Preparing for Wealth is the Key to Retaining It

By Brad Scott, Founder and Manager, Institute for Family Wealth

FACT – 70% of all wealth transitions from one generation to the next fail (Institute for Preparing Heirs)

Sad, but true. The main reason that the majority of wealth transfers to the next generation fail are not due to estate planning issues or poor tax advice or bad investment decisions. Unfortunately, 85% of these wealth transition failures around the world are caused by one or a combination of the following factors:

• the next generation not being prepared,

• a lack of a clear purpose or mission of the family’s wealth

• lack of trust within the family

• communication issues within the family

Family dynamics play a much greater role in successful estate transfers than previously understood. There is a reason there is a saying…”Shirtsleeves to Shirtsleeves in three generations” and this phenomenon is not reserved for Western cultures. The Italians say; Dalle stalle alle stele alle stalle which translates to “from the stables to the stars and back to the stables”. In Brazil, it’s Pai rico, fiho nobre, neto pobre (Rich father, noble son, poor grandson), and China - Fu bu guo san dai (Wealth never survives three generations).

The Boston College Center on Wealth and Philanthropy estimates that $1 Trillion will pass from one party to another each year for the next 50 years in the United States alone (Paul Schervish, Barclay’s Wealth, Volume 3, 2007). There are limited statistics on this for Australia, however you can be sure the number is high and consistent with other countries around the globe.

So how do you determine if your family is ready to deal with the challenges of transitioning your wealth and how do you address these issues? The first thing to understand, it this does not stop with the will and it’s not all about the money. Your estate plan may be in place but are the beneficiaries prepared? Consider the following for your family:

1. Be Aware of the challenges of transitions

2. Assess your own family’s readiness and what that might look like

3. Put the Actions in place to ensure you have a greater chance of success

How do you do that? We have outlined 10 questions below, which if used well can assist in assessing your own family’s readiness:

1. Do they know their family’s history and how their predecessors worked to arrive at the family wealth?

2. Have you shared with family members the values you hold as important and that you hope to pass on to your children, grandchildren and their spouses?

3. Does your family meet regularly to discuss topics of importance to the family?

4. Do all family heirs have the option of participating in the management of the family’s assets?

5. Are younger children encouraged to participate in the family’s philanthropic decisions?

6. Has your family reached consensus on a written statement that spells out the overall purpose of the family wealth, including a detailed definition of all the important terms used in that mission statement?

7. Are family members encouraged to freely express an interest or passion for a future family role, whether or not that role is directly related to the management of the family’s assets?

8. Do you understand the basic financial language used in your family’s investment portfolio and estate planning documents?

9. Do family members easily communicate with one another, including spouses, on topics that may be viewed as uncomfortable (e.g. money, wills, health)?

10. Do family members typically live up to their commitments to one another?