Legacy beyond wealth

Estate planning can be a tool of both generational wealth and self-actualization.

Spend enough time bouncing around the local Chamber of Commerce social calendar and you’re likely to hear that the toughest part of the estate planning business is getting people to sit down and talk about estate planning.

This doesn’t mean people don’t care about these issues. They do. Deeply. Personal independence, family well-being and generational wealth are significant goals for many people. It’s just that the other thing gets in the way.

As an industry, financial planners and estate lawyers have come up with a number of polite euphemisms, but when most people think of estate planning, it’s inseparable from the topic of [clears throat]. Unsurprisingly, few people are eager to spend a sunny afternoon downtown talking around [car alarm] when there are so many other things to occupy a day. Inventorying one’s kitchen junk drawer comes to mind.

In fact, we hear you pulling away already. What if estate planning isn’t about [seagull cries], but about legacy – no euphemism?

And what if the best way to create a legacy is to live it?

And further, what if all this has the added benefit of helping you nurture generational wealth?

Let’s start at the beginning.

The things that get in our way

There’s a deep question disguised as an icebreaker: What would you do if you won the mega lotto?

“I’d keep working, but without the pressure.”

“I’d spend every day at the beach with my loved ones.”

“I’d focus on my hobbies.”

“I’d keep enough to feel comfortable and donate the rest.”

“I’d make sure my children don’t have the struggles I had.”

More than flippant “I wants,” these answers cut to the heart of one’s personal values. It’s saying that absent life’s base resource-related concerns, the answerer would dedicate their lives to virtues like industriousness, well-being, discovery, philanthropy, community and family.

A follow-up question: What keeps people from doing those things now? Is a billion-dollar jackpot really necessary to actualize one’s ideal self? Surprisingly, the study of behavioral finance suggests that yes, sometimes it does – the fear of future deprivation is a tough one to shake, no matter how healthy your accounts are. And as we get older, those fears can become more pronounced. To feel secure enough to live the life we envisioned when we first started investing, we have to combat them.

The discipline of financial planning is primarily designed to align one’s resources and liabilities with their goals. As a secondary benefit, it can help blunt financial fear. In other words, it can help give investors the tools and insight to manage risk rather than run from it.

Similarly, as its primary project, estate planning removes ambiguity about a person’s wishes regarding their assets and beneficiaries, but secondarily it helps to frame their long-term needs, guard against aging-related risks and discover surpluses. It can provide a dose of confidence in an uncertain world.

Does this mean you’ll find the means to relocate your whole social sphere to Mallorca and share tapas overlooking la playa each night? Maybe not, but it could give you the confidence to fund the fantastic, memorable family trip you’ve dreamed about. Will it mean you stand up an empire of animal rescues? Again, perhaps not, but it could make you feel more comfortable about creating a donor advised fund and providing bedrock support to your favored animal charity in your community.

Financial advisors will tell you this is not an uncommon conversation. While some investors have no problem dining on the fruits of their labor, others diligently build nest eggs they’d never hatch without encouragement. Estate planning can be that nudge.

Meanwhile, as you use the wealth you built to create personal fulfillment, if you have children, they’re watching and learning. You’re teaching that wealth is not meant be hoarded but guided smartly and used as a tool of purpose, and to promote contentment. And that’s one of the lessons that can help with another common, challenging goal in estate planning – generational wealth.

The n-generation problem

There is a common fear among people who earned their wealth from scratch that by the third generation, family wealth will evaporate in the hands of their less-diligent scions. This is often cited as a 70% loss by the end of the second generation and a 90% loss by the end of the third. The reality is more nuanced, but the fear speaks to a real and damaging concern families face: My kids didn’t earn it. Will they respect it?

This has led some families to build a fortress of legal and financial structures to try to enforce a degree of stewardship, backfiring into the popular notion of “trust fund babies,” coddled wastrels on lifetime allowances.

Many financial advisors will tell you this is the wrong way to go about it. In the business world, there is a common saying – often misattributed to Peter Drucker, a titan of management theory – that “culture eats strategy for breakfast.” No matter who said it, it resonates for a reason. Brought to the kitchen table, it means trying to control your heirs into compliance is going to be less effective than teaching them a moral foundation for your family’s wealth and purpose.

This idea has been described by James E. Hughes, Jr., who throughout his 50-year career guiding ultra-high-net-worth families’ wealth came to intimately understand the interior dynamics of some of America’s most prominent families. In his seminal book, “Family Wealth: Keeping It in the Family,” he describes generational wealth as resting on five pillars:

• Legacy capital, the shared sense of purpose and vision that unites a family
• Social capital, the strong relationships and decision-making skills that prevent conflict from tearing the family apart
• Intellectual capital, the passing down of knowledge, traditions and skills to ensure continuity
• Human capital, the investment in the growth and well-being of individual family members
• Financial capital, the quantitative pillar that supports the four qualitative pillars, managed with a recognition that family wealth creates opportunity but can be corrosive

This is one approach to a discipline known as family governance. A structure emerging from the needs of old money families, family governance is now a common framework for all manners of people who want to nurture durable generational wealth.

A primer on family governance

In the first generation, wealth stewardship is easier. Those who built it now manage it, and there are fewer voices of dissent. The second generation learns from their parents’ example and, in many notable cases, increases the family’s position by several fold. By the third generation, they’re more likely to have grown up touched by wealth. The efforts it took to create it are abstract and notions of purposeful wealth can seem quaint.

Family governance sees this problem as a succession issue. It means parents need to talk openly about money and be willing to eventually ween control.

This means that rather than hiding their wealth in an effort to keep their children motivated to succeed the same way they were motivated to succeed, parents should instead work to demystify wealth by discussing its purpose as it relates to the family’s goals and values. These conversations can become more candid and detailed over time. Lessons can be bolstered by giving children opportunities to be part of decisions and giving them enough leeway to fail and the chance to try again. Many prominent families use philanthropy or jobs in family businesses as this learning ground, further reinforcing Hughes’ four qualitative pillars.

Meanwhile, the children can see their parents living their legacies, examples of how wealth can promote life fulfillment. Eventually, children can be brought into discussions with their parents’ financial team, and later, become partners in making decisions. Within their parents’ lifetime, the children will be expected to take the lead, giving the elder generation a break and allowing the children to continue the cycle with their children.

In families with more than enough for the first generation’s needs, wealth transfer strategies need not wait for inheritance. Giving sooner can also provide a more pronounced long-term difference in their children’s lives.

If the parents’ wealth was earned after children left the nest, the path to partnership requires a different kind of diligence. But the steps are the same: moral education, practical education, involvement, partnership, succession.

It doesn’t take tremendous wealth for this approach to make sense. Even for families who don’t have designs for generational wealth, their children will benefit from this philosophical and practical approach to wealth.

Make someday today

The road to any dream worth dreaming is long. It’s often talked about how easy it is to lose sight of them in the demands of the present, but as we get close, we can likewise struggle to touch it. We can arrive at the moment and from habit or fear, keep walking. “The time’s not right.” “Maybe next year.”

When that happens, think back to the start of your journey. Think of all you’ve achieved. Maybe that old dream isn’t important to you anymore. Maybe you have a different one to replace it with. Or maybe it’s something else getting in the way – a conversation about it can help. The life you desire – the you, you want to be – might be right there in front of you. You made it possible. Now make it happen.

Sources: Business Insider; The James E. Hughes, Jr. Foundation; CFA Institute; Stanford Encyclopedia of Philosophy; Stanford Medicine Ernest and Isadora Rosenbaum Library