Families with significant wealth are continually challenged by next-generation transitions and various wealth management-related matters. Whether it’s establishing trusts for newborns, training young adults for leadership within the family structure or closely held business, or educating younger generations on the concept of stewardship, charitable giving, and financial responsibility, there are many issues to consider. There is a frequently heard saying in working with the ultra-high net worth crowd, “Shirtsleeves and to shirtsleeves in three generations.” This statement, attributed to philanthropist Andrew Carnegie, refers to the cycle of building wealth initially and then having proceeding generations blow it. It is informally predicted that by the third generation, 90 percent of wealthy families may lose their wealth. However, wealth “evaporation” can also be the result of poor planning around wealth transfer, estate, and gift taxes, in which case two generations may be the appropriate number. Either way, wealth can be squandered quickly without proper preparation, planning, and communication. Which brings us to the topic of family governance. While proper financial planning, investing, and wealth strategy is a baseline for wealth preservation and tax management, family governance provides a structure where shared and differing values, as well as the actual numbers and strategic wealth planning implementation, may be addressed with greater transparency across generations.
When to Focus on Family Governance
In working with ultra-high net worth families for well over a decade, I have yet to see a standard in what the term “family governance” means or how and when it’s applied within a family. While there are many attempts at defining it, and perhaps an ideal framework to consider, it rarely evolves in an ideal way. This makes perfect sense because families are so different, generational wealth can be “old” or “new,” and family members have very different perspectives and personalities. As family assets grow in value and complexity, babies are born, others pass away, and marriages, divorces, and dysfunction occur, the need for some type of governance and oversight related to education, transparency in investment holdings, trust and estate updates, philanthropy, and family leadership (“patriarch or matriarch”) becomes more apparent and, frankly, more important. Families often take note of this as generation two or three reach adulthood.
How Families Execute Family Governance
In some cases, a family may develop a “mission statement,” which is a summary that states the shared values, vision, and purpose of the wealth across generations; or it states the core legacy values and vision of only the wealth creator(s) who hope to instill these principles across generations. Is a mission statement required? Not necessarily, and families sometimes get too hung up on getting this statement exactly right at the expense of focusing on what they want to accomplish through the family governance process. If a mission statement doesn’t come easily, start by answering this question: What do you want to accomplish by establishing “family governance” now? Answer that question first, then decide the best format and timing of how to proceed. Here are several examples of how the governance process evolved within several families. None are alike and only one had a formal mission statement.
Driven by Philanthropy
A first-generation wealth creator in his 60s established a family foundation that supports a variety of highly specific local causes. The wealth creator brought three of the four adult children together to discuss the oversight and the goals of the foundation. All other topics related to estate planning, trusts, wealth transfer, etc. were off the table. One initial, in-person meeting was held and several one-on-one phone calls. One adult child took the lead and expressed interest, and the other two were mildly interested and were unfamiliar with some of the concepts and ideas discussed. Although there wasn’t a lot accomplished at first, it was the effort by the wealth creator to communicate what was important to him that changed the dynamic of the family in a healthier direction. Eventually, other topics were addressed.
Operating Company Update Focus
A privately held $2 billion family-owned company is run by one of three members of the second generation. The other two do not participate in the management or operations of the company but receive an equal share of distributions and proportional ownership. Meetings are held quarterly with the siblings to review the company and the financials, but each family line determines how they will educate and train their children in financial management and stewardship. One of the three siblings takes advantage of the training available to them through their advisory firm. The others do not because they have younger children who are not yet ready for more education and preparation.
Investment, Trust, and Foundation Focus
A divorced first-generation wealth creator with four children and twelve grandchildren meets in person bi-annually over a weekend in a neutral location with the children and in-laws. None of the grandchildren, some of whom are young adults, are included. The main topic of the discussions is a review of family trusts and legacy, the investment allocations, and the family’s donor advised fund. The charitable allocation from the fund is rotated each year by family line so that all children and in-laws are involved in charitable activities.
Heirs of an early 20th century industrialist (five lines of cousins) meet for a family reunion every other year in the town where the wealth was originally created. Some family members consistently attend, while others do not. At this point in time their only connection is the inherited, smaller “pockets” of wealth passed down through several generations, and the connection to the original family homestead, which is no longer occupied by any of the family members. They spend the weekend together, review family history and legacy, catch up with one another, have a picnic, then go their separate ways. A handful of family members remain involved in several family foundations.
Single Family Office
A multi-billion-dollar family with four living generations holds an annual family meeting. Every family member over the age of 18 attends. The highly structured meeting with a firm agenda is held over a weekend and is focused on legacy and trusts, charitable giving, investments, and educating the younger generation on all aspects of the oversight of the family wealth structures and expected stewardship.
Five different families and five unique attempts at family governance. There is no standard “formula;” however, a good advisor can greatly assist a family with developing goals, objectives, and a format that works with the unique style and approach that best serves them.