Originally published in Forbes on June 29, 2022
BY: DAVID REDDING, CTFA, AEP, CWS
Austin, TX Market President, Argent Trust Company | (512) 478-3188
Estate planning is not something that anyone puts at the top of their “Fun Things to Do” list, but most can agree that it is particularly important. You’ve worked a lifetime to create your estate and desire to transfer it at your death to family or other individuals and/or to charity. But how do you do this in a way that creates the legacy you desire for your heirs? How do you transfer wealth in a way that energizes, motivates and creates opportunity for your chosen beneficiaries and avoids creating strife, anxiety, disharmony and even bitterness?
Simply creating a will and leaving your estate to your family is certainly an option. After spending a lifetime accumulating wealth, which required hard work, planning and diligence, I would suggest that those same characteristics should be applied to the estate planning process when deciding on how best to transition your wealth. It is surprising to me the number of individuals that do not engage in the planning process with the same diligence that they applied to their wealth building.
Even the most costly and complex estate plans cannot overcome cultural barriers that may exist in your family. Peter Drucker’s famous quote, “Culture eats strategy for breakfast,” has been tweaked to, “Culture eats estate planning for breakfast.” Drucker was referring to the fact that the culture of a company will not allow even the soundest strategy to work because the culture is much more dominant than the strategy developed by management. The same applies to our families. This truth is why the proverbial saying, “Shirtsleeves to shirtsleeves in three generations” is so powerful. It is widely believed, and many studies prove, that 70% of affluent families will lose their wealth within three generations—regardless of how expensive and complex their estate plan!
These facts leave you with one logical option—address the culture of the family system head-on. You must put in the demanding work needed to change the culture into one that can thrive both before and after the transfer of wealth and become more vibrant, motivated and full of purpose. This is much easier said than done, but it is worth the work and effort needed to change the family culture and make wealth transfer and a positive legacy not only possible but the most likely outcome.
It is my experience that even well-meaning gifts and plans that provide significant wealth to children or other heirs without the proper cultural framework or agreed purpose/mission can create more harm than good. Take for example the well-meaning parents who are advised by their advisor to make annual gifts of $16,000 to their children to take advantage of the annual exclusion amount. This is a quite common approach to reducing a taxable estate and can provide much-needed funds to successor generations. However, when gifts of this type are made without considering the potential outcome or how receiving a gift of this amount might affect the relationship with their children or how their children might react to this action, they can have very devastating effects.
For example, one daughter hasn’t spoken to her parents in a decade and is basically estranged from her family. The parents believe that sending these funds will be helpful to their daughter with whom they desperately want to repair the relationship. However, when the daughter receives the check without any context or cultural framework, she simply chooses to believe that her dad is using his wealth to try to buy her affections and the relationship is damaged further by what was intended to be positive.
When a large estate is bequeathed to future generations, the problem is compounded and even a little bit of preparation can go a long way to help those downstream beneficiaries to be more likely to succeed as inheritors. The issue is primarily that few people are wired like a wealth creator, and if this type of person is rare, it is even more unlikely that the children or grandchildren of a wealth creator will be so wired. Therefore, it is incumbent on the wealth creator to educate his heirs on their roles and responsibilities and to teach them how to be good stewards of the wealth that he or she has created. Everyone must learn to bring their gifts and talents to the table to develop a culture, vision and purpose around the wealth that future generations can buy into and give the plan the best chance of success.
I follow and subscribe to the thoughts of Jay Hughes. Jay has argued that there is more than just financial capital that needs to be addressed when working with families of wealth. According to Jay, there are five capitals, and each must be a part of the bigger picture. To create a culture that will allow a comprehensive estate plan the highest probability of success, each of the capitals needs to be valued and nurtured. The five capitals are Financial, Intellectual, Social, Human and Spiritual (FISHS). I look forward to providing more of my thoughts and experiences in future articles around this important topic and diving deeper into the five capitals.
David E. Redding, Market President and Senior Wealth Advisor at Argent Trust Company, helps clients navigate the complex world of estate planning, trust administration, wealth transfer and closely held business strategies. David has over 28 years of experience in in the wealth management industry.