Families are complicated. Creating a system of governance to preserve family wealth for multiple generations is even more complicated. How complicated? Well, let’s just say that the current industry standard has a 70% fail rate. That is, if you employ traditional estate planning methods, there is a 70% chance that your family’s wealth will be gone by the second generation and a 90% chance it will be gone by the third generation. Those are not odds any family should want to take. The logical conclusion is that traditional estate planning methods simply do not work. Therefore, we need to look at the problem from a different perspective.
Traditional estate planning forces your family to work for the family’s wealth. It begs the question: how can I make my estate (i.e., the money and investments I have earned and saved during my life) last as long as possible? That is why it has become such an incredibly tax-driven industry—because saving taxes means saving more money. Yet, if the reality is (and I assure you, it is a reality) that whatever money you have when you die will most likely be lost by the second or third generation, what difference does it make how much you save in taxes? It’s all going to be gone anyway.
Instead of worrying about how you are going to make your money last for multiple generations, you should be worried about how your money is going to enhance the lives of your family for multiple generations. That is, instead of making your family serve the family’s wealth, you should be making the family’s wealth serve your family. Instead of merely working to preserve the family’s wealth, you should be working to preserve the purpose of the family’s wealth.
What is the purpose of family wealth? For most, the answer is simple: to give our children and future generations the opportunity to live happy, fulfilled lives. For any system of family governance to succeed over time, it must remain committed to this core principle. The reason traditional estate planning fails is not that family’s do not create systems of governance to manage their wealth—they have systems of governance through trusts, family owned companies, etc. The problem is that those systems of governance are focused on protecting the family’s assets, as opposed to protecting the purpose behind those assets. Human fulfillment, happiness, family harmony—these should be the goals towards which family wealth is applied.
When it comes to family wealth and governance, there are two key and very distinct issues: (1) how to manage and invest the family assets, and (2) how to spend (or give away) the assets. Too often, families end up focusing on (and arguing over) how to manage and invest the family’s assets without knowing how those assets should be applied. The family ends up serving the family’s wealth, instead of making the family’s wealth serve the family. Before you can begin to discuss a multi-generational investment strategy to preserve family wealth, the family needs to first commit to a strategy of how those assets will be applied to benefit the family. In order to be effective, a system of family governance must insist on a unified commitment to the purpose of the family’s wealth. It must also create separate roles to decide (i) how to apply the family’s wealth towards achieving that purpose, and (ii) how to manage and invest the family’s wealth towards achieving that purpose. This way, the family can be sure that the management and investment of its wealth is working to achieve how the family wants to apply its wealth towards fulfilling its purpose.