Can Family Wealth Last More Than Two Generations?

Build generational wealthIn July 2020’s  “Imagine That™! we met “Donna” (named changed), an interior decorator with a thriving business, who had asked us to help establish her estate plan and create a legacy for her two children and four grandchildren. As a reminder, she’s a self-made millionaire creating her version of the American Dream of building a legacy with one son working with her in the family business and the other fully independent. She hopes that someday one of her grandchildren might take over the business she passes to her son.

Estate planning means more today than just finding the best tax-advantaged strategy(gies) to pass family wealth to the next generation. It also means focusing on family cohesion – interdependence – standing on your own while working effectively with your trusted support network, your family. We’re swinging back to how this little-known estate planning tool can help families like Donna’s beat the odds of only a 9% success rate of transferring wealth through three generations… “Imagine That™!


Did You Know That Only 9% of Multi-Generational Wealth Transfers Succeed?

Versions of this statistic are so common that there are sayings about it in most countries: “shirtsleeves to shirtsleeves in three generations” (U.S.), “there’s nobbut three generations atween a clog and clog.” (England), “rice bowl to rice bowl in three generations” (Asia), and “wealth never survives three generations” (China). “From stalls to stars to stalls” (Italy). It doesn’t matter what the economic structure is or the tax code. 

But why does this happen? 

Families spend fortunes educating their children and raising them to be independent, functioning members of society. 

The late Roy Williams of “The Williams Group” spent 25 years studying this high failure rate. He found that:

  • 60% of all wealth transfer 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 vision

  • Only 5% are attributable to other factors like taxes, governance, or legal issues

A wonderful friend by the name of Tom Rogerson (GenLegCo.) found, on his way to forming the company he and his wife run, that traditional estate planning no longer has the scope clients want. A tax-efficient transfer of wealth only addresses 5% of the failure rate. 

Instead, he focuses his entire consultancy around building family cohesion – funded by a family legacy trust.

 

How Do Trusts Build Family Cohesion?

Tom Rogerson and estate attorney Marvin Blum developed the concept they call Family Advancement Sustainability Trust or FAST. I have, however, shortened it and made it something I can remember – the Family Legacy Trust (FLT). Whatever you decide to call it, this concept makes such good sense after you think about it for more than a second. But still, I have yet to meet someone who has one in place.

Trusts for spreading wealth across generations are nothing new. Transferring wealth by itself, however, does little to ensure that it will last generationally. Research shows that unless we also transfer the virtues and value system that created the wealth, within a few generations, the financial wealth disappears.

The primary purpose of a Family Legacy Trust focuses on keeping the family together, no matter what happens in the lives of its members. It prepares heirs to inherit the money (25% of wealth transfer failures) through funding education outside of traditional institutions. 

For example, upcoming generations may need to learn more about:

  • how to get (and stay!) married

  • how to raise self-motivated, emotionally-balanced children  

  • tax structures that apply to them

  • how to read legal documents

  • how to negotiate financial deals

Families setting up FLTs will work with family dynamic consultants like our friends at GenLegCo. to build family purpose (10% of wealth transfer failures). It begins with regularly bringing the family together to learn to make decisions as a team. 

Affluent/wealthy families often find their relationships are more social in nature. They don’t see parents modeling the dynamics of conflict resolution or showing to work together. If someone gets upset, they can take their phone in another room and perhaps not see their family members for days at a time. The root cause(s) of their distress often remains unresolved. 

In these affluent families, parents rarely make financial decisions in front of their children. The children, as a result, don’t learn to navigate the dynamics of making big, impactful decisions together with their spouses. We see more and more of “your money” and “my money” in adult relationship dynamics, not “family money.”

FLTs can be used to help families address challenges that inevitably come up in even a close-knit family. Learning strategies for resolving family issues in a healthy way through low-stakes practice builds trust and knowledge of each other’s strengths and weaknesses. A few common examples our friends at GenLegCo recommend are selective charitable contributions as a family group and organizing family vacations or retreats together.

