission statement, that wealth gets lost.

Lisa worked with a gentleman in New York and he is in his forties now. He came to the country about 20 years or so ago and he was telling Lisa that he was having issues because the attorneys and the trust officers only wanted to talk about the provisions of the trust. What is the language, how are we going to structure it? And he was frustrated by that.

Lisa said, “What is it you want to talk about?” He said, “I want to talk about my family.” She said, “Well, tell me about your family.” And he has two children, younger children, and what he would, the interesting part of the story was that he immigrated to this country about 20 years ago and he said one of my jobs was at a photo mat.

Photo mat was essentially an outdoor hut where you would drive up to it and you would drop film off from your camera back when we had films or cameras with film and you’d have your pictures developed and then you drive back and you’d pick it up.

He worked at that photo mat. He made $3.35 cents an hour. He was robbed at gunpoint twice. And Lisa said, “That’s an important story for your family to know.” And he said, “Why?” She said, “Because it reflects who you are. And you’ve talked about how a hundred years from now you want your family to know how this money was made and the purpose of it. So what you’re looking for is a family mission statement. It’s a guidepost for your family and for your advisers, generations to come. And it should articulate your core family values and identify the priorities for the use of your family.”

So they set about working on that and it’s the values piece that is so difficult to transfer, because those values, they don’t come through in your estate planning documents.

 

 

My experience

The clients that I advise are quite driven, self-starters, maybe they’ve even gone bankrupt in their earlier years, but restarted and they’re entrepreneurial people who have done well and possibly maybe those family companies are still doing well.

They get frustrated a little bit about the next generation that they don’t have the same values. And we read about in the papers, don’t we? Bill Gates, Warren Buffett, Sting, they’ve all talked about do we leave too much money to our heirs? Will we rob them of their vitality?

 

 

Should we disinherit our heirs?

Not necessarily.

You look at Warren Buffet as a perfect example. You look at the life that he lives and he lives a very modest lifestyle. And I don’t think he believes anybody in his family needs to live an extravagant lifestyle. At the same time though, I think he wants to prepare them and educate them to go out to the world and be productive.

You can have this roaring fire of family wealth and when your beneficiaries, your heirs are ready to go out in the world, if you hand them a burning log, it’s going to last so long, it will burn out eventually. They may burn themselves, but they’ll be left with nothing.

However, if you prepare them, you send them out with a burning log, but you also give them flint and kindling and you show them how to use it, when their log burns out, they can create more and they can pass that knowledge forward.

 

 

Using wealth to develop lifetime goals and maintain family unity

When you talk to these very successful individuals, they are thinking forward in that we want productive people in our families. Successful transfer is really about being able to use that wealth to develop lifetime goals and to maintain family unity.

Going back to shirtsleeves to shirtsleeves in that third generation, why is it that money is lost in that third generation? A lot of it is because that third generation is really not in touch with what it took to make that money. They didn’t see the struggle, they didn’t know that a rent payment was bounced or that there was no money for groceries this week.

They haven’t lived that life. If you think about the world today, so many of us live in tremendous abundance. So it’s hard for people to understand that and have a respect for that.

Family history is a really big deal for families. Family history is something that I think we can do a better job of sharing. And certainly when you’re in a public family you can look your own family history up on the internet, but for individual families we lose touch with that. And so do we want to disinherit our children? No, I don’t think it makes sense, but at the same time decide what is it that they need and prepare them.

The better they’re prepared, then the more they’re going to be able to go out and do.

 

 

How to prepare your children

Lisa talks about 10 conversations all clients can have and the conversations that begin with family history. Something that you as a family can sit down and do.

Simply sit down with your family and say these are the things that are going to happen and we have this estate, these are our advisors. You should know our lawyer, you should know our financial adviser, you should know our insurance specialist, opening the door so that your children and grandchildren can see into this. This is what’s coming, these are the people.

And then going into other areas where you can bring the family together and have discussions about say family charitable giving.

Charitable giving is a big one. This is a place where I think more families can get together. Not everybody gives money away and I don’t think you should have to give money with even if you can afford it, but for many families, values of gratitude, of giving, of generosity, of community, empathy, those are grounded in their families and that leads to giving. So it’s a really nice way to bring families together and it’s something they can always circle back to.

There are all kinds of areas where you can have conversations with your families, not only to educate them, but this idea of values and being able to pass those along. It’s important. And I feel like that’s the way that families are able to pass their wealth and think about the definition of family wealth. It is not just financial wealth, it’s your family name, your reputation, your health, your spirituality, your community influence. And of course your family unity.

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