“Shirtsleeves to shirtsleeves in three generations” is a common adage in respect of intergenerational transfer of wealth and family businesses. The first generation creates the wealth, the second stewards it and the third consumes it. Sadly, less than 10% of family wealth survives the transition to the third generation.
Yet it is possible to counter the shirtsleeves-to-shirtsleeves paradigm and effectively differentiate yourself as a true manager of long-term family wealth. The key is to understand and avoid the four basic mistakes people typically make during intergenerational wealth planning.
Mistake 1: Focusing on short-term tactics rather than long-term strategies
Executing a tactic is the last thing you should do, not the first. A tactic should be completed to achieve a broad set of goals that are predicated on shared values, vision and purpose. In the absence of such clarity, implementing a tactic can have unintended consequences. For instance, writing a will without incorporating the full planning picture can result in a document that actually contradicts the client’s strategic, long-term wishes.
Focusing on short-term outcomes (updating a will, buying life insurance, gifting assets or implementing an estate freeze) could mean circumventing the deeper benefits of developing a family- and advisor-level narrative around the purpose of the planning. This approach enhances trust in advisor motives, decision making and communication, leading to more profound and lasting client relationships.
Mistake 2: Communicating in a way that no longer serves the needs of the family
Communication in wealthy families tends to follow the golden rule: whoever has the gold makes the rules. The communication methods that brought the family past success, however, aren’t likely to contribute to future success as the family expands. Emotions, expectations and perspectives become haphazardly interwoven. Add spouses and children into the tapestry and, handled poorly, the entire fabric can be vulnerable.
As an advisor, consider your own communications model with the client. Are you prepared to engage the client’s children and grandchildren in meaningful conversations about their collective family goals, objectives and wealth? How connected are you with the client and spouse? How have you helped them develop skills at discussing wealth between generations? For example, consider offering an educational program for the next generation. As part of that, you could run workshops on topics such as “How to Conduct a Family Meeting,” “Understanding the Sources and Potential of our Family Wealth” and “How to Be a Great Beneficiary.”
Mistake 3: Planning for financial wealth, but not the family’s social, human and intellectual capital
Advisors typically focus on growing and then preserving a family’s financial wealth; less so on making sure the heirs are ready to receive it. In other words, we tend to plan more for the money than for the recipient. In such instances, however, resentments can emerge.
Part of preparing heirs is creating a values-based, goals-driven process in which all generations can participate. As an advisor, what efforts and techniques have you developed to understand your clients’ shared goals and objectives? One approach I use is to ask a client “Why?” after asking an estate planning question. After five successive inquiries, you have typically arrived at the core reason the client wants to do their planning (try it on yourself). It could go something like this:
Advisor: You indicated you want to reduce tax as part of your estate plan. Tell me about that desire. (Why #1)
Client: I don’t want to pay more tax than I have to.
Advisor: Can you share with me how that is important to your planning? (Why #2)
Client: It will leave more financial wealth for my children.
Advisor: Can you tell me more about the benefits of preserving financial wealth for your children? (Why #3)
Client: It will allow them to do things that are important to them and for their families.
Advisor: Share with me how that is important to you. (Why #4)
Client: I want them to be happy.
Advisor: Explain how their happiness serves your goals and objectives. (Why #5)
Client: I love them and want only the best after I am gone.
By the fifth inquiry, you have revealed the real reason they plan. It’s not to save tax, but to take care of those they love the most. In my experience, most decisions in this area are based on love and fear, and yet clients try to appear rational by choosing tactics. Knowing the true goals of every adult family member is a powerful starting point toward an authentic and sustainable estate plan.
Mistake 4: Not making the commitment required to achieve long-term success
Most clients don’t like to plan. It’s hard work and often demands attention to unresolved and sensitive issues. As an advisor, you have to be prepared to challenge clients’ overly optimistic assumptions. For instance, if your client has two married children, try asking which one will get divorced. After some laughter, the reality often sinks in when we are prepared to courageously challenge their assumptions.
Taking someone else’s perspective is also hard work and can result in difficult self-reflection. Once, I had a client get quite irate when I challenged her assumption that her son was ungrateful and selfish for not wanting ownership in the family business. The planning breakthrough was achieved by taking some time to imagine the son’s potential perspective—we imagined that his reluctance was because he was immensely proud of his parent’s entrepreneurship and he didn’t want the business to fail on his watch. Then, we reframed the question to, “If these facts are all true, what steps could be taken to enhance his confidence as a family business leader?” The client was then able to see her son’s perspective and the narrative of the planning took an important directional change for the better.
Successful family wealth transition is not an accident. It happens when clients and advisors intentionally develop a process so that every generation can function as successful creators, stewards and consumers of total family wealth.
In the next article, I will explore how to create such a process in order to combat the “shirtsleeves to shirtsleeves” phenomenon.