Hubler For Business Families

Shirtsleeves to Shirtsleeves in Three Generations - Part One

The emotional values of financial wealth (first in a series)

Key Takeaways:
  • Seven out of ten affluent families can't maintain their wealth through the third generation.
  • Legacy gaps exist between boomers and their parents because they're not having in-depth conversations about legacy and inheritance - even though they say they are.
  • Parents who successfully maintain wealth across generations prepare their children for wealth through nurturing, family traditions, family values and personal development.

"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 " 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:
  1. Values and life lessons
  2. Fulfillment of final wishes and instructions
  3. Personal possessions of emotional values
  4. 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.

Part 2 of this article delves deeper into wealth preparation planning using a fictional example based on real events. It offers a perspective on what a family has done, and can do, to maintain its emotional, as well as its financial, wealth.

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. Part 2 tells the story of what they did.

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