A recent article noted that an inheritance of $1,000 could be made to last in perpetuity, with annual distributions of $100 a year, rather than being spent all at once. “Given the choice … a lot of grandparents would prefer that scenario compared to the check and oblivion,” Scott Martin wrote on thetrustadvisor.com website in November.
Although these are modest sums, the implication is clear: Money that lasts a lifetime is preferable to a one-time gift. That may be true in some or even many scenarios, but is that always the case? Is a budding scientist really better off with annual $100 distributions than having the capacity to purchase a $1,000 microscope? Indeed, a one-time gift of a microscope to a young beneficiary might one day result in the creation of far more wealth than yearly distributions—and bring far greater satisfaction to the life of the beneficiary.
There are no “one-size-fits-all” solutions when it comes to family wealth continuity. If you are planning to perpetuate wealth over generations, it’s a good idea to have a deep understanding of the purpose and goals of that plan and to be able to communicate them to the family members affected.
Whose Dream Is It?
If wealth continuity is only one person’s dream, then there is relatively little likelihood of the dream persisting over time.
The owner of a $500 million company approached us some time ago and asked whether we might assist with business succession planning.
But there was a problem he needed to discuss with us:
“Our company has been a wonderful success. Our customers and employees love us,” he said. “Our family [members] have grown rich both financially and spiritually and I want this to continue after I am gone. I’ve been planning and preparing and dreaming for years that my oldest son will take over after me. He is terrific.”
“That sounds great. What’s the problem?”
“He just quit to become an investment banker.”
The son had his own dream, a fact the father ignored or was unaware of. Wealth continuity is most likely to be successful if the dream is shared by other family members of multiple generations.
Here are a few ways to share the wealth continuity dream:
• Have regular and open communication about individual and family goal.
• Share stories about the origins of family wealth.
• Ask family members and inheritors about their dreams and wishes for the future.
• Identify common areas of interest where the family wealth can be deployed through philanthropic giving, investment, etc.
Giving Family Members Choices
We worked with a fourth-generation, multibillion-dollar family business where multiple trusts had been created providing distributions to five cousins. The distributions were held in individual investment accounts and the family patriarch made it clear that the only acceptable investment for the cousins was in the family business. The cousins were responsible beneficiaries and were concerned about concentration in a single stock. However, they understood their grandfather’s view of diversification and they were reluctant to raise the issue with him personally or in family meetings. Their dilemma led to significant unrest in the family.
When, finally, family advisors encouraged the cousins to put this issue on the agenda at a family meeting, grandfather surprised everyone by agreeing to the principle of diversification! Perhaps not surprisingly, once the cousins knew they had a choice, the issue went away and they all continued to purchase stock in the family company. However, by reaching an agreement with regard to a wealth management approach, the family was able to arrive at a joint purpose that included multiple generations. Collaborating in managing financial assets strengthened the family’s relationships. All family members shared ownership in the decision, generating a feeling that all contributions were valued and respected. This increased the likelihood that the family’s relationships and financial assets would be preserved.
David Lansky, Ph.D., is a principal consultant with the Family Business Consulting Group Inc. His new book, “Family Wealth Continuity: Building a Foundation for the Future,” is available at www.thefbcg.com.