Wealth Preservation and Succession Planning in a Family

Entrepreneurs are very good in creating wealth, but they are often not as skillful or interested in managing and working towards preserving their wealth over multiple generations. Much of the wealth in the world will change hands over the next two decades from experienced family members who might be the creators of this wealth to newer generations that may not be prepared and might lack skills in managing and preserving the wealth.

Thus there is a significant opportunity to advise affluent families now and well into the future about wealth preservation and succession planning over multiple generations.

You might have heard of the proverb “Shirtsleeves to Shirtsleeves in three generations”. 

This means that family wealth is not self-preserving. Without careful planning and dedication a hard acquired fortune is easily lost within a generation or two. The phenomenon of losing family fortune over generations is so well recognized that there are variants to the above proverb in nearly all part of the world the Irish call it “Clogs to Clogs” in three generations. The Chinese call it “From Paddy Field to Paddy Field in three generations”.

What these proverbs signify is that the first generation starts out wearing the clog working in the potato or starts working in the paddy field , they have no formal education and through very hard work , acquire a fortune while maintaining a frugal life style. The second generation attends colleges, goes for higher education, lives a lavish life style and enters the high society. The third generation’s members grow up in luxury, do little or no work, spending the money and fortune causing the fourth generation to find itself back in the potato or paddy field.

This is a classic three stage process: first a period of creativity; second a period of maintenance of the status quo and third a period of losing. The question is this rags to riches to rags cycle irreversible? Let us rephrase the question…..

Can a family successfully preserve its wealth for over four generations???

Before we go on to solve this puzzle let us define some core terms that we would be using.

Family: Two or more individuals who because of bonds of affinity, genetic linkages or emotional linkage think of themselves related one another.

Wealth: The human, intellectual, and financial capital of a family.

Preserve: A dynamic process requiring effective employment of a components of a family’s human, intellectual and financial capital in order to conserve the family.

The solution to the above question is based on the following arguments:

1.   Preservation of family wealth is a question of human behavior.

2.   Wealth Preservation is an ever changing dynamic procedure requiring group participation i.e. efforts that must be successfully  re-energized in each successive generation to overcome the threat of lethargy setting in.

3.   The real assets of a family are its individual members.

4.   The wealth of a family consists of the human and intellectual capital of its members.

5.   The families financial capital is a tool to support the growth of the human and intellectual capital.

6.   To successfully preserve its wealth, a family must form a social agreement among its members that reflect its shared values and each successive generation must endorse and readopt that social agreement.

7.   To successfully preserve its wealth, a family must agree to create a system of representative control or governance through which it actively follows its values.

8.   The mission of family leadership must be boosting of the quest of happiness of individual member. This will enhance the family as a whole and further the long term preservation of the family’s wealth: its human, intellectual and financial capital.

Solution:  A family can successfully preserve wealth over multiple generations if the representative leadership it creates is based on a set of shared values that incorporate that family’s distinctiveness.

Procedure: Families should use multiple quantitative and qualitative techniques that allow them over a period of time to take positive decisions on use of their human, intellectual and financial capital.

Further a family’s ability to remain in business over a long term period always boils down to excellent long-term succession planning irrespective of how successful the family is financially.

If a family thinks it is in the business to enhance and enrich the lives of its individual family members it would have discovered the most powerful technique of wealth preservation.

In the end successful wealth preservation over multiple generations by a family involves the following four from the leadership within the family.

1)Communication

2) Educate future generations

3) Practice philanthropy

4) Lead by example

Wealth Preservation and Business Succession Planning are very important skills for financial advisors. The CHARTERED WEALTH MANAGER® and CHARTERED TRUST AND ESTATE PLANNER® designation offered by American Academy of Financial Management allow financial advisors/ wealth managers/estate planners to develop the necessary skills to give meaningful advice to families in wealth preservation and business succession planning.