Some families do well in general transitions, but many fail — some fail miserably. Those who thrive from generation to generation are rare, but not as rare as some think. These families tend to be strong, resilient and deliberate. But most importantly, they are paying attention to the real threats to wealth.
These threats revolve around failures of communication, trust, cohesion and preparation — which can be summed up as failures of family culture. By addressing these breakpoints, you begin to eliminate the greatest cause of the loss of financial wealth — failures of family culture.1
These families understand that successfully navigating wealth is a bit like flying a jetliner — two well-matched wings are required. These are the wings of structural estate planning on one side and family preparation on the other. One strong and one weak wing won’t do. Failure of either wing is catastrophic. Yet in many families who flounder, the “planning wing” has received disproportionate attention — trusts are established, advisors are in place, tax strategies are adopted, investment approaches are calibrated. The planning is superb. It all looks terrific on paper. But these complex structures comprise only one wing of the plane, and the other equally important wing — the wing of family preparation — is neglected.
Different family cultures require different estate-planning structures. Creating estate-planning structures that match your family culture is critical. Identifying misalignment between culture and structure can help families — in collaboration with their professional team — understand the importance of preparation for the plans that have been created. This practice can help mitigate everything from family legal battles to untoward effects of too much wealth by promoting positive family interactions and outcomes.
Once a misalignment between culture and structure has been identified, the families and the wealth holders can decide how to course-correct. They will either do the work to build a family culture equal to the sophistication of their planning or simplify the plan to match the capabilities and competencies of the family. Some will seek to do both and engage in a dynamic process in which planning and preparation evolve. They will identify an aspirational goal and then slowly build out the plan and actively engage in preparation as they do that — adjusting both planning and preparation as they go.
For families that seek to match planning to preparation, it is important to understand the nature of family culture. It is clear that family culture will eat estate-planning structures for breakfast, lunch and dinner. Plans fail not because they are bad plans but because they must work in human systems, which by their nature are messy. These human systems are driven by group culture. Culture can be understood as the unseen driver of family behavior. Every family has invisible “software” that encompasses its beliefs, perspectives, attitudes and actions. Families who successfully curate their cultural software take charge of writing their own operating systems.
Three primary conditions underlie this inattention to culture and are challenges for families taking charge of their cultural development:
Concern about confronting challenging family dynamics or historical behaviors can leave culture unaddressed. Family members may believe that discussing challenging issues could worsen financial outcomes and relationships. While that is certainly possible, if discussions are navigated thoughtfully, a family can rewrite its cultural software.
Families are complex. Navigating that complexity requires frameworks (such as those outlined in this article). It also requires dialog and the collective development of beliefs, perspectives and principles that guide the actions of the family.
Often families contain a confusing array of conflicting beliefs, values and roles. To establish a productive family culture, leaders of the family find ways to facilitate accountability systems for appropriate behavior. Family meetings and policies help to create a cadence of consistency that can align the family.
Family leaders who plan for transition as a culturally embedded process serve the long-term interests of their family much more effectively than those who don’t. This planning allows you and your advisor to play a proactive long game so that you are not only tactically reducing estate taxes (which are not the greatest threat to wealth), but strategically matching the structures you are creating to the capacities, capabilities and true needs of the people who are inheriting the wealth. The goal of your planning shifts from merely saving taxes to creating structures that are much more likely to survive the test of time.
In surveying the families we work with, we have found that there are three basic or strategic approaches to estate plans. Plans typically fall roughly into one of these pathways. We find that understanding these pathways helps wealth holders decide on what type of plan they want to leave behind for their families. Each pathway requires different levels of preparation and different levels of teamwork on the part of the family members. Any pathway is a valid choice — the question isn’t which pathway is “better,” but, rather, which pathway best fits your family and will most likely allow them to flourish over generations.
Pathway 1: Division
In this first pathway, each heir receives some fixed amount and the balance goes to taxes or to charity. This pathway usually results in the disappearance of the wealth within a generation or two— which is precisely what the person setting up the plan intends.. Typically, such plans arise from a desire to create self-sufficiency in future generations and concerns about enabling entitlement among children. It can also be motivated by a desire not to saddle children and grandchildren with the complexities of trusts and entity management.
Metaphor: In explaining these strategies, we use the analogy of the goose that lays the golden eggs. In division, the eggs are given to the children and the goose (or bulk of accumulated capital) goes to charity or the government.
Structures: Division estate plans are basic; they don’t include generation-skipping trusts, entity planning or other complex structures designed to last for extended periods of time. At most, these plans educate grandchildren and/or give them a jumpstart on their financial life, but terminate quickly after that.
Skill sets required for success: For such plans to be successful, beneficiaries must have financial literacy (that is, knowledge of how to effectively earn, save, invest and spend their money). If children are to be self-sufficient, they must know now to fend for themselves in the financial world.
When things go bad: When there is inadequate preparation, wealth erodes rapidly from such things as overspending, failure to hold productive employment and psychological issues such as mental illness, addiction or the inability to maintain stable social connections.