For many, a financial windfall not only brings about a new and improved lifestyle but also provides an opportunity to create a lasting legacy for future generations.
According to a 30-year study by the Williams Group, three-quarters of wealthy families failed to transfer their assets to the next generation successfully.
Shockingly, the assets of nine out of ten families were completely lost before reaching the third generation.
Building Lasting Wealth
While every family is different, those with significant wealth share a common thread – thoughtful planning and execution.
1. Hire a Family CFO
Families with new-found wealth need the advantage of an independent, unbiased mind to ensure the family’s affairs are being planned, managed, and executed efficiently and in accordance with its strategic goals and objectives.
The CFO, who reports to the family CEO – typically the patriarch, matriarch, or senior family member, is usually an independent wealth management firm with multiple layers of expertise and resources.
Because of all of the planning disciplines involved, the CFO oversees a group of advisors that includes legal counsel, tax professionals, risk management specialists, and an investment manager.
2. Assess Your Family’s Current Condition
The next step is to create an inventory of your family’s financial and human assets. In addition to its value as a repository of information, it becomes the initial benchmark for measuring the family’s progress going forward.
The first component is a set of financial statements to include a balance sheet (assets and liabilities), an income statement (income and expenses), and a three-year projection for each.
Second, create a list of all the important people inside and outside of the family who will have a role in the family’s future. The list should include a brief assessment of each person’s strengths and weaknesses along with a description of the role you believe they could play.
Next, identify any existing legal structures (trusts, corporate entities, etc.) that have been put in place to protect assets from creditors, litigators, ex-spouses, and taxes.
Finally, create a list of any entities or actions that could threaten your family’s ability to achieve its goals.
3. Create a Family Mission Statement
Once a family has had the opportunity to take inventory, it needs to be able to answer the crucial question:
“What does having wealth mean to us?”
The answer should be clearly articulated and memorialized in the form of a Family Mission Statement.
Creating a Family Mission Statement is an opportunity for self-reflection in which the family’s values, beliefs, and ambitions are crystallized:
- What is the purpose of maintaining and growing your wealth?
- What is your family hoping to achieve over the short and long term?
- How do you prioritize your financial and non-financial goals?
- Are there charitable or moral ideals to pass on to our successors?
The answers to these questions should be articulated and memorialized in the form of a Family Mission Statement.
This process requires collaboration between the senior and junior family members, but ultimately is the responsibility of the family patriarch and matriarch, or other governing family members.
Over time, this Mission Statement may evolve as control of the estate transfers to future heirs; however, all family members should understand the Family Mission Statement and its fundamentals should serve as a guide for family decisions and actions that will share their future.
4. Set Goals and Assign Responsibilities
After the mission statement is formulated and adopted, it’s time to craft a strategy to realize the family’s ambitions. This plan must outline specific near-term and long-term goals, the actions and parties responsible for these goals, and an expected time horizon for achieving these goals.
Accountability is key. Every thoughtful strategy must include contingency plans, as life has many twists and turns that are completely outside of your family’s control.
Part of the strategy is to determine who will make decisions and the process surrounding those decisions. This not only requires the participation of family members, but also those important partners that serve them – asset managers, attorneys, accountants, and the family CFO.
Clearly defining each person’s role in the family decision-making process will create order and accountability inside the Family Enterprise.
5. Build Your Family Infrastructure
After the family’s mission and strategy are in place, the next step is to build a framework of governance to formalize the family’s decision-making process. This may involve the separation of senior family members into those responsible for decision-making and those not responsible for decision-making today.
The governance framework also identifies the role of non-family decision-makers and advisors and what role they will play. Understanding who will be the final decision-maker, whether the decision-making process will be democratic, and whether non-family members will be involved in the decision-making process, is also important.
The ultimate objective of a family’s governance framework is to ensure that all essential family matters are addressed and resolved with speed, logic and fairness, and with the focus always on achieving the family’s mission.
6. Succession Planning
Understanding early on that senior family members will not be around forever is critical in preventing multi-generational destruction of resources. But there is only so much time one can give toward educating the next generation.
Therefore, it is imperative for a thoughtful succession plan to be in place that not only handles the tax-efficient transfer and control of assets but also accounts for the transfer of knowledge and responsibility to the next generation.
This process should include formal education, empowerment, and experience for junior family members. It should also be designed to promote leadership skills and pass on your family’s values to the next generation.
This can include “shadowing” senior family members, employment within and outside of the family business, workshops with outside experts specializing in inter-generational wealth transfer, and many other more novel approaches.