Is Your Family Wealth Sustainable?

Around the world, in most every country, there is a saying that goes something like: “Shirtsleeves to shirtsleeves in three generations”, meaning that the first generation works hard, earns and saves to build a family fortune, the second generation sustains the fortune only to have the third generation lose it.

There are families who have overcome this syndrome. They have overcome the threats to sustainable family wealth.

What are the threats to sustainable family wealth?

Your health care costs.

Yes, the government plans cover many medical expenses, but according to Canadian Life and Health Insurance Association (CLHIA) it probably won’t cover long term care in a nursing home if you need that.

Long term care can be quite expensive and can quickly dissipate your accumulated net worth.

Your spending decisions.

As we age, and realize that our time on Earth is growing shorter, the temptation exists to “Get busy living or get busy dying” ( a quote from the movie The Shawshank Redemption ). This can result in a change in our spending habits. While not necessarily a bad thing to enjoy life a bit more, it can be a threat to building sustainable family wealth that lasts across generations.

Too short of a financial planning time frame.

According to author Mark Haynes Daniell (Strategy for the Wealthy Family), a plan that looks ahead 100 years is not out of the question to preserve a family’s wealth for multiple generations. With this long of investment horizon, your mind gets opened up to possibilities you would never think about if you are planning for the rest of your own short life.

As you grow older, you tend to become more conservative in your investment goals (indeed we are usually encouraged to do so). It may be harder for you to replace failed income sources, and you may fear running out of money prior to running out of living. If instead, you focused on a 100 year horizon, you might be more likely to move money to a vehicle which could be managed by younger family members who would tend to be more willing to take certain risks to grow the pot. Your family might find other investment choices, such as start up companies, alternative geographical locations or things with a longer term payout.

A conscious decision to avoid sustaining wealth.

Some believe that wealth is not good for their would be heirs. It can lead to problems – lack of motivation, inability to focus on something worthwhile, or a feeling of being entitled to special privilege.

Some wealth earners would rather their offspring make it on their own.

Obviously, if you don’t want to present the problems of wealth to your progeny, you will find a way to spend or give away the wealth before it can be transferred to the next generation.

Jeffrey Skoll, the Canadian eBay billionaire may be one of those, joining the Gates Foundation Giving Pledge and pledging to give away 95% of his net worth.

Lack of transfer planning.

In the USA, death takes it’s toll if you have more than $5.43 million in your total estate (counting all assets, even life insurance payouts if you held the policy). Your estate can be charged up to 40% of the amount you hold at death on the assets over that amount. Even in Canada there are taxes to be paid on death, although typically not as punitive as the US taxes.

Court costs, lack of privacy and the possibility of heirs squabbling over what is left to them can also cause delays and reductions in the family wealth.

Do your transfer planning, get the documents created and reviewed by a lawyer (you don’t get do-overs after you die), and then keep them up to date.

Don’t keep your estate plans to yourself. Let your heirs know your intentions and rationale. Discuss it with them, in private and in a group. Give them copies. Let them know of changes. This will help avoid quibbles after you die.

No heir preparation.

My Mom and Dad left a few thousand to each of our sons. They did not let us or the boys know that this would happen. No one prepared our sons to receive such a sudden windfall. Although one son did quite well (the older boy), the younger one was at a critical point in his life – college days – and it just about totally derailed him. He lost his way on what he wanted to do with his life, was late in graduating and took several years to get back on track. Needless to say, the windfall went to the wind.

Start educating your children (and grandchildren) at an early age. Teach them about money, about true wealth (which is much more than money), how to manage and earn money and what your families values are around the topic.

There are several excellent books out on this subject, including Children of Paradise Successful Parenting for Prosperous Families by Lee Hausner, Ph.D; Family Wealth – Keeping It in the Family by James E. Hughes Jr. and Silver Spoon Kids How Successful Parents Raise Responsible Children by Eileen Gallo, P.H.D. And Jon Gallo, J.D.

Focus on money instead of true wealth.

Money is just a tool. If your focus is just on the money, you stand little chance of avoiding shirtsleeves to shirtsleeves in three generations.

You and your family need to define what wealth really means to all of you. While family members may want the financial condition of future family to be sustained and even improved, other things are typically more important. Health, family relationships, giving back to society, making a worthwhile difference with each family member’s life, travel and more may be part of your family’s value system. Many, including Mark Haynes Daniell, recommend writing out a family vision, mission and values statement and training the next generation to embrace it and keep it up to date with their current conditions.

External threats also exist.

Many things are beyond your control and pose risks to your family wealth sustainability. As an ex Project Manager, I was required to perform risk analysis to identify risks to the project and to figure out how to a) avoid the risk b) mitigate the risk or c) compensate for the risk.

Risks can include things such as man-made and natural catastrophes, economic difficulties and downturns; misconduct of your advisors; identity theft; geographic issues and more.

Think through the risks for your family. What are they? How likely are they to happen? What will the impact be if they do happen?

Diversification of assets and family members (geographic as well as by other means) can help you avoid or mitigate some of the risks. Insurance might be of help in compensating for a risk.

Weigh the cost and complexity of the solution to the risk against the impact and likelihood of the risk.

Do you want to give your family’s next generation a leg up? How are you dealing with the threats to sustained family wealth?

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