The term "family legacy" is often used as convenient shorthand for providing financial security or passing on money and property to heirs.
But for many families, their true legacy involves sharing values and teaching younger generations to be good citizens and philanthropists, along with being good stewards of family wealth.
“One family I worked with recently to revamp their estate plan has included a provision to pay for financial literacy education for future generations," said Shilpa C. Mirchandani, a senior wealth planner with City National Bank. “They clearly want their heirs to have a sense of motivation and purpose as well as the ability to manage finances as part of that family legacy."
In addition, said Mirchandani, this family values the intellectual capital of future generations. Their estate plan ties financial distributions for younger family members to their academic achievements. The plan also provides funds for trustees to plan family reunions and meetings to strengthen family relationships.
Traditional estate planning, said Mirchandani, tends to focus on trusts and tax laws – the mechanics of wealth transfer – rather than the broader objectives around establishing generational wealth.
“When you see that parents are genuinely concerned about the well-being of future generations in every aspect of their lives, that's when you see a big leap forward in overall sustainability of the family’s wealth," said Mirchandani.
According to Roy Williams' and Vic Preisser's book, Preparing Heirs, families on average lose 70 percent of their wealth by the second generation and 90 percent by the third.
“For families to sustain their wealth through several generations, it can help to clarify what their wealth means to them, including the non-financial dimensions," said Mirchandani. “I came across Dennis Jaffe's Journal of Financial Planning article, 'Six Dimensions of Wealth: Leaving the Fullest Value of Your Wealth to Your Heirs,' and believe this can be a framework for families to assess themselves and identify what messages, values and traits they want to pass on to future generations."
Mirchandani recommends discussing each of these six dimensions as part of the wealth planning process:
The traditional approach to planning is to talk about how to have enough assets for retirement and to address the best methods for transferring wealth.
“My approach is to learn about the family, their personalities and their relationships, to determine the best approach for what they want to accomplish," Mirchandani said. “The wealth may not be sustainable if the plan doesn't take into account potential disputes or issues with the beneficiaries."
For example, she said, a family may implement a tax-efficient plan but fail to take into account about how future generations would interact with each other around the family business.
Human wealth, said Mirchandani, can be defined as the character, skills and identity of family members and how those traits influence their approach to wealth management and life's work.
“Families should make sure their beneficiaries are prepared intellectually and psychologically and ensure that they have a purpose in life," said Mirchandani. “You want to make sure that the beneficiaries aren't relying completely on their inheritance as income." Parents are sometimes scared that their kids won't be able to manage their money, so they send the kids to a financial advisor separately, something Mirchandani doesn't recommend doing in isolation.
“I put together a workshop for parents and their older children to attend jointly for financial literacy, so that the parents can be there to contribute real-life examples from their own experiences ," said Mirchandani. “It's more effective to have parents there to share their mistakes and successes and have an individualized focus for the discussion."
The family dimension of wealth refers to the connection between immediate and extended family members.
“The Williams and Preisser study found that 60 percent of family financial failures were traced back to a lack of communication," Mirchandani noted. “You need to establish open communication and a way to resolve conflict. Financial advisors aren't therapists, but if they know that there's lack of communication between family members, they need to think about how that impacts long-term financial planning." Regular family reunions and gatherings can be planned and paid for through estate-planning documents, which can give family members a forum to connect with each other and improve communication.
The structural dimension of wealth refers to wealth-management tools such as estate plans, dynasty trusts and family governance plans.
“One family I worked with had 18 different trusts with lots of different incentives built into the trust documents for beneficiaries," said Mirchandani. “The team of professionals, including the family office manager, the family’s attorney, our trust services team and myself worked together as a group to organize all of the trusts into one simpler structural plan."
Various incentive clauses are intended to motivate the next generation, but often can be ambiguous, making it more difficult to administer and can also cause resentment when heirs don't receive what they expected.
Societal wealth, said Mirchandani, is an extension of the family dimension of wealth into the family's community and the world around them.
“The family's impact on their community impacts the family internally, too," she said. “Whether they choose to establish a family foundation or a donor-advised fund, the charitable and philanthropic activities of a family are a way to link generations together as well as connect them to the larger community."
“Spiritual wealth doesn't necessarily refer to religion," said Mirchandani. “The spiritual dimension of wealth refers to the vision, the mission and the values of the family. Williams said 10 percent of family financial failures can be linked to the lack of a shared mission, vision and values."
Mirchandani said families can attend a workshop to develop a mission and vision statement, discuss the family's history and share their concepts of family values. Or they can gather on their own for this type of discussion. “The idea is just to be more intentional, to bring the family together in a more cohesive way," said Mirchandani.
Taking a multidimensional approach to wealth could strengthen family relationships and increase the opportunity for sustainable, inter-generational wealth.
“For families with significant wealth, the financial capital tends to get the most attention from family members and their advisors," said Mirchandani. “Helping to broaden their definition of wealth over the long term could have a positive impact on the financial and non-financial well-being of future generations and help make the process of wealth management more enjoyable and meaningful."
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