Between 2007 and 2061, $59 trillion will be transferred from the estates of 93.6 million deceased Americans to heirs, charity and the government through taxes.1 This will be the largest wealth transfer in U.S. history. What will happen to the estimated $36 trillion expected to end up in the hands of the next generation? Will it be used to benefit causes and people that are important to the family, or will it create tension and division among siblings and other family members?
At Brown Brothers Harriman (BBH), we have seen countless families successfully transition wealth; however, we have also observed breakdowns in that transition that have resulted in the significant dissipation of family wealth over time. Our experience is not surprising; studies show that even when a family has a good team of trusted advisors and the best of intentions, a successful wealth transfer can be elusive.
In 2002, Roy Williams of The Williams Group published the results of a 25-year study of 3,250 instances of generational wealth transfer. He concluded that 70% of those transfers failed, where failure was defined as involuntary loss of control of the assets, whether through taxes, economic losses, litigation or any other financial reversal. Rarely was this failure due to poor legal, tax or investment advice and planning. Overwhelmingly, the failure was a result of a breakdown in trust and communication among family members.2
To help our clients and their families navigate the rocky shoals of wealth creation, transition and ultimately preservation, we embarked on a study to identify the elements and characteristics that define successful wealth transitions: the secret sauce, if there is one, to avoiding the old adage of “shirtsleeves to shirtsleeves in three generations.”
Our study focused on the 30% of wealth transfers that are successful – and why. We reached out to some of the country’s foremost estate planning attorneys and accountants to ask them what factors, in their experience, are key to successfully transferring wealth from one generation to the next. We thought it important to collect this crucial data from independent, neutral experts who could pinpoint the common threads among successful families.
The results remind us that the most successful families don’t shield their children and grandchildren from understanding the family’s wealth. Instead, they identify and embrace the family’s values and history as a guidepost in thoughtful, collaborative discussions surrounding the family’s capital. These families have discovered that a critical element of successful wealth transfers is open, honest communication among family members, even younger generations.
Our survey confirmed that proper tax and estate planning is critical to successful wealth transfers. Fully 98% of respondents believe it is important, very important or necessary that a family has a good team of legal, tax and investment advisors; 94% say it is important, very important or necessary that family members have appropriate tax and estate planning documents. It is difficult to conceive of successful generational wealth transfers in the absence of good tax and estate planning because the dissipation of wealth through taxes, divorce and spendthrift beneficiaries would likely be swift. However, as the Williams study reported, and our survey respondents confirmed, even the best tax, estate and investment planning is rarely enough to ensure success – it is merely the beginning of creating a robust plan.
Family Communication and the Family Story
Talking about money is not easy, even in families – and often, especially in families. However, in our experience, families who engage in open communication on a range of topics, including money, are far more successful in preparing the next generation to be good stewards of wealth than those who remain silent.
Parents often worry that speaking openly about wealth – and even acknowledging the existence of family wealth – will lead to their children feeling entitled or less motivated to engage in productive, fulfilling careers and pursuits. However, our study revealed that just 2% of respondents believe that sheltering younger family members from the magnitude of the family’s wealth is necessary to ensure successful wealth transfers. Rather, 86% feel it is important, very important or necessary to deliberately prepare younger family members to be stewards of the family’s wealth. Even very young children are incredibly perceptive and quickly become aware of their world and their place in it. Wealthy families who avoid discussions about money do not necessarily raise children who are blissfully unaware of the money’s existence. Instead, those children may be acutely aware of the family wealth, but without discussions about where the wealth came from and how it is managed, spent and given back, they may be more likely to take it for granted and lack any appreciation of their role as future stewards of that wealth.
That does not mean these conversations are necessarily easy. The senior generation may not know where to begin in establishing open, healthy communication about wealth with children and grandchildren. To initiate the conversation, the family’s story can be an excellent starting point. Jay Hughes, author of Family Wealth, wrote, “Every family I know that is successfully preserving its wealth sets aside time at family gatherings for the sharing of its unique history.” Teaching children their family’s history, including who created the family wealth and how, can help establish an appreciation for that wealth and an understanding of the hard work and perseverance that their ancestors (whether parents or generations long before) employed to create it. Further supporting this idea, among the respondents to our survey, 84% feel that it is important, very important or necessary that younger family members are taught how the family wealth was created.
