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Most of us have heard the proverb: “Shirtsleeves to shirtsleeves in three generations.” What many may not realize is that this is the American expression of a phenomenon that is by no means limited to this country. In Chinese, the same saying translates as “from peasant shoes to peasant shoes in three generations.” In Japan, it’s “from rice paddy to rice paddy…”; in Italy, “from the stable to the stars and back again”; and in Scotland, though covering four generations, the principle is baldly framed: “The father buys, the son builds, the grandchild sells, and his son begs.”
For decades – maybe centuries – persons of great vision and determination have been building financial legacies that they hoped would provide for their families on down through the years, but in the vast majority of cases, those legacies were mismanaged and/or squandered by subsequent generations. But there are rare cases of wealth builders who put in place structures and policies that enabled their families to continue to thrive, even long after the passing of the founding generation. In America, two famously contrasting examples are the Vanderbilts and the Rockefellers. Though Cornelius Vanderbilt’s deathbed advice to his son was “Keep the money together,” the vast fortune he had accumulated with his railroad and shipping empire was dissipated by the time 50 years had passed after his death. The Rockefellers, on the other hand, whose fortune was built during the same “Golden Age” as the Vanderbilts, still control a financial legacy that is worth billions. By means of careful planning and thoughtfully designed guidelines, they have “kept the money together,” even though they are well known for their generous philanthropic efforts in the arts, conservation, healthcare, and other worthy causes.
Be a Rockefeller, not a Vanderbilt
As financial advisors and wealth managers, we want our ultra-high net worth clients to emulate the Rockefellers, not the Vanderbilts. How can we help them do that? We provide sound investment and financial planning advice while building the type of relationship that helps to ensure that our advice will be received and followed. But beyond that, we need to help them think through estate planning, education – of themselves and those who will come after them – and governance.
Don’t make assumptions about what our clients know about all these matters. It would be easy to assume, for example, that someone who was savvy enough to put together a multimillion-dollar estate already knows about the importance of wills, trusts, and other basic estate planning tools. But a 2015 survey by CNBC.com found that more than a third of those who had $1 million or more in investable assets had no estate plan in place. This may be, in part, because of recent increases in estate tax exemptions that currently permit as much as $12.92 million per individual ($25.84 million for a couple) to be passed without incurring estate tax liability. But estate planning is about much more than federal tax consequences. For one thing, many states levy their own estate taxes at much lower thresholds than the federal exemption amount. For another, some of the most important aspects of creating and securing intergenerational wealth have little to do with taxation; they have more to do with attitudes, commitment, and understanding. All these matters must be addressed effectively for a family legacy to function for generations.
Planning for intergenerational wealth starts with a vision
Everything starts with an idea. Establishing and securing a family financial legacy is no different. Those who built the wealth have the vision for doing something great, something long-lasting. So, the all-important first step is codifying and “institutionalizing” that vision. It must be in writing and shared with everyone involved, including family members and professional advisors. Too often, for example, estate planning doesn’t go beyond what happens with the children and grandchildren after the passing of the founders. In addition to benefiting from well-designed wills and trusts, the founders’ heirs need to understand the vision for the family wealth: how the founders wish it to be used; how they intend for it to be replenished by each generation; what they want their wealth to accomplish, long after they’re gone, both for the family and for philanthropy. This document should become part of the family’s financial worldview, shaping the assumptions and understandings of each successive generation.
The vision needs to be multi-generational. Many times, family stewards focus on the needs and predispositions of the second and third generations but fail to project any farther into the future. To build a truly intergenerational financial legacy, our clients need to cast their imagination further ahead, giving consideration to generations they will not live to see. Admittedly, it can be hard to see past the faces of children and grandchildren, but we need to help our clients keep in mind that those future descendants will be someone’s children and grandchildren; they deserve attention, too.
Sustaining intergenerational wealth requires ongoing education
For many first-generation wealth builders, the concepts of saving, budgeting, and controlled spending are second nature. But for their children, who may have grown up with an assumption of many of the privileges wealth confers, these principles are unlikely to be as intuitive (just ask the Vanderbilts!). This is where a qualified, fiduciary wealth advisor can offer tremendous support as a financial educator. When children grow up in a culture of attention to the principles of sound financial management, they are much more likely to adopt these principles when they “come into their own.” Like the founding vision, this culture of educating the next generation must become part of the infrastructure, continuing over the years, if the wealth of the founders is to accomplish all that they intend.
Good governance preserves intergenerational wealth
Every successful business leader understands the importance of succession planning. For families seeking to maintain and build generational wealth, this is even more crucial. Good governance of the family enterprise can ensure that those who inherit leadership roles are ready for them. It can also provide guardrails against disruptions caused by the unexpected: premature death of a key individual; disputes among family members; and other events that pose challenges to the smooth functioning of the family organization. A properly designed governance and continuity plan institutionalizes a shared vision, providing stability amid the passing of years and the inevitable changes that come over time. We, as wealth advisors, offer invaluable service as impartial third parties and conduits for our clients to best-in-class governance practices and advisors.
Many of these governance practices have little to do with taxation or even investment or estate planning. Instead, they often focus on effective communication with family members around shared values, effective resolution of conflict, succession planning, proactive approaches to philanthropic goals, and other valuable principles.
As financial and wealth advisors, we will often be the “quarterback” of the team helping to put in place the infrastructure to support an intergenerational financial legacy. It is certainly to our clients’ advantage – and ours, too – for us to provide knowledgeable, authoritative guidance for family stewards and others who are seeking to establish such a legacy.
Kimberly Foss, CFP®, CPWA®, senior wealth advisor, Mercer Advisors, based in Roseville, CA. Prior to joining Mercer Advisors, Kimberly was president and founder of Empyrion Wealth Management. Kimberly is a well-respected thought leader in the financial industry and frequently shares her expertise on the markets, financial planning, and investing with many leading media outlets. Kimberly works with affluent family stewards, women in transition, and thriving retirees. You can reach her at [email protected].
Read more articles by Kimberly Foss
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
