Successful Families Understand the ‘Why’ Behind Their Planning
Knowing the “why” – or said differently, the values – that underpin how money is spent and allocated is critical to creating a wealth plan that meets a family’s objectives and allows for long-term success. In this article, we offer six guiding principles we believe help families create life-affirming, enduring, effective wealth plans. These plans are the bedrock of family legacy – what we leave for those who come after.
Born in 1926, just prior to the Great Depression, John grew up poor, a child of immigrant parents. He saw two of his four siblings perish from childhood illness in the 1930s, which led him to go to medical school and become a physician. As an adult, John was intensely focused on his wealth. He kept a ledger calculating the value of his real estate and investments. Every page of a thick book summarized the value of his net assets. He updated the calculation every day for decades. He watched his investments grow to a sizable sum but never stopped tallying the value of his wealth daily. Why?
For John, money was a means to having security for himself and his family – never having to wonder where their next meal would come from or how his children’s education would be paid for. His family found the ledger after his death, nearly a century after the Great Depression. They realized the poverty that pervaded his childhood influenced his thinking about money’s role – how he spent, saved, invested and gave – for his entire life, even when those early years of scarcity were a distant memory. The ledger served as daily reassurance that his family would not want for financial stability, but also demonstrated the pervasive fear that a fortune not carefully tracked and tended to could disappear.
Our understanding of the purpose and role of money is typically shaped early in our lives. A childhood with limited resources can mean money is a means to security. In another household, there may be plenty of wealth, enabling the family to have a summer home, where everyone gathers, spends long days on the beach and creates lasting memories. The home represents a place of connection and meaning, where family traditions are celebrated. The family may prioritize the summer home’s preservation and fund a family trust to support the property’s maintenance and guard against the scenario where none of the family members have the means to keep an expensive piece of real estate. For this family, money is a means to maintaining family connection and tradition. In still another family, unlimited access to all of the “stuff” money can provide without context or communication around that money may foster in children a sense that they are entitled to the family wealth without an appreciation for how it was created and how it should be managed.
What Do You Want to Accomplish with Your Wealth?
When families are asked, “What do you want to accomplish with your wealth?” most often the answer is phrased in the negative: “We don’t want to pay estate taxes,” “We don’t want our children to be entitled,” or “We don’t want creditors to reach our assets.” While these are all important objectives for a good financial and estate plan, they do not answer the question: What do you want to accomplish? In other words, what life-affirming values underlie how you deploy your wealth?
As Ellen Perry, a Senior Advisor to Brown Brothers Harriman (BBH), writes in her book, A Wealth of Possibilities: Navigating Family, Money, and Legacy:
Strong, healthy families generally have well-defined, clearly articulated, life-affirming values. In such families, values are discussed openly, lived enthusiastically, constitute the organizing principle of family life, and define the nature and quality of many family relationships.
Family members tend to have common values, even though it may not always appear so at first glance. This makes sense because values are often derived from stories shared, memories of ancestors and the collective family narrative. The values underlying family decisions can serve as the framework for determining when and if a wealth plan should be changed. In other words, values are a north star to a family’s wealth plan – helping the family stay on course even in changing conditions.
We believe the following six guiding principles can help families create life-affirming, enduring, effective wealth plans:
- Communication and trust are critical to preserving family wealth and values
- Raising financially responsible children is a lifelong endeavor
- Children should be allowed to take risks and make independent decisions
- Everyone should be at the table
- Privacy should be respected, but secrets are risky
- Children learn by watching their parents
Communication and Trust Are Critical to Preserving Family Wealth and Values
Most families fail to transfer wealth effectively – 70% of wealth transfers to the second generation and 90% to the third fail; just 3% of failures are due to poor tax, legal or investment advice.1 Ninety-seven percent of the causes for failure are within families’ control and relate to a lack of communication and trust among members.
The most important factor in successful wealth planning is communication among family members. Once families understand the “why” behind their biggest decisions, they should consistently and openly discuss how their values influence behavior and decisions.
“I keep $x in fixed income because I value security, so it is important for me to know I have five years of living expenses in low-risk securities.”
“We are contributing significant assets to a family trust to endow the maintenance of a summer home because we value the traditions and family relationships fostered there.”
“I am not going to buy my son a car. Instead, it is important for him to earn the money to purchase it himself. I value hard work, and earning it himself will teach him the value of working hard for something he wants.”
Articulating the connection between values and action is how families pass down values to the next generation. Each family member will express values differently. Even if everyone prioritizes the same set of values, they will make choices that look and feel different from each other.
In the example of the family summer home, the first generation (G1) may endow the home, the second generation (G2) may enjoy it and use it as intended for family gatherings and traditions, and the third generation (G3) may sell the home and use the proceeds to gather the extended family yearly for a vacation in an exotic location. This seemingly radical departure by G3 does not mean they do not value family and tradition. In fact, it is not a departure from the family values at all. This generation is expressing the same values in a different manner. For G3, going to the same place every summer may be inconvenient due to their geographical dispersion and the sheer size of the family. However, they are still using family resources (the summer home trust) for the intended purpose: to connect with family members and celebrate traditions, new and old.
Let’s imagine that G1’s guidance to the trustees of the summer home trust provided:
Our greatest wish is to ensure that family members prioritize family connection and communication over generations. We encourage our descendants to take time to gather, celebrate family traditions and reconnect with each other regularly. In providing this trust fund for the summer home, our intention is that this home serves as a place for such family occasions and connections and that the house will not be a financial burden for the family in the future.
G1 would likely be pleased that three generations later, their plan to pass down family values has been successful, despite the sale of the summer home. G1’s priority was family, not the preservation of the home. The house was a means to an end. The clarity of purpose and values, as well as the connection to G1’s actions, allows G3 to understand and perpetuate these values in the face of changing conditions.