In their recent book, Preparing Heirs, Roy Williams and Vic Preisser - two self-styled "family coaches" - lay out a five-step plan to help those with investable assets of at least a million dollars pass that wealth on to succeeding generations. Indeed, not only do Williams and Preisser promise to help pass on the wealth itself, they also promise to help pass on the family values that come with it (if any).
In theory, the book should have a large audience: Data gathered by The Economist in the year 2001 suggest that more than 7 million people fit the authors' profile. Meanwhile, data from other studies suggest that, in the next fifty years, $36 trillion will be transferred from the million-plus-dollar estates the authors discuss (These estimates are compiled by researchers interested in philanthropy.)
In sum, there's a lot of money getting transferred. Preparing Heirs points out that there is also a lot of money being lost. Indeed, in the authors' terminology, the Uniform Worldwide Failure Rate for Wealth Transfers is seventy percent. "Failure," in this context, means loss of control. In contrast, a beneficiary who donates to charity is simply redistributing the wealth; the wealth transition itself was "successful."
Put another way, in only thirty percent of the cases involving the descent of great wealth does that wealth actually remain under the control of the intended beneficiaries for any significant period of time. The rest of the time, it is "involuntarily" removed from the beneficiaries' hands.
The authors offer an explanation of why this occurs, and suggest ways to prevent it. In doing so, they say that they draw on extensive survey data (both on paper, and through personal interviews) regarding 3,250 families who, over the past thirty years, tried to transition wealth - some of whom succeeded, and some of whom failed.
At times, Preparing Heirs takes itself--and the woes of rich folks who squander their money--a bit too seriously. For instance, at one point it compares the transformative power of declaring a Family Wealth Mission to signing the Declaration of Independence. But it also provides insight into the common problems that plague transitions of great wealth - and useful advice for ensuring success. For this reason, it should be well received by its target audience.
What's going on? How can these generally well-counseled wealthy people be losing so much money just because they are transferring it - often to their very own relatives? The short answer, according to the authors, is: It's not the professionals, it's the family dynamics.
There are a number of reasons why transition of wealth "fails." A few involve professionals: too high taxes or expenses. Some are no one's fault: financial reversals or a rough economy.
But many directly involve bad behavior within the family. There can be inattention, incompetence, or mismanagement by family members when it comes to investments. There may be waste and profligacy when it comes to spending. And there may be feuds, distrust, and needless grudge litigation. (Indeed, the authors note that sixty percent of failed transfers are attributable to breakdowns in communication and trust.)
Failed wealth transitions, the authors explain, only occasionally result from technical deficiencies in the estate plan. In only fifteen percent of the families the authors surveyed, could a failed wealth transition be attributed to poor drafting of estate documents, bad tax planning, or incompetent investment advice.
Thus, the authors conclude that it's not really the fault of estate planners, lawyers, financial advisors, or will executors - in general, they're doing a competent job. Indeed, when the wealthy focus on choosing professionals, they may only create a false sense of security for themselves. In practice, no matter how careful they may be, this will not ensure that their wishes will be carried out following the transfer.
The problem lies within the family and must be fixed within the family: It's necessary to work on the level of communication and trust within a wealthy family preceding the transfer of wealth and control.
According to their survey data, the authors found three variables that were present in most successful wealth transitions: total family involvement; a process that integrates the wishes and decisions of family members; and learned, practiced skills like communication, trust, accountability, and a unifying family mission.
(Unfortunately, though, since the research is claimed to be "proprietary," the reader is told very little about the way in which the surveys were actually conducted, and it's hard to assess whether the authors were correct in identifying these variables as the most important.)
The Authors' Five Steps for Preventing "Failed" Wealth Transfers
The authors argue that rich parents worry about the right things--that their children will overemphasize material things, that affluence will make them lazy, that they will never learn the value of the dollar, that they will be taken advantage of by friends and mates who want their money, and that they will have limited exposure to non-affluent people.
But they also add that rich parents, well-meaning as they may be, don't tend to take the necessary steps to avoid these pitfalls. And so they recommend five sensible steps to help them do so.
The first step is to evaluate the wealth-transition plan to see whether common pitfalls have been avoided. The authors stress that it's important to build in "incentives and opportunities" for heirs, so that they develop money-handling skills, and do not become either idlers, or overly dependent on their parents.
In particular, the authors suggest requiring any potential heir to work for five consecutive years, earning appropriate raises and promotions, outside of any family-controlled business. They also suggest developing ways for heirs to earn their handouts each year - or conditioning successive wealth transfers on successful investment or donation of previous ones.
They also suggest developing and adhering to a "family mission" to provide a focal point for philanthropy - an interesting idea that is rarely stressed in the law-centric world of estate planning, and that is worth considering given that statistically, thirty percent of this kind of wealth goes to charitable causes.
Step two is - working with family coaches like Williams and Preisser - to formulate an action plan to deal with "the family issues that threaten the orderly transition of family wealth and responsibility." This, of course, seems like the hard part: It requires the family - and their coaches - to convince lazy heirs to be energetic, and train incompetent ones to be skilled.
Step three is the preparation of heirs. The family must disclose potential inheritances; explain the reasons for unusual or unequal distributions; begin to groom successor company heads for the job; and get heirs involved in investments or family donations. Issues that are often sorted out only after death, the authors suggest, ought to be sorted out long before, when the benefactors still have a hand in things.
The fourth step is for the heirs to prepare themselves. Steps to increase self-awareness (read: therapy) are suggested. Steps to increase the competence necessary to use wealth wisely or run a family company - again, business experience or courses - are also prescribed.
Finally, step five is to continue evaluating and measuring the family's success with steps one to four.
Will the Five Steps Work?
The five steps are intuitively appealing--and there is no reason to assume they won't work; indeed, they seem well designed to work exactly as they are supposed to. But they sure would take the joy out of being a millionaire, or an heir or advisor to one.
Under the five steps, many opportunities for family fun are eliminated: Rich elders are not supposed to coerce obsequious loyalty from younger relatives with the threat of disinheritance. Nor are lawyers and financial advisers supposed to scheme with the wicked old man to ensure that his cold, dead hand will control and poison the lives of his survivors for a century to come.
Grown children are not supposed to waste their lives at the family trough, passing on any opportunities to become educated, experienced, or independent. No heir is left behind to be the "black sheep" - the spoiled, ungrateful, embarrassment to the family.
And here's the real kicker: families are not supposed to gossip about each other.
Still, some families who are very wealthy indeed may find it palatable to bring themselves to make the sacrifices the five steps would entail. For the rest of us, it's good to know being a potential heir to millions isn't just a bed of roses anymore.
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