The stories most likely to have a profound positive impact on the next generation are often personal stories that show the humanity and vulnerability of key family members and how those situations and hardships built success and character. It is not enough to have a general overview of how a family business was built. Instead, unique, personal elements should also be shared, such as the personal motivations and beliefs that drove the development of the business. It is through an understanding of those transformative moments in the family’s history that children begin to appreciate what matters to the family and the responsibility that comes with the family’s financial success.
Sharing the family story does not require immediately drawing back the curtain and revealing the dollar value of the family’s net worth. Instead, it is an initial step in laying the groundwork with the next generation so that when they eventually understand more about the numbers involved, they will be prepared to receive that information with a healthy appreciation and, hopefully, a desire to be a part of the continuum in preserving and growing such wealth.
Giving Everyone a Voice
Open communication about wealth does not end with sharing the family story or discussing the estate plan. Among our survey respondents, 92% believe it is important, very important or necessary that family members fairly consider one another’s perspectives in order for wealth transitions to be successful. Senior generations cannot simply impose their beliefs, values and priorities on younger generations and expect that approach to result in harmony and success. Rather, the voices of the younger family members should be heard and respected, and they should have a role in shaping the family’s mission, values and philanthropic focus. One survey respondent noted: “The single most important thing is respect. If family members treat each other with respect, you have a much better chance of putting in [place] a plan that works. When family members stop treating each other with respect, you are likely to have trouble.”
Finally, almost half of our survey respondents (47%) ranked helping families identify and share values as the most or second most important service to aid in successful wealth transfers. Values are inherently personal and unique to families. Collaborative, interactive meetings and thoughtful conversations can help families discover and articulate the values that most resonate with them and inform their actions and goals. When family members can openly discuss their values, where they intersect and where they diverge, they further open the door to communication, mutual respect and responsibility to each other and the family legacy.
The Importance of Educating the Next Generation
Respondents to our survey ranked providing financial education as the top service to ensure successful wealth transfers. Financial education can include teaching the next generation about investing, thereby preparing them to help grow and preserve the family wealth. It can also include helping the senior generation share and discuss the values and reasoning behind the structure of a family’s estate plan so that younger generations have an understanding of what it means to be a trust beneficiary and why trusts can be important elements of family wealth preservation over time. Sheltering the younger generation removes the opportunity for some of the best collaborative financial education – personally showing children and grandchildren how to be good stewards of the family’s wealth.
No One-Size-Fits-All Solution
There is no one clear path to “success” when it comes to wealth transfer, and the route a family takes to get there should be guided by what feels right to each member. Could a parent share an impactful family story with a child during a holiday dinner? Could that parent ask that child to tell a story to him or her in return? Do certain family members need assistance articulating what matters to them and the key meanings behind their philanthropy? Our survey results tell us that a successful wealth transition cannot be built overnight or through a single action or trust document, but instead requires open, ongoing communication and education.
At BBH, assisting families in successfully accumulating, managing and transitioning wealth to the next generation or charity – or a combination thereof – is core to our mission. For nearly 200 years, we have listened closely to our clients to understand their personal circumstances and design wealth planning strategies to accomplish their goals; this includes everything from reviewing legal documents to ensure alignment with client values to educating the next generation to assist with smooth, successful wealth transitions.
This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries ("BBH") to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area ("EEA"), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority (FCA). BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries.
© Brown Brothers Harriman & Co. 2017. All rights reserved. 2017.
1 Source: Boston College Center on Wealth and Philanthropy, 2014.
2 For more information on the causes of failed wealth transfers and strategies that families can employ to increase their likelihood of success, read Chief Investment Strategist Scott Clemons’ article from the spring 2016 issue of Women & Wealth Magazine, “Crossed Wires: Why Most Generational Wealth Transfers Fail.”