Nine Characteristics of Successful Family Wealth Plans

Planning & Strategy

Recently we had the opportunity to attend (virtually) the Johns Hopkins All Children’s Foundation 24th Annual Estate, Tax, Legal & Financial Planning Seminar. This year’s keynote speaker was Pamela Lucina, Chief Fiduciary Officer and head of the Trust & Advisory practice for Northern Trust Wealth Management, one of the country’s largest trust companies. Her keynote presentation highlighted the characteristics of successful families and provided practical strategies to avoid mistakes commonly seen in the administration of multigenerational wealth plans and trust structures. We summarize Ms. Lucina’s nine key observations below.

1. Don’t Buy Into Shirtsleeves to Shirtsleeves in 3 Generations

Echoing what we’ve said and highlighted at the Family Business Director, the saying “Shirtsleeves to Shirtsleeves in 3 Generations” is less fate and more myth. Family companies and trusts that operate from a place of fear (“We will fail unless we do something”) often fail to make sound, long-term decisions and revert to more short-sighted thinking. Focusing on the positives of the family business (long-term focus, generational wealth creation) induces better decision-making and outcomes.

2. Resist Ruling from the Grave

Wealth creators and first-generation founders often find themselves, usually with the best intentions, attempting to ensure that they will continue to control the business or assets of their beneficiaries from the grave. This manifests itself in incentive trust structures and strict rules-based criteria for distributions or asset allocation. Ms. Lucina warns against this thinking. Beyond creating animosity and resentment, if beneficiaries are solely focused on checking boxes created by others (i.e., get a degree, hold a job, sign a pre-nuptial agreement), they will often do the bare minimum to meet the standard. Instead of relying on such extrinsic motivation, families and trust documents should aim to effectuate the grantors’ intent while tapping into the intrinsic motivations that will cause beneficiaries to genuinely thrive.

3. Consider a Statement of Intent

The best family businesses and trust structures contain a statement of intent. The purpose of the statement of intent is to clarify the purpose of the trust. Statements of intent provide guardrails for the trust and help keep the beneficiaries and trustees on the same page. From this view, the modern estate planner’s job is, in part, to serve as amanuensis for the grantor or wealth creator, turning the desires of the trust grantor into a prudent and workable plan.  Having a statement of intent can often demystify the seeming ambiguity of trust language and best effectuate the grantor’s wishes.

4. Attend to Concentrations

Diversification is a common topic on the Family Business Director blog.  Ms. Lucina notes that strong families aim to address concentrations within trusts and long-term wealth plans. This can come in the form of having outside investment management of trust assets or the sale of concentrated, long-held stock. A common pitfall for families arises when the grantor of beneficiaries becomes “attached” to stocks, whether because they are what created the family’s wealth or provide income to meet beneficiary needs. On the flip side, a trust may have been created, in part, to maintain a family’s ownership in a private business. Understanding that goal can provide clarity to the beneficiaries and help them to level expectations on asset allocation and distributions in the future.

5. Clarify Roles and Responsibilities

Just as it is important to have clear roles and responsibilities for family members in your family business, families need to clarify each member’s responsibilities in their long-term planning and trust structures. Trustee and administrative roles need to be specific, and families should identify possible pain points in trust structures. This includes avoiding ambiguous language and providing clarity to the who, what, where, and why.  Clarifying roles can help to stave off future family squabbles and tough conversations.

6. Provide for an Exit and Autonomy

Trusts are often put in place as a means to achieve tax efficiency and maintain family wealth. They also can act to maintain family harmony and togetherness when the grantors are no longer in the picture. This can be achieved through annual family meetings or owning common private assets (private company stock, a vacation home). However, Ms. Lucina notes that creating an exit mechanism and establishing autonomy at outset of the long-term wealth plan is key to family harmony. Similar to shareholder redemptions in your family business, you need to understand the ‘outs’ for beneficiaries in your trust structure to prevent family resentment and feelings of entrapment.

7. Develop Competencies

Strong family businesses educate the next generation not just in the family business, but the intricacies of their family’s trust structure and broader wealth plan. Working to build key competencies, either through education from advisors or real-life learning opportunities (participating on investment committees, overseeing donor advised funds, etc.) gets beneficiaries involved and prepares them for their future role as primary stewards of the family’s wealth.

8. Cultivate the Entrepreneurial Spirit

Family wealth often comes about through the entrepreneurial spirit of the founders of a family business.  Successful families inculcate this spirit and encourage each generation to contribute to the overall wealth of the family. Families can act as the ‘family bank’ and underwrite investment ideas and business ventures or create new divisions or entities to house these ventures.

9. Communicate, Communicate, Communicate

Ms. Lucina’s final takeaway is one we are all familiar with: the importance of communication. We have discussed how much you should communicate with your family shareholders previously, but how do you handle discussions on wealth from a holistic family perspective? Often, mum is the word regarding high-net worth families and their wealth. Second and third generation members may know there is wealth, but not understand how it fits into the family wealth plan or what governs their access to it.  This silence is often motivated by a desire to not corrupt children or disincentivize their work ethic. However, not communicating with family about your business or wealth planning can seriously damage the trust of family members. While every family is different, we tend to lean to the side of over-communication regarding family wealth planning conversations.

Family businesses and advisors would be wise to keep a number of these practical rules in mind when crafting or advising family wealth plans and documents. As valuation professionals, we aim to be a helpful partner in the tax planning process alongside estate attorneys and other advisors for businesses and high-net-worth individuals. Give us a call to see what we can bring to your estate planning team.