I was recently contacted by a successful restaurateur. He has a number of children in the family business, and some who are not. He was interested in minimizing or even eliminating taxes upon the death or transfer of his business to the next generation. While he was asking excellent questions regarding the technical aspects of his planning, it was obvious that he had never considered a major question… “What are you doing to prepare your kids – both those in the business and outside the business – for the ultimate transition of wealth upon your death, disability or retirement?” The other firms he had interviewed, all excellent firms, had not even mentioned this critical topic!
Preparing heirs for wealth is usually overlooked in traditional wealth transition planning. Yet it is an essential component of a successful transition of wealth between generations. Did you know that 70% of transfers from one generation to the next are doomed to fail? This is true worldwide, across countries with radically different economies and tax structures. This failure has generated some interesting sayings… “clogs to clogs in three generations” (UK), “rice bowl to rice bowl in three generations” (Asia), “shirtsleeves to shirtsleeves in three generations” (US) and “wealth never survives three generations” (China).
Strategic partner, Roy Williams, President of The Williams Group in San Clemente, CA has spent over 20 years studying why such a high failure rate exists. According to Roy, the cause does not stem from external factors – taxes, governance, legal issues, etc. Roy’s research indicates that 60% of all failures result from a breakdown in communication and trust within the family unit, 25% result from heirs who are inadequately prepared for financial responsibility, 10% are attributed to a lack of common purpose or family mission and only 5% are attributed to other factors. Yet most wealth transition plans focus only on preparing the assets and completely ignore the heirs. This is true in estate planning, asset protection, tax planning, investment management, and philanthropic giving.
So if most planning is destined to fail, what can we do differently? How can we beat the odds?
The key is communication. Talking with your children helps develop healthy attitudes toward money and responsibility. Yet families avoid the topic of wealth for a variety of reasons. Many feel that money is a private matter and simply not open to discussion. Others fear that a discussion may rob their children of motivation and/or initiative, put too much emphasis on materialism, put undue pressure on their children to ‘fill big shoes’, or create a sense of entitlement. Whatever the reason, the topic is avoided.
I, however, encourage my clients to begin a dialog immediately. The preparation of heirs for wealth is a long term process that should begin with an early establishment of family values. Educate your children about your values and what you would like them to accomplish with their inheritance. Make sure your children know what your expectations are and make those expectations realistic.
A wonderful tool that we use to begin this dialog is a ‘Letter of Intent’. An effective Letter of Intent is personal and addresses your heirs directly. It explains the history and source(s) of your wealth, your values regarding money, your definition of happiness and/or personal success, your hopes and wishes for the future, and your responsibility to yourself, your family and your community. Get your Letter of Intent sample here.
Why not challenge yourself, as I challenged the restaurateur who contacted me, to write a Letter of Intent by the end of February and start preparing your family for the transition of wealth? If you have any difficulty with the process, you are welcome to call my office.
Written by R. J. Kelly – January 2015