As I’ve written before, most planning today ensures that family wealth will be destroyed in three generations.
Consciously deciding to sustain family wealth for the long term is atypical and requires a different planning relationship between advisors and clients to understand the scope of family wealth.
In my new book, I outline a five-step model for intergenerational wealth planning. Let’s examine steps 1 to 3; we’ll look at steps 4 and 5 in a future article.
1. Create effective communications with family meetings
Effective communication and decision making are essential skillsets for long-term planning success. Many wealth creators and their heirs are uneasy discussing emotional topics, let alone how to distribute wealth. Family members have varied expectations about wealth, both in terms of entitlement and quantity.
Many advisors frame wealth distribution as a “fair versus equal” decision. Yet it is possible to be fair and equal if both concepts are discussed from the perspective of all stakeholders.
In my experience, families tend to conflate equality with fairness. However, as children enter businesses or as families purchase legacy assets such as a cottage, “fairness” becomes more nuanced. Dollar-value equality becomes less relevant because it is no longer the true measure of the value everyone shares in their mental accounts. Advisors must guide clients toward new valuation metrics and work towards equality on that basis. Effective family meetings are one method to achieve these outcomes.
Here’s what it takes to run a successful family meeting:
- Choose a neutral location. A business office or a parent’s house are locations of power and experience—offering comfort to some while antagonizing others. For example, if you are conducting a family meeting about an agricultural transition, avoid having the meeting at the home farm. Everyone should be comfortable.
- Be mindful of speaking order and create a seating plan that encourages positive discussions.
- Establish ground rules for asking questions, offering comments and introducing or tabling subject matter. An open and welcoming environment will encourage participation and engagement.
- Include every appropriate family member. Excluding or moving ahead in someone’s absence is a recipe for discord later.
- Be reasonable about what can be accomplished at first and provide generous time frames for discussions. For example, it’s often a good idea to start with a values exercise to identify areas of agreement. This is starting from a position of strength. Decisions can be made later because family meetings are about process and not a specific outcome.
This is time-consuming and difficult work, so many clients procrastinate or avoid it. Yet clients want advisors who will help them through this important process. That brings us to Step 2.
2. Understand your client’s shared family values
As an advisor, you are planning in the dark if you cannot state the values that underpin a client’s planning motivations. Values represent the principles, standards of behaviour and judgments about what is important in your clients’ lives. This is partly why so many Canadians are without wills; unsigned shareholder agreements are not uncommon. When these documents don’t reflect the family’s core values, they don’t get executed.
For example, consider a family meeting cycle that reveals shared values of honesty and philanthropy among the multi-generational participants. The process of getting to these common elements could reflect the outcome of the meeting considerations discussed above. Once everyone agrees on the core values of honesty and philanthropy, all proposed technical plans must further those values. This provides family members with a decision-making standard against which to assess any proposed tactical solutions, such as life insurance, an estate freeze or a donor-advised fund. Any tactic that doesn’t advance the core values should be scrutinized, and potentially avoided.
An advisor who understands the client’s shared values will also find that clients appreciate tactical solutions that are aligned with the family’s strategic core values and goals. In this respect, the products will be linked to fulfilling goals. Moreover, the opportunity for multi-generational engagement offers opportunities to create deeper value.
3. Focus the values into actionable purpose
Next, your role is to transition a client’s goals and objectives into action. To guide this action, help the family create a directional document such as a mission statement. The mission statement can evolve and is about defining the family’s common purpose. It could answer questions like:
- What does it mean to be a member of this family?
- Why do we stay together?
- How do we define our members?
- Where do we stand at times of adversity and times of abundance?
- Where are we going together in the future?
If a family values philanthropy, for instance, the advisor can start conversations about planned giving. This is because philanthropy as a long-term value is now embedded into the family’s mission.
This offers more opportunities for an advisor to create value. Philanthropy can promote leadership, togetherness and appreciation of abundance. More than a mere tax tactic, philanthropic planning is a profound way to develop and nurture the intellectual, social and human capital of all generations.
This understanding leads more naturally into conversations that will result in a mission statement. It also allows the advisor to help craft solutions that promote various forms of family capital in every generation. This may require placing products, but it will also include leveraging the strengths of the advisor’s professional network.
The first three steps are about getting started with shared planning and communication. They lay the groundwork for the family’s longer-term and ongoing strategic process. We’ll talk about steps 4 and 5, how to adopt and solidify the process, next week.