Fantastic Estate Transfer Failures and How to Avoid Them

What Can We Learn From Famous Estate Transfer Failures?

 

We’ve all heard the names of some of the wealthiest families that built their fortunes from modest beginnings; however, did you realize that few have maintained the same purchasing power through generations? What is worse, great divides between family members have often resulted from how the family wealth was handled.

Cornelius Vanderbilt, patriarch of the Vanderbilt family, built a steamship and railway empire from just $100 in the early 1800s. At one time the Vanderbilts were one of the wealthiest families in the U.S. However, Cornelius’s legacy was left in ashes as the family and future generations squandered their wealth. Now, six generations later, there is little left.

The Hartfords built their fortune from the first grocery store chain in America, A&P. Just a few generations later, the inherited family fortune was wasted on overspending and failed business deals. The A&P stores all closed in 2015, with the Hartford family going bankrupt.

The Strohs, who owned Lion’s Head Brewery, the third-largest brewery in America, once wielded a $700-million fortune. Today, due to bad business practices and massive debt, that fortune is mostly gone. Bernhard Stroh started the company with just $150 in 1850 but left a legacy that wouldn’t endure past a few generations because of poor wealth management decisions.

These are just a few examples of failed generational wealth legacies. There is great responsibility in managing wealth, and there is no “gene pool benefit” transferred to your heirs that ensures they preserve and pass on the wealth you have created for them. Many wealthy families are just one poor steward away from family infighting and a likely permanent reduction of the wealth, security, and happiness they would have enjoyed.

Why Wealth Attrition Happens

According to the Williams Group, a wealth consultancy group that specializes in generational wealth, 70% of wealthy families lose their fortunes by the second generation. By the third generation, almost 90% of wealthy families have squandered their fortunes. Wealth may dissipate from generation to generation for clear reasons, such as division of assets, divorce, inflation, inability to avoid certain taxes, poor investment performance, or poor estate planning. Yet, most wealthy families have competent attorneys and good legal documents.

Across generations, the pattern might look something like this: the first generation builds a fortune through hard work and discipline; the second generation grows up seeing how their parents worked hard and often struggled and sacrificed to build financial stability and might continue to practice such things, but they don’t have to go through the same ordeal to “make it”; but the third generation hasn’t even witnessed struggle and sacrifice secondhand, so the original values are often lost along with financial responsibility and, finally, wealth.

Often, wealth attrition happens due to the overall lack of financial responsibility in those receiving the inheritance. This isn’t always the result of bad behavior or upbringing, although those can be contributing factors. Lack of financial responsibility comes from a much bigger problem, namely, a lack of experience with or understanding money and its true value.

In many families, open discussions about wealth are also taboo. But when there’s no communication about money between parents and children, or between grandparents and grandchildren, the values that helped build that fortune don’t get communicated. At a minimum, talking about money means teaching about good financial practices and the true value of money. Failures in this area can also destroy incentive and produce lazy or entitled heirs who seek only luxury and celebration.

The families mentioned above obviously had access to the best attorneys and advisors in their day. The technical legal documents were not the problem; the problem was a people problem, and it resided either in the training the heirs received, or alternatively in the conscious decisions that should have been made to limit the heirs’ access to the family wealth. The only way to avoid the above trap is to prepare your heirs to become owners of your legacy after assessing their capacity to fulfill the required roles of managing wealth.

Proper Generational Wealth Management

When it comes to protecting your legacy for generations, estate planning documents aren’t enough. Your heirs must also possess the capacity to become the stewards of your wealth and the family legacy. Generational wealth management begins with educating heirs and passing on family values and attitudes about money. This helps ensure that your heirs have the best possible opportunity to enjoy financial freedom and pursue their own happiness and life opportunities.

You may begin training your heirs and involving them in decision making gradually, eventually handing them the reins. Or you might want to take a more hands-off approach whereby family members focus on what matters most to them, and a corporate trustee and fiduciary advisor handle the day-to-day trust management. Either way, you will want to know that you’ve done all you can to positively influence your heirs’ futures in the decisions you make today.

You Need a Generational Wealth Plan

If you have generational wealth, you need a generational wealth plan. This plan should cover acquiring, building, and keeping wealth beyond your own lifetime. It’s also your way of passing on your values to future generations to help them be good stewards of that wealth. To do this successfully, it’s critical to put a wealth management plan in place as well as to have competent family fiduciary and legal advisors to help educate and protect your heirs and to make prudent financial decisions.

While it’s easy to give money to your kids and grandkids, it’s also often difficult to talk about how to handle money. It’s can be especially difficult to communicate the very values that led to the successful building of that wealth. Perhaps the difficulty comes from not wanting to seem too authoritative or controlling. Or maybe it’s because the topic of money has always been difficult to discuss due to inattentiveness or disagreement about key money principles on the part of your heirs. Maybe it’s just lack of the time and energy required to discuss such issues.

Just as you invest your money with deliberate consideration of the likely outcome, you should invest your time and energy deliberately in family communication around money and values. You’ve spent a lot of time and energy to build your fortune, and now you need to put time and effort into ensuring future generations know how to maintain that wealth through values such as hard work, investment rather than just spending, and sacrifice. These are likely the values that helped you succeed.

You should know where your kids and grandkids stand on financial matters. Do they think money is the solution to all their problems? Do they respect that money has limitations and that, used in the wrong way, it can actually cause them harm? We all know of the proverbial “trust fund baby” who squanders wealth through overspending on a lavish lifestyle and lives with a sense of entitlement. You will want to address the above attitudes and provide your answers to them through how you communicate your family’s legacy.

Protect Your Family and Preserve your Legacy

Alpha Fiduciary understands how to prepare heirs to help ensure your legacy lasts. This plan is not the same as a financial strategy or an estate plan; it’s not solely about your assets or spending needs. Rather, it’s a guide for the family for how to articulate expectations, responsibilities, values, goals, and purpose to create a successful inheritance. This plan will help guide your family conversations and decisions about finances.

A good legacy plan should include set times to discuss finances with family. This doesn’t necessarily mean everyone gets a say in the budget, but communicating goals, expectations, responsibilities, and a clear vision for the family legacy will help keep everyone on course. Your plan should also include clear values and standards of behavior; when those values are communicated to the rest of the family, it’s easier to develop a wealth plan that reflects those values and passes on to future generations. We can develop the materials for you, or even host and run the meetings for you, if you wish.

If a corporate trustee is warranted, Alpha Fiduciary has you covered. We have developed a transparent and cost-effective solution whereby Alpha fiduciary will perform its ongoing fiduciary core competencies while the corporate trustee will perform trust-related tasks, as follows:

Alpha Fiduciary performs the following:

  • Financial planning and profiling to determine the most pressing needs.
  • Asset allocation strategy development based on risk appetite and sustainability considerations.
  • Establish client service profile, (i.e., review frequency, planned inflows and outflows, etc.)
  • Investment and ongoing management of trust account funds according to established policy.
  • All behind-the-scenes interactions with the corporate trustee.
  • All client-facing interaction including communication on behalf of the trustee.
  • As needed, family counseling.

The corporate trustee performs the following:

  • Fiduciary administration according to the controlling trust agreement and state laws.
  • Disbursement of funds as permitted under the controlling trust agreement.
  • Record keeping and principal-and-income accounting with periodic statements to required parties.
  • Online access for account asset and transaction viewing.
  • Annual administrative review of the trust.

Alpha Fiduciary would be pleased to speak with you about your unique family situation. Click here to schedule an introductory call.

About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.

Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).

Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.

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About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory. Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA). Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.