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.
....
