Avoiding “Shirtsleeves To Shirtsleeves In Three Generations”

A flourishing interior decorator “Donna” (name changed) recently contacted us to help establish her estate plan and create a legacy for her two children and four grandchildren. Donna is a self-made millionaire who created her own thriving business. One son works with her in the business and the other son does not. Donna wanted to make sure the son in the business can continue to successfully run the company when she retires. She also wanted to ensure the business will be able to continue providing a substantial income to both of her sons and then have it pass to her grandchildren when they are older and if any are interested in joining the family business.

Unfortunately, most family businesses will not make it to three generations. By knowing why most wealth transfers are doomed to fail, however, and using a little-known estate planning tool to successfully transfer wealth generationally, Donna can beat the odds . . . “Imagine That™!“

Did You Know Most Wealth Transfers From One Generation Are Doomed To Fail?

Not to be “Donny Downer,” but did you know that 70% of transfers from one generation to the next are doomed to fail? Even more depressing is that 91% of multi-generational wealth transfers fail by the third generation. And, this is not just true in America, but across all countries in the world, even though they have radically different economies and tax structures. This dramatic failure rate has generated some sayings you may have heard: Andrew Carnegie is attributed with saying “shirtsleeves to shirtsleeves in three generations” (US), “three generations clogs to clogs” (England), “rice bowl to rice bowl in three generations” (Asia), and “wealth never survives three generations” (China).

Why Aren’t Most Wealth Transfers Successful?

Ground-breaking mentor to many of us, the late Roy Williams of “The Williams Group” in San Clemente, CA spent over 25 years studying why such a high failure rate exists. His research indicates:

• 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

• only 5% are attributed to other factors—taxes, governance, legal issues, etc.

Most wealth transition plans focus on preparing the assets, which is where only 5% of the issues are and completely ignore the family and heirs, which is where 95% of the issues reside. The focus on the wrong issues 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? As you can see from the above data, focusing on external factors is not nearly as important as focusing on the internal factors of your family.

Investing In Your Family Is The Key To A Successful Transfer Of Both Family Values & Wealth

The death of the older generation can create a leadership gap concerning the running of a business and the continuity of the family itself. Trusts that last generationally are nothing new for transferring financial wealth. Generational trusts, however, that are for transferring a family’s value system, wisdom, beliefs, cultural wealth and so forth are very, very new.

As recently as 2017, I recall learning of a special trust called a “Family Advancement Sustainability Trust” (FAST). The FAST came about as a result of conversations between Marvin E. Blum, founder of The Blum Firm, P.C. in Fort Worth, Texas, and Tom Rogerson, President and CEO of GenLeg Co. in Duxbury, Massachusetts. The purpose of the FAST is different than traditional family trusts which are instead focused on passing along wealth and distributing money to heirs. The primary purpose of the FAST, however, is to help establish a leadership structure and provide financial resources to fund educational and personal development activities for family members generation upon generation.

Two-Stage Process Of The FAST

There is a two-stage process to implement the FAST:

• Stage 1: Initiate the process of teaching and enhancing family communication skills, and work with family members and spouses to determine, clarify and commit to family beliefs, shared values, and goals

• Stage 2: Identify and implement the family vision – which includes a plan for the purpose of the family’s financial wealth and perpetuating the philanthropic mission of the family. The plan should be purpose-driven and tailored to the beliefs, values and goals that were obtained in Stage 1. The plan should also be beneficiary-focused and oriented towards ensuring that the family itself continues for more than a single generation

The 4 Decision-Making Components Of The FAST

The usual governance structure of a FAST includes four decision-making bodies:

• Administrative Trustee—usually a corporate trustee serves in this position. They are responsible for recordkeeping and maintaining custody of the Trust’s assets

• Investment Committee—commonly comprised of two family members and a financial advisor. They are responsible for making all the decisions concerning investment of the Trust’s assets

• Distribution Committee—often consisting of family members and one or more advisors (e.g., family attorney, accountant, consultant who provides legacy planning.) They are required to spend the Trust’s assets to preserve and strengthen the family (e.g., family retreats and educational opportunities)

• Trust Protector Committee—usually made up of three professional members (e.g., family attorney, CPA, financial advisor, trusted fiduciary). Although it is not advisable to have any family members on this committee, they can serve as consultants. The committee members will take over the role of grantor once the grantor is no longer able to do so due to illness or death. Their decisions may include removing or appointing Trustees, Committee Members, or other advisors, and amending the terms of the Trust to efficiently administer the Trust or to achieve favorable tax status

Creation And Funding Of The FAST

Usually a FAST is created during the patriarch’s and matriarch’s lifetimes to afford them the opportunity to educate their family members and advisors on the Trust’s purposes and guiding principles. FASTs generally require minimal funding when created, with the bulk of funding coming after the grantor’s death(s). The amount of funding can be a fixed amount or a percentage of the estate and will vary from family to family according to the degree of their wealth and the FAST’s agenda. Although funding can come through the grantor’s estate, a better approach is to fund a FAST with life insurance or a properly structured irrevocable life insurance trust.

Conclusion: Establish A FAST To Successfully Maintain And Grow The Family Heritage For Good Over Multiple Generations

Are you in the same situation as Donna? Do you want to make sure the legacy you hand down to your children lasts more than one generation?

By establishing a FAST, you can ensure that the focus is on the internal factors of your family. There is a lot of flexibility and options in creating a FAST, not to mention many moving parts and pieces. Let’s schedule a call or a meeting to discuss your interest in creating an estate plan that will last more than one generation.

Avoiding the “Shirtsleeves To Shirtsleeves In Three Generations” statistic can be accomplished with the FAST. Knowing that your children, grandchildren, and more will be able to enjoy your gift should be a source of peace and contentment as you create something that will benefit future generations to come . . .