How to Vanquish the Odds and Preserve Family Wealth

There’s a pithy saying that galvanizes wealth management professionals and wealthy families: “From shirtsleeves to shirtsleeves in three generations.” It or its variants exist around the globe — from Canada to Scotland to China.

The English-language version paints a perfect image: the first generation rises from poverty – shirtsleeves – to build wealth. The second generation may retain or even grow the nest egg. By the third generation, that wealth has eroded or vanished. The bottom line: While founders often build incredible wealth, subsequent generations excel at losing it.

This week I’d like to bring you the sage words of my colleague Jeff Noble. Jeff has advised hundreds of business families on how they can beat the odds and preserve their wealth to the fourth generation and beyond. I wanted to get his take on beating the three-generation curse.

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We all have a different set of thoughts and feelings on the value of life and wealth. When considering a multi-generational wealth plan that will endure and be the basis of successful and sustainable wealth transition, it is critical to clarify and communicate our values. This is no idle exercise. By sharing our philosophy about wealth creation, wealth management and wealth divestiture — we can increase the chances that the wealth will truly be generational.

Here’s the challenge: The time-honoured statistics on successful wealth transition are not promising. Wealth creators are often painfully aware that at least two-thirds of the time, wealth erodes or even disappears when it gets in the hands of the next generation or the one after that.

Building a wealth philosophy

Defining principles and values and developing a belief system – a philosophy – from those principles and values with your family will significantly increase the opportunities for you and your family to beat the statistics.

As constant and reliable as the true north in navigation tradition, choosing direction and purpose for wealth will define your legacy and help your beneficiaries and their beneficiaries to be best prepared to receive and to give. Some examples:

• Don’t give away the golden eggs. The goal is to teach family how to look after the golden goose.
• Recurring wealth is like gardening. You enjoy the flowers and then nurture the plant with care and attention so you can enjoy even more prolific blooms the next season.
• Your standard of living is not equal to your cost of living. Always live within your means, not to a standard to which you may feel entitled.
• Spend, save, give. Buy the things you need. Set aside money to buy things in the future. Donate money to help people, animals and the environment.
• Leave the word a better place. Some wealthy families make a point of educating their children on this mantra: I have a personal sense of responsibility to leave the world a better place than it was when I got here.

 

The three Cs of wealth preservation

In my experience, families that successfully beat the odds at preserving and even increasing wealth through multiple generations excel at what I call the three Cs: collaboration, communication and common vision. This is what family governance is all about.

When speaking about collaboration, we speak of working with others among generations, between generations and with a group of external advisors to make the best decisions, together.

To do that, positive communication is critical. This will tie right back to family values as to how we treat each ourselves and how we treat others. Understand and learn from history, relationship dynamics, moods and personalities. Use structure and deal in facts. This will create a positive and safe environment for open, honest and productive communication.

Perhaps the most important of the three Cs is a common vision. This is your wealth-strategy true north. With this alignment of purpose, the focus is not on any individual “me.” The focus is on “us.” Adopt a future focus when managing your wealth for the long term.

Introducing a new definition of wealth

This brings me to a new definition of wealth. When we think of wealth, or capital, we naturally default to tangible items like money, stocks, bonds, real estate and the like. This is financial capital.

The other types of capital include human, intellectual, social and spiritual capital:

• Human capital is a family’s greatest wealth. It comprises all the individuals that make up the family.
• Intellectual capital is the sum of all the information that those individuals know.
• Social capital is the quality and quantity of relationships within the family’s network.
• Spiritual capital covers the deepest values that express the nature of the family.

And when you think about it, if we do not look after the human capital and all that means, the financial capital has precious little chance to endure.

Yes, each of us has a different set of thoughts and feelings on the value of life and wealth. Defining your family’s principles and values – the true north that can steer your family through the blips that will no doubt arise – is fundamental to creating alignment for the future and a common vision supported by positive communication and collaborative decision making.

Jeff Noble is a senior consultant and family enterprise advisor in the BDO Advisory Services practice. He can be reached at jnoble@bdo.ca, or by phone at 905-272-6247.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

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Financial Ethical Wills - For Estate Planning and Managing Family Wealth

Last week, you read about the benefits of an ethical will. These wills are a way for you to share your personal beliefs, spiritual values and hopes for the future with your family. Today you will discover how some people are using ethical wills, to set forth their financial principles and values.

As a parent, a financial ethical will can help you accomplish one or all of the following:

1. Allow you to explain your estate planning
2. Assist your family in maintaining the wealth you created
3. Provide your family guiding principles of how to conduct business
4. Set forth how you hope your monetary legacy is to be used 
5. Discuss your philanthropy values and principals.

Estate Planning - Explaining Your Decisions

As you may have read in my blog titled One Big Happy Family - Until We Discuss the Will, I am a proponent of family meetings to discuss your estate planning (or at least parts of it). Given that many people are uneasy with having a family meeting to discuss money and inheritances, an ethical will provides you the opportunity (albeit after you have died) to clarify for your family your thinking and decision making process in respect of your estate planning.

However, be mindful; if the objective in writing your ethical will is to be positive and motivating, you may need to consider whether the clarity you wish to provide to your family relating to your estate planning decision making process, is in keeping with this objective.

