David and Joan had worked hard over the years to turn their food service supply company into a successful business. They had amassed a respectable fortune through careful business planning and a healthy investment portfolio, and they made a point of giving back to their community through a number of charities. They also created a series of trusts to ensure each of their children and grandchildren would receive a sizeable inheritance, and they were even able to turn their company over to their eldest son, John, before retiring. When David and Joan passed away within two years of each other, their family was set financially for generations to come—just as they had hoped.
Except things didn’t go as planned.
Despite having a well-devised estate plan, the family fortune was undermined from within—a combination of disputes among the siblings and misappropriation of funds by the trustee. Several of the grandchildren burned through their respective inheritances within three years of receiving them. The company fell on hard times, and when John seemed either unable or unwilling to navigate through the problems, he sold the business—which in turn created even more family squabbles. With their investments depleted and no company to generate new wealth, within 20 years, the family fortune was gone. The great grandchildren only grew up hearing stories about how their family was once wealthy.
Perhaps a more apropos question would be, “What didn’t happen?”
David and Joan had taken great pains to preserve their wealth for their descendants, but what they failed to do was instill the guiding principles that helped them build and keep that wealth in the first place. They didn’t leave a legacy for the children and grandchildren to follow, so when they received their inheritance, they didn’t have any idea how to keep that wealth working for them.
Tragic as this story sounds, it’s more common than you think. In fact, seventy percent of wealthy families lose their wealth by the second generation, according to Money Magazine—and 90 percent by the third generation. Something is obviously being lost in translation—namely, that intangible idea we call legacy.
Understanding legacy planning
The term legacy planning is often used interchangeably with estate planning, but they’re not quite the same thing. I like to think of legacy planning as values-based estate planning or planning with a greater purpose in mind. It involves establishing family priorities and good financial habits, then imparting both to our descendants while we are still with them. We can also integrate these values into our estate planning so the wealth remains protected until our descendants mature enough to follow our example.
Tips for Leaving a Legacy, Not Just Assets and Money
Of course, no one can predict the future, nor can you control our children’s choices once they come of age. You can, however, take steps to reinforce your priorities while reducing the risk of conflicts and squandering. Let’s explore a few ways to work a family legacy into your estate plan.
- Talk about money with your children and grandchildren—early and often. Talk with them about how you built your business, bought your house, created a retirement fund, etc. Focus on the philosophies behind good financial habits, not just the money itself. Don’t just put your kids to work in the family business; take opportunities to explain the process of running the business and why you do what you do. Doing this helps them feel a sense of shared ownership of the family legacy.
- Create safeguards within your estate plan. If you have a child who is vulnerable to bad financial decisions, for example, consider structuring their inheritance to come to them incrementally or after certain benchmarks are reached. Talk to your estate planning lawyer about tools for preserving portions of your estate for the third and fourth generation.
- Integrate charitable giving into your estate plan. To ensure your estate continues supporting the causes you care about after you die, consider setting up a charitable remainder trust (CRT), charitable lead trust (CLT) or another vehicle that designates funds or assets to your favorite charities. If you have the time and bandwidth, you might even set up a separate family foundation and appoint trusted family members to administrate it.
- Talk with your beneficiaries openly about your plans and desires for the family. Schedule a family meeting to discuss your estate plan, how it is structured and why you’ve designed it that way. Encourage questions and resolve concerns ahead of time so everyone has realistic expectations about the estate and what your intentions are.
The more you involve your family in the behind your accumulated wealth, the easier it is for them to begin adopting your priorities as their own. That’s the idea behind leaving a legacy. Begin to think now about how to pass on your values, not just your stuff. Doing so will give your family a fighting chance at keeping what you’ve worked so hard to provide for them.
What To Do Next:
Estate planning can be deceptively complex. Not only do state and federal laws change, but every family situation is different. Planning choices have profound tax and family relationship implications; and, not having a plan in place is worst of all.
Adam Wood offers clients a no hassle estate planning strategy meeting. During and after the meeting, Adam guides his client through a plan which will achieve his client’s goals and put his client’s fears to rest. Ultimately, he provides peace of mind for his client and client’s loved ones. Just call his office at 631-266-2200 to schedule a planning strategy meeting.