There is an amazing (or perhaps terrifying, depending on your circumstance) statistic around family wealth succession plans. A study of 3,250 wealthy families in the US discovered that an enormous 70% of multi-generational wealth plans fail. By fail, I mean that the wealth did not last as long as it was intended to.
The reasons for failure are numerous but one major difference between families who preserved and grew their wealth successfully over multiple generations versus those who didn’t is that the successful families had a shared vision for their wealth. Interestingly, the plans did not tend to fail due to bad investment choices or high taxation, it was the spending or erosion of the wealth by the family members that was the primary cause, or a breakdown in family communication.
Having wealth is all well and good but for it to be maintained and grown over many generations, those responsible for its stewardship must have a clear understanding of the purpose of the money.
A simple ‘grow the wealth’ type statement is just not going to cut it. We need to think more deeply than that. Why should the wealth be grown? What are we aiming for? Quite frankly, why not just spend it?
Wealth can be a great enabler, if used properly. It can change the lives of not just those who have it now, but future generations too. Think about the charitable causes the wealth can help or the future children and grandchildren who can call upon it for their education, housing, or business start-ups for example.
A vision for the family wealth becomes more important, the ‘older’ the wealth gets. For ‘generation zero’, i.e., the creators of the wealth, their vision tends to be quite clear. Let’s take the example of someone who starts a business, grows it and then sells it a number of years later. Chances are, that business would never have succeeded if the founder had not had a goal (or vision!) for what the company could be. That tends to extend to the wealth that the company brought about, with the creators of wealth most likely to be active stewards of the capital and very conscious of how much they spend or erode.
As the generations pass, this stewardship discipline can slip. There is a phrase called ‘shirt sleeves to shirt sleeves in 3 generations’. I can’t help but think that this lack of vision could be a primary cause for this phenomenon. The saying goes that the first generation creates the wealth, the second preserves it and the third spends it. By the time the wealth gets 3 generations down the line, has the struggle of creating it in the first place been lost? Has the vision for what the wealth can do, faded with time?
Now think about the power of having a written vision statement, signed by the family members, that can guide future inheritors. How reassuring would that be to future generations- to call upon the guidance of those who have presided over the wealth in the past and to understand their values and priorities. Remember too that wealth can be a burden (see my video here) to those who are new to it– so a written statement of values and principles can greatly assist them.
There are a number of factors to consider if you are thinking of putting a family vision statement together. I’d like to share 3 with you now to help you on that journey:
1) Make something that will last. Don’t be time-specific, this document should be able to last a long time and whilst it will undoubtedly be tweaked over the years, it shouldn’t need to be completely re-written
2) Get agreement. Just like a company mission or vision has to be embraced by staff, your family vision statement needs to be embraced by the family. Take other people’s thoughts and wishes in to account
3) Give examples of ‘good spending’ that the wealth can be used to fund, and whether consideration should be given to loans, rather than outright gifts. This does 2 things: provides a structure and precedent for what is and is not something that the family wealth should fund (that second Range Rover, for example, may be pushing it). It also gives a heads up to the family that the wealth can be used to fund purchases but importantly, does that wealth need to be recirculated (i.e., a loan) or can it be distributed (i.e., a gift) to those family members who ask for it?
I really hope that this article has been of assistance to you in your own wealth journey and my insights are useful. As always, I’d love to hear any feedback.
All the best,
Louis
Source: Williams & Priesser, Preparing Heirs
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