Business - An Ethical Will Provides Guidance for a Family Business

Given the tremendous failure rate of second and third generation businesses (only 30 percent of all family-owned businesses survive into the second generation and only 12 percent will be survive into the third generation), an ethical will can be used to convey the guiding principles of your family business, and even set forth the challenges and opportunities you foresee for the company going forward.

In his article "Reintroducing the Ethical Will: Expanding the Lawyer’s Toolbox", written for the American Bar Association, author Scott E. Friedman provides the following insightful comment:

“In contemplating the scale and variety of intra-family conflict, we have come to the conclusion that many such conflicts are, in part, attributable to the death of a leader who had not thought to clearly transfer his or her intentions, wishes and wisdom to the surviving family members. Lacking direction and the benefits gleaned from a legacy of insight and wishes passed on by the patriarch or matriarch, surviving children often become absorbed in the negative emotions of selfishness, resentment and jealousy, which all inevitably leads to trouble for the business”.

Thus, any guidance and direction you can provide to your children may be invaluable as they try to navigate through the issues of succession of a family business.  

Philanthropy - Setting the Tone for Family Giving

You can use an ethical will to ensure your philanthropic values are carried forward by your children. Here is a quote taken from an article by Eric L. Weiner, Ph.D. written for the practice management section of the Financial Planning Association, in which a parent said the following:

“I would love to see you become responsible members of the community and philanthropists. To that end, I have set up a donor-advised fund as the main conduit for our philanthropic interest. This fund will give you and possibly your children the ability to make grants to worthy causes. I want portability so that you can direct grants to your own communities, as well as to national and international interests”.

Alternatively, instead of setting up a charitable fund, you could just encourage philanthropy by speaking to the importance of charity in your ethical will and hope you lead by example and your children follow in your charitable footsteps.

Ethical wills provide you with a tool to impart both your spiritual and financial values and beliefs and principles to your children. You may therefore, wish to consider using an ethical will in addition to the traditional Last Will and Testament.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Wealthy families and their children-any lessons to be learned for everyday Canadian families?

In my recent blog “Estate Planning-Taking it to the grave or leaving it all to the kids,” I quoted comments made by Dr. Lee Hausner in regard to how she suggests wealthy families deal with their money and their children. I remember reading Dr. Hausner’s comments in a 2007 article, titled The Trust Fund Whisperer and they have stuck with me over the years.

Although Dr. Hausner deals with extremely wealthy families, I feel that her advice is relevant for many Canadian families, from middle to upper class. In this blog I will review some of her suggestions and their applicability to Canadians who are not “über rich”.

Set an example

In the article, Dr. Hausner notes that “How children feel about money has a lot to do with how they see their parents spend it. Stay productive, be charitable and invest wisely, and your kids will too.” For a typical Canadian working class family, I think the example is set through children observing how hard their parents work to put food on the table. But what about upper middle class and upper class Canadian families? These parents also often work extremely hard, however, even with significant family income, many live pay cheque to pay cheque in an attempt to keep up with the Jones’s by spending for a house in the right area, the BMW lease and the required family vacation to Europe, while paying little attention to volunteering or charitable giving. Stepping back and paying some heed to Dr. Hausner’s comments may provide some perspective and provide a better example to your children. (I am not in anyway saying I am above this discussion and that I am not guilty of some of these sins, I am just commenting in general).

Encourage philanthropy

Dr. Hausner is very big on encouraging philanthropy and becoming involved in charitable causes. I would suggest that these two activities can be undertaken by anyone, regardless of wealth. Where children observe their parents involved in charitable causes, there is clearly a filter down effect, including discussion of these causes at the dinner table. Where children receive birthday gifts or other cash gifts, parents should encourage the child to give even $5 to a charitable cause. In Ontario, the high schools have really taken an active role by requiring community service as part of the graduation process.

Avoid cash paralysis

Dr. Hausner suggests you don't transfer any substantial amount of wealth before or during a child's career-building years. Pay for education, housing and other expenses, but large sums of cash will just "grind their productivity to a halt." This suggestion is limited in scope for most Canadian families, but should be kept in mind by any family that will inherit funds as part of the large wealth transfer currently underway.

An interesting read in this regard is an article by Leah McLaren in the July edition of Toronto Life titled Latner vs. Latner vs Latner vs Latner. To quickly recap the article: Albert Latner made millions of dollars in real estate and then sold out and branched into health care and casinos amongst other interests. He then took his healthcare company, Dynacare, public and sold out for $480 million dollars. His holding company also owns shares in the Fallsview Casino Resort. According to the article, after Albert’s wife passed away, he decided to distribute his children’s entire inheritance in full. The Toronto Life article discusses the fallout of distributing the full inheritance, it's a fascinating read to say the least.

 Encourage passions

Dr. Hausner suggests that if your child wants to be a teacher, but worries about the standard of living associated with the profession, offer to match their salary. Again, while not applicable for most Canadian families, I think this is a great suggestion for any family that will have some excess wealth. While matching a salary may not be within the grasp of many, if your family has some excess wealth, what better way to encourage your child than by supporting them in a job or profession they truly love.

Most families do not have the wealth transfer concerns Dr. Hausner addresses, however, in my opinion, her suggestions are applicable to many families, notwithstanding their incomes.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.