The Family Legacy Trust can be used as a funding mechanism for hosting periodic family retreats. This might be as infrequent as once a year, or could be as often as once a month. The trust prevents the logistic hurdles of each member putting up their share of the money. (“Sorry, we can’t make it this year. All our funds are tied up in putting in the pool.”) Instead, the trust pays for the family retreat. It’s a low barrier to entry. Why not go?


Plus, with organization and outside funding, it’s less likely for a well-intentioned, good idea to fizzle out when people get busy. 

It sets a space for families to reconnect, refine the family values and vision, and set up extra-educational opportunities, as mentioned above, for each member to manage wealth with wisdom. Don’t forget it’s also a great opportunity to onboard spouses into the family dynamics.

 

But what about the breakdown of trust and communication (60% of multi-generational wealth transfer failures?)

Working together to organize family philanthropy and family retreats offers a good inroad to building healthy family dynamics. It’s like taking a car on a short drive before heading out on a cross-country road trip, just to double-check that all the bolts are tight and tires are properly inflated. 

All this money could come straight from the pockets of the matriarch and patriarch of the family, with no trust involved. Depending on the family dynamics, this could be healthy. But it could also make the younger generations ask, “with what strings?”

That’s where the decision-making components of the FLT come in. Let’s take a look at the mechanics.


The 4 Decision-Making Bodies of an FLT

Experience shows that the best results come from a blend of trusted family members and professionals for the administrative functions of the FLT.   It creates a system of checks and balances to ensure the family’s vision lasts generationally. For example:

  • The Administrative Trustee takes responsibility for recordkeeping and custody of the Trust’s assets. A corporate trustee oftentimes serves in this position. 

  • The Investment Committee makes all the decisions concerning investments of the Trust’s assets. At a minimum, two family members, ideally from different generations, and a financial advisor could comprise this committee. 

  • The Distribution Committee spends the Trust’s assets to preserve and strengthen the family. They fund family retreats and continuing education for all members. It consists of a mix of family members and professional advisors, such as the family attorney, accountant, and financial advisor. 

  • The Trust Protector Committee takes over the role of grantor once the initial grantor can no longer serve in that capacity. They will remove and appoint Trustees, Committee Members, any other advisors, and amend the terms of the Trust for more efficient administration or improved tax status. It generally starts with three professional members familiar with the family, like the family attorney, CPA, financial advisor, or other trusted fiduciary. Family members can be consultants to the committee but generally shouldn’t serve here. 

 

Creating and Funding a Family Legacy Trust 

Family Legacy Trusts require minimal funding to start. Most of the funds will transfer to the trust after the grantor(s) passing. The amount will naturally vary from family to family and can either be a fixed amount or a percentage of the estate. 

We recommend taking advantage of the tax optimization of a properly structured irrevocable life insurance trust. A more traditional life insurance policy can work well too. It eases some of the tax burden and provides an extra layer of protection to ensure the Trust has the funds to perform its mission. 


Conclusion: Reinforcing Family Connections, and Passing Forward Virtues and Values Provide the Best Chance for Family Wealth to Last Multi-Generationally

One of my friends was born to a family of nearly a billion dollars. Her comment about wealth has stayed with me for decades, “Wealth is simply a magnifier. It makes good parenting better and makes bad parenting worse.”

Leaving the estate outright to your children is often not the wisest path. Instead, leaving an inheritance focusing on nurturing family relationships and passing forward the family’s virtues and values alongside it helps future generations lead healthy, meaningful creative lives.

Creating an FLT during the patriarch’s and matriarch’s lifetimes builds an inherent mechanism to hold the family together after their passing. By refocusing on building strong family virtues and values, continuing education for each and every family member to supplement what formal education misses, and providing time for reconnection, the family can remain a wealthy family for generations to come…Imagine That™!

Imagine That™! is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families. Sign up to receive our monthly newsletter here.

R. J. Kelly, Wealth Legacy Group®, Inc. – October 2022

Image on Canva, one design use license

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