All too often, family wealth fails to last. One generation builds a business—even a fortune, in some cases—and it is lost in ensuing decades. We see it happen again and again… but why?
Often, it is because families fall prey to serious money blunders, both old and new. Classic mistakes are made, and the effects of changing times are not appropriately factored into decisions. If you know what to look out for, however, you will have a better chance of avoiding financial calamity. Consider how your family can sidestep the following financial traps as you progress into the future.
Failing to plan is always a risk, but so is failing to respond to acknowledged financial weaknesses. Long-term financial success requires foresight and a well-thought-through approach.
Consider the case of a fictional multimillionaire named Alan as an example. Alan gets a call on afternoon from his bank, which considers him a VIP private banking client. Alan is informed that his six-figure savings account lacks a designated beneficiary. Thanking the banker, Alan promises to come in soon to take care of the issue… but never does. With a busy schedule, the detour always seems too inconvenient.
While Alan knows about this financial weakness, he fails to act upon it. As a result, procrastination costs him when those assets end up subject to probate, costing his heirs in the end. In the meantime, they find out about other lingering details that were not buttoned up with Alan’s other holdings, and they feel the negative financial impact.
Minimal/Absent Estate Planning
Forbes noted that 55% of Americans lack wills, and every year multimillionaires die without them. These are not just rock stars, athletes and actors; they are small business owners and entrepreneurs you might meet every day. Some at least create a living trust, pour-over will or basic will created online, but that is not always enough.
Anyone reliant on a will risks handing the destiny of their wealth over to a probate judge. A wealthy person that has a child with special needs, a family history of Alzheimer’s or Parkinson’s disease, a former spouse or estranged children may need more thorough estate planning. The same is true if he or she wants to endow charities or give grandchildren a strong start in life. If the person is a business owner, there is definitely the need for coordinated estate and succession planning.
A finely crafted estate plan has the potential to perpetuate and enhance family wealth for decades—perhaps generations. Without it, however, heirs may have to deal with probate and painful opportunity costs such as the lost potential for tax-advantaged growth and compounded interest.
Lack of a “Family Office”
In the past, wealthy families sometimes chose to assign financial management to professionals, and family mansions boasted offices where those professionals worked closely with the family. These traditional “family offices” have largely vanished, but the concept of close collaboration with financial professionals is as relevant as ever.
Today, wealth management advisors consult with families, provide reports and assist in decision-making in an ongoing relationship. Personal and responsive service is key. When your financial picture becomes too complex to confidently address on your own, tapping a consultant remains advisable.
There are some modern concerns to take into consideration that have not always threatened wealth. For example, hackers can hijack email accounts and personal information in order to trick banks, brokerages and financial advisors into allowing unauthorized asset transfers. Also, which social media can help you build a business and personal brand, it can also expose personal information to identity thieves that want to access your assets.
Some businesses and families take precautions such as installing digital and physical security systems, but when they experience problems or find them inconvenient, they turn the systems off. Unscrupulous people, even some you may know or trust, can take advantage of these mistakes.
Failing to Communicate
When a family wants to sustain wealth, they must understand both how to do it and why it is important. Equally importantly, all family members must be on the same page with regard to decision-making. If family communication about wealth tends to be opaque, the mechanics and purposes of the strategy may never be adequately communicated to heirs, and mistakes will be made.
No Decision-Making Process
In the typical high-net-worth family, financial decision-making is vertical and top-down. Parents or grandparents may make decisions in private, and it could be years before heirs learn about or fully understand it. When the heirs become the decision-makers upon the death of elders, the heirs may already be in their 40s, 50s or 60s… and now they have current (and perhaps former) spouses and children that must be factored into family wealth decisions.
Some of this financial planning stress can be alleviated through horizontal decision-making. In this scenario, multiple generations understand and participated in the guidance of family wealth. Estate and succession planning professionals can help ensure that decisions are made with an aware ness of different communications styles, fostering in-depth conversations. Good estate planners know that silence does not necessarily mean agreement, for example, and will coax necessary discussion.
The Bottom Line
There may be abundant risks to financial wealth, but most, if not all of the issues mentioned above can be avoided through smarter planning. Collaborate with financial and legal professionals, and you can avoid many of the challenges that have derailed earlier generations. Most importantly, it is never too soon to begin. Want to discuss these challenges in more detail? Reach out to us any time.