"Shirtsleeves To Shirtsleeves In Three Generations"
Common
experience suggests that most families fail to sustain wealth across
multiple generations. An almost universal proverb reminds us that the
third generation of a wealthy family is ill-advised to rest on its
ancestors' laurels: in Italy, the expression is "From the stable to the
stars and back again" and in China it is "From peasant shoes to peasant
shoes in three generations." Empirical research helps us understand
the underlying reasons. One study of 3,500 families found that 70%
failed to sustain wealth across generations. Interestingly, the study
concluded that errors in financial planning or taxes accounted for less
than 3% of the failures. By contrast, 60% of the failures were found to
result from lack of communication and trust in the family and 25% from
"unprepared heirs" (Roy Williams & Vic Preisser, Preparing Heirs).
This is often surprising to wealth management professionals who devote
their careers to designing technically elegant estate plans. But it can
be viewed as an opportunity to serve clients more broadly, while
deepening the advisory relationships with them.
Fear And Worry
So,
if the stakes are so high, why is communication so difficult for
wealthy families? The answer, most often, is fear. Clients worry that
children informed of the estate plan will feel "entitled" to the
wealth, become spoiled, unmotivated and isolated by envious peers. They
worry that children might tell outsiders, who will exploit the
knowledge to harm the family, or that disclosure will trigger conflict,
such as sibling rivalry, years before the estate plan is even relevant.
Clients also worry that disclosure today will limit their flexibility
if they want to make changes in the future.
These fears are not entirely unfounded. Every estate planning attorney can relate horror stories involving children with knowledge of an estate plan who try to declare a client incompetent before he or she can change the estate plan (for example, to favor charity) or children who make even more dastardly attempts to accelerate their inheritance. But such stories can be countered with equally chilling tales in which a second spouse manipulates or exploits a client to the detriment of uninformed children from a prior marriage. The point is not to compare horror stories, but rather to take note of the more common, non-sensational ways in which clients' bias to under-communicate their estate planning intentions can create lasting problems.
Lost Poets And Disappointing Lotteries
In
my experience, these more routine failures take two very different but
equally troubling forms. The first arises when failure to communicate
leaves highly responsible children with an inadequate understanding of
their parent's desire that the family's wealth be used to make life
more comfortable for them than it was for the wealth-producing
generation. The client in this case might be someone sympathetic to
John Quincy Adams' famous quote: "I must study politics and war, that
our sons may have liberty to study . . . commerce and agriculture, in
order to give their children a right to study . . . poetry." A client
who fails to clearly express this intention allows each generation to
underestimate its ancestors' generosity and repeat unnecessarily its
their hardships.
On the other hand, clients who are determined that children not use the parents' wealth as a justification for their own laziness are often surprised by the extent to which uninformed children can overestimate the extent of the family's wealth, or the parents' desires to facilitate and subsidize their study of poetry. In these cases, disclosure can help children who are waiting for an inheritance as a kind of lottery which never materializes as quickly or as abundantly as they assume it will.
Discomfort With Wealth - "Born on Third Base and Thinks He Hit a Triple"
An
entirely separate problem caused by failure to disclose estate planning
intentions is the perpetuation of feelings of embarrassment and
discomfort with one's wealth. Under-communication reinforces negative
messages that children receive from the earliest ages about the
family's wealth. These messages are offered by less fortunate peers
(and their parents), extended family (such as the children's uncle who
feels the client's wealth is the result of favoritism by the
grandparents), and even politicians and the media (consider, for
example, how wealthy people are often caricatured in the movies). Our
own work with wealthy families often reveals surprising distortions
about wealth that only a healthy, candid dialogue over many years can
correct. Parents' secrecy about the family's wealth can also leave
children with the impression that the parents don't trust them, which
can do lasting damage to their self esteem.
Of course, clients have their own negative feelings surrounding their wealth, which makes it especially hard for them to break the silence. Wealth is a very sensitive topic to most people and discussing it honestly with others is often extremely uncomfortable. In fact, clients themselves may not be clear about the underlying motivations for their estate plans and may therefore not be willing or able to tell their advisors the full story. In those cases, the plan is not completely aligned with the client's true intentions and he or she is more likely to be ambivalent about discussing it with others, even family members.
The Advisor's Dilemmas
Finally,
as wealth management professionals, we must also consider our own
hesitations to engage in these conversations with clients. Many fellow
advisors discover over time that their attraction to our field is
based, at least in part, on their own complicated attitudes concerning
wealth (just as psychiatrists often discover they themselves have
unresolved childhood issues). The estate planning lawyer's focus on
confidentiality and attorney-client privilege raises understandable
anxiety about encouraging, and especially participating in,
intra-family discussions about one family member's estate plan. More
generally, many advisors, given the nature of their training and maybe
even the personality types that attract them to more technical fields,
are more comfortable focusing on ascertainable results rather than
process and on analytical subjects rather than feelings.
And, of course, the pressures of modern professional life- applicable to attorneys, accountants and wealth managers alike - often discourage advisors from initiating conversations about communication issues. Advisors who charge by the hour might worry that such issues will be seen by clients as somehow "softer" and harder to justify than more explicitly technical issues requiring specialized expertise. And advisors who charge fixed fees or asset-based fees might worry that introducing more open-ended communication issues might bog the relationship in an unprofitable morass.
Our experience is that these fears are greatly exaggerated. As advisors, we are in a unique position to help clients see that a well-crafted plan is only the beginning of a successful strategy for multi-generational estate planning.
So How Can You Help?
