Focusing on Your Family

Michael Lachance

Virginia Cooperative Extension

The Williams Group researched the causes of failure with 3,250 families over four decades and reports 2/3

of all wealth transfers fail after transition!

Estate planners generally provide reliable guidance on tax, wealth preservation, and governance.

The most common reason for failure is poor family communication, including gossip and anger, and loss of trust.

Family Wealth

• The developmment of responsible adults is the goal of wealth preservation

• Primary wealth:– Human Capital

• (the aptitudes individuals possess)

– Intellectual Wealth • (what each individual knows)

• Secondary wealth is financial capital

Where does your life have it’s greatest impact?”

• Work

• Family

• Other?

Genealogy

• Patrilineal and matrilineal histories

• Most family histories are traced through marriages, burials and land ownership, missing many important parts of the story!

• Research family “stories” and share with others in and out of your family

• Has wealth been continuous or have there been disruptions?

Net Worth

• Everyone needs to take inventory

• America Saves http://www.americasaves.org

Site includes introduction to other instruments as well

• Current problem for young people: little incentive to save.

Major financial issues

• Education expenses

• Retirement planning

• Risk management including expenses of health care

Learning to speak to family members about financial management

• Continuum of family communication: from strict silence to full disclosure

• Communication styles differ within and between generations

• Books: to read and avoid

• Financial advice: can help or hinder

Preparing for Financial Discussion• Do careful planning prior to holding a

meeting where wealth transfer issues are discussed

• Give adequate advance notice to everyone• What is the best location? • Consider assessment activities & audits to

get the process started• Third parties can help or harm the discussion

Family Wealth (Again)

• Family goal of preservation of wealth over a long period of time

• Primary wealth:– Human Capital

• (the aptitudes individuals possess)

– Intellectual Wealth • (what each individual knows)

• Secondary wealth is financial capital

Family Governance

• Identify shared values

• Develop family goals

• Create a family mission statement

• Discover, build and use individual talents

• Strengthening family relationships

• Recruit and work with advisors outside the family

Family members should have the willingness to invest time, energy, and money into learning how to work as a team to preserve their wealth as a family blessing.

Have everyone complete this questionnaire:

• What are your individual passion?

• Define your big dream?

• What big gift your family could give you that would achieve, propel forward your life?

Although well over 90 percent of all corporations (and many of the largest public corporations) in the U.S. are family owned or controlled, the average life expectancy of such organizations is only twenty-four years, and only 30% of family firms survive into the second generation.

SMR Forum: "Managing Change in the Family Firm -- Issues and Strategies," Beckhard, R. and Dyer, W.G., Jr., Sloan Management Review, 24:3 (1983 Spring)

WHY FAMILY GOVERNANCE?

How family governance time should be spent

70-80% emphasizing families assets

30-20% focused on liabilities within the family

“...only one third of businesses successfully make the transition from each generation to the next

...and that figure has been very stable, and is true around the globe...“

Prof. Joe Astrachan, Cox Family Enterprise CenterKennesaw State University, Georgia

The Economist, page 69, 5 Nov 2004

WHY FAMILY GOVERNANCE?

Family is the basic unit of culture

• Define the values and goals of the group• Gain acceptance to be governed by the

family, if seen as a loss of freedom, what is to be gained by aligning with the family

• Vertical vs horizontal linkages; roles of siblings and cousins are critical for wealth retention

• Practice joint decision making• Wisdom of elders needed to resolve disputes• Trans-generational activities are critical

PROBLEM: FOIBLES OF HUMAN COMMUNICATION

• Learn from your dinner table

• Learn from your marriage

• Acknowledge the long drive home

• Encourage engaging in civic life

Outcomes of Family Meetings

• Forces everyone to think about their goals for their wealth and their children

• Causes the younger generation to think deeply at an earlier age about their own goals for their families– Hazard: children change as they mature, but the older

generation may tend to treat them as though they were still inexperienced

Most Important Factors of Wealth Transfer

• Levels of trust and communication among family members

• Degree to which the heirs are prepared for wealth and responsibility

Most Important Factors of Wealth Transfer

• Levels of trust and communication that exist among family members

• Degree to which the heirs are prepared for wealth and responsibility

Goals for Family Wealth

1. Development of trust, communication and teamwork within the family

2. Preparation of heirs to manage themselves and wealth effectively

3. Reaching agreement on the mission of the family's wealth as a guide to the family's professional advisors.

4. Professional advisors need to realize that the family is their client, not just the grantors!

Wealth Management Ideas

1. Develop a mission for the family wealth, along with a strategy, structure, and roles to accomplish it

2. Offspring invest sweat equity to become competent to managers of all or part of the family business, charitable foundation, or large amounts of capital

3. Develop standards, such as successful work experience outside the family, as preparation for specific roles.

Wealth Management Ideas

1. Develop a mission for the family wealth, along with a strategy, structure, and roles to accomplish it

2. Offspring invest sweat equity to become competent to managers of all or part of the family business, charitable foundation, or large amounts of capital

3. Develop standards, such as successful work experience outside the family, as preparation for specific roles.

FINAL THOUGHTS: What about the spouses

• Are these people assets to the family at large?

FINAL THOUGHTS: Equality versus Fairness in

Disbursements

If someone is handicapped in a certain way, that person might require more.

FINAL THOUGHTS:Does Grantor Plans Preclude

Subsequent CreativityBeneficiaries may want to develop a new property or start their own business.

Can they convert the transferred wealth to more liquid assets in order to allow them to take advantage of emerging opportunities?

FINAL THOUGHTS: Philanthropy

• Philanthropy becomes natural bonding agent to family discussions

• When families work on a transition plan with council, they often commit more resources to philanthropy or at least think harder about their community goals

Philanthropy Ideas

Create a family foundation to make grants focused on:– Shared belief– Youth– Education– Environment– Programs that strengthen community through

collaboration and/or development

Can You Call Your Family Together?