By Daniel G. Berick.
Divergent values and financial objectives among family members can dissipate a family’s assets. As successive generations become more removed from the generation that accumulated the initial wealth, a sense of entitlement and lack of familial ties can threaten the success of generational wealth transfers. Leadership that encourages transparency within the family and a buy-in of a shared philosophy across the generations can help overcome these pitfalls.
The Entitlement Trap
Problems and intra-family resentments created within a family unit by the entitled child of privilege or the proverbial “prodigal son” do not have easy solution. Families that are sensitive to this issue struggle to inculcate a sense of responsibility, discipline and balance in their children who grow up in conditions of privilege. It can be a challenge to convey the message that creating and maintaining wealth is difficult and requires work and dedication. Communication among the wider family group, and with it the transmission of heritage and values, has helped families instill a sense of obligation and purpose in succeeding generations. Likewise, providing visibility into the work required to oversee and direct a family’s investments, and even providing early opportunities to participate in that process, can help convey a sense of what is involved in the family wealth management.
The Problem Child
An equally perennial issue for wealthy families is how best to address the circumstances created by the “problem child,” and the ripple effects caused by problems of criminal behavior, substance abuse or similar issues, improvident personal relationships, or other problematic personal matters. A structured approach to wealth preservation and generational wealth transfers can provide some insulation against the financial effects of problem child behavior by interposing legal protections and formal entity structures between the problematic family member and the family’s assets. Analogous to the problem child problem are the complications that can arise from divorce, remarriage and multiple marriages, as families look to navigate the sometimes difficult wealth transfer and succession issues involving ex-spouses and step- and half-siblings. A family that has a rigid tradition of fixed succession parameters (first-born child, eldest son or any similar formulaic approach) is especially vulnerable to problem child risk, as it does not have either a history of, or any commonly accepted process for, dealing with leadership succession when that mechanical approach produces a patently unsuitable candidate for family leadership.
This unsuitability can manifest itself in ways that are less dramatic, but equally require an ability to come to a consensus regarding the leadership of the family or a family business enterprise. Trusted outside advisors and family office professionals can play a crucial role in effecting the changes in leadership that those situations require.
Lack of Connection
While the entitlement trap and the problem child problem focus on issues relating to individual family members, the issues caused by lack of connection among family members are both less obvious and more insidious. Transmitting culture and fostering cohesion are key elements in creating the connectivity that keeps wealthy families from splintering over time. That sense of connection is extremely difficult to manufacture when needed. It is either developed organically over years of planned, purposeful communication and engagement, or in most cases, it simply does not exist. In our experience, families that are unable to develop and maintain that cross-generational connection are much more likely to fracture over time. At a minimum, this may lead to the “Balkanization” of a formerly unified vehicle of family wealth into a number of much smaller, separate units and, at worst, to the dissipation of family assets in protracted, painful and expensive intra-family litigation. Building relationships among successive generations early gives them the mutual familiarity and relationships that allow for cohesion and resilience in the face of change and transition.
Alignment of Goals
Part of maintaining unity and successfully stewarding family wealth is communicating a sense of unified mission and shared goals to those successive generations. Periodic assessments of a family’s goals to ensure they remain aligned with the objectives of the next generation are recommended. Family leadership that can adapt to junior generations’ shift in values will be the most successful. Recently, we have seen evidence of this manifest itself in the millennial generations’ strong interest in impact investing (i.e., environmental and social governance projects) with venture investment projects and philanthropic priorities.
Conversely, members of a junior generation who feel they don’t have a place at the table, tend to lack that desired sense of engagement, connection and commitment to the family. More likely than not, fracture and disunity will ensue.
Failure to find alignment and compromise regarding investment strategy and goals among family members, even absent generational shifts in emphasis, can be equally problematic. Misalignment can also occur when there’s a pressure from a family member to devote significant family assets to a vanity project. Finding a way to mediate these individual priorities can take creativity, patience and no small measure of diplomacy.
Training and Education
A family puts wealth preservation at risk when successor members have not been groomed for their stewardship roles. Without adequate preparation, successor generations can find themselves in management positions of their family’s wealth lacking the crucial tools to discharge that responsibility successfully. Families frequently provide family members with a measure of basic financial literacy on investment and accounting topics, but also employ training and education sessions to convey a fundamental understanding of the family’s operating businesses and philanthropic activities.
Assumptions and Expectations
Among the most challenging and sensitive issues in effective generational wealth transfers are those arising out of assumptions and expectations concerning family members’ roles. Challenges can include traditional or cultural mindset of sons versus daughters; additions of step- and half-children and -in laws; no suitable family candidate for leadership; or conversely, a family candidate who doesnot want the obligation. Each case demonstrates the importance of open and honest assessment of skills and aptitude when considering family governance.
Daniel G. Berick, Esq. is Americas Chair–Global Corporate Practice and Co-Chair, Global Family Office Practice at Squire Pattton Boggs.