Dividing Up Your Trophies

Note: This is the first post in a series where we’ll talk more about the topic of Legacy Planning, offering actionable advice on how to successfully pass on not just your wealth but, more importantly, your values to the next generations.

I recently wrote a blog post discussing the topic of “estate planning” as most people define it. For most successful people and their advisors, estate planning is all about how you can share all of the financial assets you’ve earned and created with the next generation. When we talk about estate planning now, you hear a lot of euphemisms, but let’s keep it simple for you:

 What is Estate Planning?

It is the process by which financial planners and attorneys use various sophisticated tax, insurance, and estate planning strategies to help you leave a whole bunch of money to your kids and grandkids.

However, as this blog post explains, this process ignores the importance of passing on something of much more value than your financial capital — your values. Imagine if Tiger Woods spent all of his time planning how to bequeath his son, Charlie, with all of his golf clubs and championship trophies … instead of teaching Charlie how to expertly swing a golf club so that he can win those trophies for himself.

For many wealthy individuals and their advisors, the priority is simply maximizing the amount of money that is passed on. Estate planning is nothing more than a process of making a plan for dividing up all of the golf clubs and the trophies among your descendants. Often, little thought is given to what comes next or what true legacy means. And there’s an unfortunate reality to what typically happens next.

Shirtsleeves to Shirtsleeves in Three Generations

A popular maxim is that families go from “shirtsleeves to shirtsleeves” in three generations, meaning that most family fortunes are squandered two generations after they are built. In fact, the Family Firm Institute (FFI) in Boston — the leading association worldwide for professionals serving the family enterprise field — estimates that less than five percent of all family wealth and enterprises survive to the fourth generation and beyond.

Let’s talk a little bit about how that can play out.

The original wealth creator, in this case, the grandparent, develops the knowledge, skills, motivation, responsible work ethic, and thrift to create financial wealth beyond the immediate needs of the family. Over their working life, they generate enough wealth for their heirs. When they pass, their wealth is bequeathed to the next generation.

The wealth creator’s children do okay. Because of their proximity to the wealth creator, the second generation of family members often learn and retain some — but not necessarily all — of the values, skills, and work ethic that built the family fortune. However, this learning often happens in a haphazard or incidental way, so these values are often diluted. Almost always, the second generation doesn’t feel the same pressure to work hard, save money, and spend prudently.

The third generation is where things tend to fall apart. In most cases, this generation has only known wealth and privilege and has never had to watch their family struggle or work hard. They often don’t feel the same burning desire to work hard and succeed, accustomed only to abundance. Spending habits can become out of control, as family members often don’t see a need for frugality. And, with each generation, the wealth dissipates into a wider network of relatives, making it more difficult to manage and prone to competing interests and resentment. It gets … messy.

Wealth and Happiness

It’s sad to say that passing on great wealth can have tragic results for wealthy families, and I’m not just talking about the loss of money. In addition to losing wealth, it also prevents the third generation from being truly happy and feeling as if they have talents to contribute. The unintended consequences of inherited wealth can include laziness and loss of motivation, incapacity to work hard and produce income, mental health issues, depression, suicide, alcoholism, divorce, family fractures, family feuds, and anti-social behavior.

If you’ve been reading my blog for a while, you know I am a believer in Maslow’s Hierarchy of Needs. Financial wealth isn’t on the actual pyramid, but financial wealth can provide the feeling of security that acts as the foundation for the path to self-actualization. When I approach growing and passing on wealth, I always think about it through the lens of how this wealth can help the receiver achieve the life they want. Clarity in their values allows their finances to actually be a resource for advancing those beliefs rather than a barrier to how they live their lives.

The Great Wealth Transfer Looms

Looking to the years ahead, the baby boomer generation stands to pass on an estimated $7 trillion to their heirs, and some feel a real sense of dread about doing it. Studies show that boomers are overwhelmingly reluctant to pass on their wealth to their children because they feel their kids are unprepared to handle the money. Some studies even indicate that most would rather leave the money to charity. The two wealthiest people in America, Warren Buffett and Bill Gates, have both argued against inherited wealth and have themselves planned to leave the bulk of their fortunes to charity.

We are seeing wealthy families put off their estate and legacy planning. Some become outright antagonistic about planning because they are reluctant to undertake a process that they view as enabling the spoiling of their children and grandchildren. Even some of the most impressive wealth creators don’t see this. Australian billionaire Gina Rinehart, who has been called the richest woman in the world, has said that she will never give her children a blank check because they “lack the requisite capacity or skill, knowledge, judgment, or responsible work ethic.”

We might challenge Ms. Rinehart on this view by asking: Whose job is it to teach her children the requisite capacity or skill, knowledge, judgment, or responsible work ethic? We suggest that it’s up to families and their advisors to instill and nurture these qualities in future generations. A holistic approach to legacy planning — one that focuses on all four components of genuine wealth — can help a family achieve this. A true legacy focuses on stewardship and on transferring the right skills, knowledge, judgment, and work ethic along with the money so that the heirs can become high-functioning, high-impact human beings.

How Do We Stop the Cycle?

Would you rather your children inherit your golf clubs or your golf swing? This question essentially asks whether you would want the next generation to have the possessions or the skills of the generation that came before them, and we explore it more in-depth in this post.

As we continue this series, we’ll dive deeper into the topic and explore how we can move from estate planning to legacy planning, properly equipping the inheriting generation to be good stewards of wealth and good, happy people. Step one is identifying the risk that comes with inherited wealth. Throughout this series, we’ll teach you ways in which your legacy can be properly managed.