Photo by Tyler Nix | Unsplash
By Scott Mathewson, CFP
Early in my career as a financial planner, I helped a family with an estate transfer plan that employed an array of trusts and entities to move and help protect their significant financial wealth. The plan was more concerned with protecting their assets from taxes and their heirs than empowering their next-generation family members. It did a great job for them from a technical standpoint. However, as I watched this family’s story unfold over the next decade, I learned planning that truly helps the family is so much more than trusts and entities. It needs to include a purpose bigger than just preserving and protecting financial wealth.
To be fair, the parents in this story were concerned about their children and wanted to help them.
When the parents died, the children and their spouses became distrustful of each other without the parents there to referee. This led to infighting and poor communication about important decisions that this family needed to address. Relationships crumbled, and the tens of millions of dollars that the parents created were gone in less than 15 years.
Sadly, this story is not unique to families of financial wealth. I’ve seen the same outcomes among families of all sizes, demographics, and net worth. Whether you are leaving $50 million or $500,000, without proper context and unifying purpose, the wealth you leave your family has a high probability of being gone by the next generation. If a family business is involved, the probability is even higher.
But doesn’t a ‘good trust’ with incentives and restrictions take care of these issues? Usually not. A friend and mentor of mine, John A. Warnick, has compared many trusts to ATM machines. He writes, “The beneficiary shows up with the proper code and the Trustee dispenses the requested cash.” Sometimes, the trust language will add conditions or incentives designed to encourage the beneficiary down a certain path, but such “Incentive Trusts” often lead to negative consequences. In our example, the parents did attach a number of contingencies and incentives to the tens of millions they left to their children and grandchildren. But, the relationship fallout and family infighting still occurred, the children and grandchildren still struggled, and the money is gone. Adding restrictions to a trust is akin to telling a child to clean their room because you said so. Unless they see value in having a clean space, they’ll only clean their room to appease you, if at all. And once you’re not around to force them to pick up their dirty socks, they’ll go right back to the floor. The same holds true of wealth transfer. If your heirs don’t have a purpose or sense the possibilities that the family wealth can create, it will disappear.
As I watched this family and others, I could see we were missing something. This realization led me to take a very different approach to estate planning and wealth transfer emphasizing communication, family purpose, and principles over dollars. It unites rather than divides. As I have worked to put this approach into practice, I’ve seen much better outcomes play out for many of the families I work with. The wealth often grows rather than dissipates as it is passed from generation to generation to generation. This approach begins with establishing a unifying purpose and often ends with a legacy of strong, capable family members and willing and empowered stewardship. Here is how it works.
Establish a Family Purpose and Unifying Principles A first step in ensuring a successful wealth transfer is establishing a collective family purpose for the wealth across the generations. Wealth should be a family affair that encourages and allows each member to be their best self, and the family as a whole to thrive. To that end, treat the money as family money for important purposes from the outset rather than as your money that will eventually become their money.
Open communication and trust between family members is key. This doesn’t just mean openly communicating how much money the family has, and how much the next generation will inherit. Instead, make the conversation about how wealth can be used to improve lives based on principles and collective family purpose.
What do you value as a family? How does your family want to make the world better? How will you do it? An essential requirement for your family purpose is that it’s one everyone buys into. The purpose need not be too restrictive. But, it does need to be based on shared principles among all generations, not just one that you hope your children follow simply because you said so.
Put Your Purpose and Principles into Practice Once you identify your family purpose and principles (this is a continually evolving process), you can begin to put your wealth to work in furthering this purpose. 1. Start living your collective values now; don’t leave it for your heirs to do once you pass away. The best way to impart meaning to your legacy is to live meaningfully now. 2. Lead by example - demonstrate how you and your family can put your family principles and purpose into practice well before the wealth transfer takes place at death. Your heirs will know better what to do and how to do it because they are already doing it. 3. Encourage and allow all family members to have a voice. It builds communication and trust as you define your family purpose and then deploy capital to achieve it. By following these three steps, you help your children and grandchildren recognize how fortunate they are to be in a position to help others and causes they feel are important. This usually creates feelings of gratitude, the opposite of entitlement.
Steward the Plan By including your family as active participants in purposefully using your wealth, you teach them the value, possibilities, and purpose of wealth. They will understand that their inheritance is more than just a windfall. It’s stewardship that needs to be grown and nurtured.
John A. Warnick refers to this as generative. The concept of generativity, as developed by psychologist and psychoanalyst Erik Erikson, is a desire to make one’s mark on the world, especially through nurturing the next generation.
Generative planning empowers and encourages the current and rising generations to become highly functioning adults and promotes positive emotional energy and growth. Per Warnick, it’s a trust that could begin: “This trust was created out of love, faith, and hope. The paramount purpose of this trust is to nurture the growth and well-being of the beneficiaries.”
Purpose-driven estate and transfer planning founded in love, faith, hope, and shared family values and principles has a far greater chance of creating a positive legacy for the family and the world. This approach takes more work, but the returns far outweigh the investment. And you can rest assured, it will pay healthy dividends for generations.