It
is an entirely fair critique of this article that an experienced estate
planning attorney develops an intuitive feel for advising a client
about when, what and how to communicate estate planning intentions to
family members. Such intuition is part of the artistry of an estate
planning practice and a direct reflection of the diverse intellectual
and emotional skills that the career choice requires. Nonetheless, the
unique perspective of a multi-family office, whose advice is certainly
more general and less technical than that of the attorney, can provide
some useful perspectives which might helpfully inform the attorney's
approach to these issues. Specifically, we have found that it is often
useful for the client and advisory team to take a collective breath and
a deliberate step back in order to view the communication issue as part
of a much broader analysis of the client family's non-financial makeup.
The detailed questions in the accompanying chart are designed to help
the client uncover, and critically consider what messages they are
passing on to their heirs, consciously or otherwise, and whether some
of those should be revisited. The objective is to learn from the past
both what has worked and what the client wants to do differently.
Inevitably, clients who pursue this exercise and see the importance of communicating more directly with their family members will ask, when, what and how to communicate.
When: Quite simply, the best time to encourage clients to talk to their families about their estate plans is "now." Ideally, this communication is a process, rather than a onetime event, and it needs time to unfold. The most effective approach is to start with an introduction of basic financial concepts when children are young and then introduce more sophisticated topics, such as trusts and taxes, at appropriate ages. Obviously the nature of the various family relationships will affect what is said at any time, but some additional communication is usually helpful at any stage of the client's life. The tax and financial topics are often unfamiliar to at least some family members, and take time to sink in. The emotional issues that underlie the entire topic often need to be identified and fully expressed before the content can truly be absorbed.
And, overcoming the misconceptions left by the powerful negative messages about wealth delivered by society and extended family may require consistency and repetition. The most successful families view the communication process as iterative and learn from the reactions of family members at each stage of the process.
What: Clients who center the communication around shared family values have the best experiences. The "money history" discussed above is a good place to start, since it is impossible to help a client communicate his or her values around wealth until those values are first fully understood. Productive discussions about shared values include those that reveal the meaning of money to each family member and celebrate the history of both the family and the wealth, with a special focus on the hard work and accomplishments of those who created the family fortune. Children who understand the family's history and values can more readily see the estate plan as a manifestation and continuation of those values.
They can accept the plan more authentically and are more likely to adopt the family values in their own subsequent planning. According to author and family governance expert Jay Hughes: "To successfully preserve its wealth, a family must form a social compact among its members reflecting its shared values, and each successive generation must reaffirm and readopt that social compact."
How: Once the client agrees to communicate early and often, and to center the discussion on shared values, a few helpful guidelines can facilitate the process. It often works best to start with the overall flow of the plan, rather than the details, in order to give everyone an opportunity to react, perhaps first emotionally, but ultimately more thoughtfully, to its overall themes. Clients should share details with children as they mature and as they demonstrate, as part of the ongoing dialogue, that they can handle the information responsibly. We recommend that the conversation be formal and structured, since the issues often involve technical, seemingly inaccessible concepts that can be glossed over in more casual conversation. Formality also reinforces that the family's history and values are important to the client. At all stages, it is critical to emphasize that the current plan can, and likely will, change and that any expectations formed from the plan's description could produce later disappointment. Nonetheless, the conversation should be very open and the client should encourage the family to offer its authentic reactions and ask uncomfortable questions. Finally, and not surprisingly, it often helps to have the client's advisors present for at least some of the conversation. This again reinforces the seriousness of the discussion, permits real-time clarification of technical issues and allows the heirs to form their own relationships with the advisors.
Summary
Successful
wealth transfer is a long-term process that does not end with a
well-crafted, technically effective estate plan-it begins there.
Clients who are willing to engage in thoughtful communication of their
estate planning intentions to their family can better understand their
own underlying attitudes about wealth, consider how their intentions
might affect their family and provide explanations or make changes, if
appropriate. At best, the communication can strengthen family
relationships and facilitate the perpetuation of the clients' values
into future generations. Advisors who assist clients with the process
can broaden and deepen their relationships with clients, form
relationships with multiple generations of client families and, most
importantly, better help clients achieve objectives that they may not
even be able to express in a more conventional estate planning
conversation.
Influences From the Past
How was money used in your family? (e.g., for control, to buy love, as rewards, etc.)
What do you remember your father / mother saying about money?
How did the money attitudes of your parents differ?
When you were growing up, who made the financial decisions in your family?
At what age did you begin to have some money?
What lessons in money management did you receive at home?
Did you have to work for your money?
Attitude About Money
What is your definition of "wealthy"?
Are you comfortable talking about your money?
In which situations are you the most uncomfortable talking about money?
What are the dangers associated with having money?
What do you think is the greatest value of money?
The Way Money is Used
Is saving important to you?
Do you live on a budget?
Do you feel like you are a prudent spender?
What types of satisfaction have you received without money?
Was/is your family philanthropic?
Do you want more or less philanthropic involvement in your life?
Belief About How Money Impacts Relationships
Do you feel that money negatively impacts your interpersonal relationships?
What role did money play in your choice of a mate?
How do your attitudes toward money differ from those of your spouse?
How do your past experiences with money differ from those of your spouse?
Communication to Heirs
What are the attitudes about money that you would like to teach your children?
What have you done to develop financial competency in your children?
What are your priorities for the control and transfer of your wealth?
Have these issues been discussed with the members of your immediate family?
David Bokman is the Chief Wealth Advisory Officer of GenSpring Family Offices and was formerly an estate planning partner with the Atlanta office of King & Spalding.