Family Wealth Continuity

Building a Foundation for the Future

David Lansky

• Publisher: Palgrave Macmillan
• Year: 2016
• Print ISBN: 9781137576385
• eBook ISBN: 9781137576392
• Topic: Business
• Subtopic: Small Business
• Index: Business

Most family business owners and wealth creators share an important vision: perpetuating family and wealth for many generations to come. To ensure wealth continuity, many families put into place various structures, plans, and processes, including estate plans (which may include multiple trusts), ownership succession plans, governance structures/strategies, and others.  These sometimes-elaborate plans are aimed at preserving family wealth.  In reality, for many families, they don't.    In fact, it has been estimated  that a majority  of estate plans in place fail, largely as a result of family conflict or communication problems.  Author David Lansky reveals here that too many one-size-fits-all and elaborate continuity plans fail to take into account the idiosyncratic family factors that can interfere with continuity planning. Lansky details further how building the right foundation will help families implement the best continuity plans.  Addressing that foundation effectively includes understanding the building blocks that make it up, assessing their strengths, and developing strategies to improve them. The specific building blocks include:

• Learning Capacity 

• Familyness 

• Safe Communication Culture 

• Commitment to Personal Development

• Effective Leadership of Change

While richly informative, this book is not intended as a training manual, but rather as a starting point for important ideas and conversations. In fact, the goal of this book is to help families consider several related factors that go into a foundation for continuity, and to build more effective continuity plans and strategies based on their assessments.

CHAPTER 1

Introduction

As an introduction to the topic of the Foundation for Family Wealth Continuity, consider two very different family business situations:

Members of one family attended a national family business conference, where they participated in a day-long workshop to learn about different governance structures and processes. Upon returning from the conference, the family discussed and began to develop several governance measures—including a family council, a plan for management succession, and a plan for passing on family ownership—and started implementing these plans soon after. Taken together, these elements constituted the family’s wealth continuity plan and they soon witnessed stronger family relationships together with the overall optimistic view that the business and other family assets would be preserved across generations.

Members of second family worked with several financial/legal advisors and consultants over several months to think about wealth continuity planning. One of the advisors’ main recommendations was for the family to create a family council including representation of cousins from all family branches, and to harness the council to aid in succession and ownership transfer planning. While the cousins agreed with the general idea of such a council, they could find no common ground regarding its specific elements—including size, election processes, and others—and it became clear they did not think of themselves as a well-connected “clan,” as they struggled to even communicate about simple topics, much less to develop complex plans together. The hoped-for continuity plans never came to be.

These examples, taken from a combination of several business families I’ve observed, highlight an important reality: while most business families and families of wealth hope to perpetuate their wealth across generations, their ability to do this successfully varies dramatically from family to family. The goal of this book is to help families understand and improve their specific nature on several key dimensions of communication, interpersonal interaction, culture, and leadership related to wealth continuity planning—from their collective capacity to learn, to individual members’ commitment to self-development. Together, these “building blocks” make up what I call the Foundation of wealth continuity.

The Challenge of Wealth Continuity Planning

As suggested by the examples above, most family business owners and wealth creators share an important vision: perpetuating the wealth their enterprise has generated for many generations to come. In this context, “wealth” means not only collective financial assets, but also less tangible resources such as family relationships (within and between generations), harmony, and engagement.

To promote wealth continuity, many family wealth creators put into place structures, plans, and processes, including estate plans (which may include diverse trusts), succession plans, governance structures/strategies, and others. Such well-established, systematic components, described in detail later in this chapter, would seem to work to preserve family wealth, at least in theory. In reality, for many families, they don’t.

There is growing evidence that wealth continuity planning is not working for many families. Part of the problem is a failure to plan in the first place. A PnC Bank survey of nearly 600 business owners found that while most expected their company and related assets to stay in the family for generations, the majority hadn’t developed plans to make this a reality.1 More directly to my point, a study by Williams and Preisser estimated that among a large sample of affluent clients, 70% of instituted estate plans failed, largely as a result of family conflict or communication problems.2 This shows that just because families create elaborate plans, success of implementation is not assured.

Overall, there is no consensus, empirically or anecdotally, on why continuity planning fails. I have had countless personal conversations with fellow consultants, attorneys, wealth advisors, insurance professionals, and family business board members centered around one specific question: How do you know that a particular family will successfully implement a specific wealth-continuity strategy, with lasting results?

The responses I hear almost always start with “That’s a really good question!” followed by some vague factor that may help promote successful continuity planning. Among the more common factors mentioned are:

• “Strong leadership”
• “Altruism”
• “Lack of greed”
• “Lots of money”
• “Trust”
• “Good communication”

But the conversation usually ends with some form of “I don’t really know.”

Despite the ongoing lack of clarity on the factors promoting effective continuity planning, some in the field have proposed related strategies to communicate more strategically about planning. Recently, for example, some family business and family wealth experts have aimed to enhance continuity planning by encouraging business families, families of wealth, and their advisors to focus on articulating and defining family values and objectives better, before focusing on continuity-related tactics.3 For example, a family might be asked to undertake an exercise to identify their values through a reckoning of past and present actions, and then to use what they discover (such as a focus on stewardship or philanthropy) to inform continuity planning.

While such efforts are important and admirable, they fail to take into account a key factor in the success of continuity planning: each family’s unique interpersonal matrix, which serves as the foundation for any wealth-related planning.

One Size Does Not Fit All

Many formal and informal approaches to understanding the success of wealth continuity planning make a faulty assumption: that all families start with a similar pre-existing capacity, or foundation, for developing and implementing a continuity plan. My experience suggests that’s a significant problem, because it prevents families and those who advise them from examining the idiosyncratic factors that can interfere with continuity planning.

For example, say a family member decides that a specific family governance structure—such as a family council—would be a good thing for her family. Does that necessarily mean that the structure in question is indeed appropriate in that particular family’s current context? Similarly, is it fair to assume that an advisor’s suggestion to a family, to develop better communication about their values to aid in estate-planning, can be followed easily by that particular family at that particular time?

The answer to both queries is a resounding “No!” The reality is that families differ widely in their baseline capacity to implement and benefit from wealth continuity structures. Just like houses, not every family has the same strength of foundation—some have solid platforms to support taking on challenges like governance and wealth continuity planning, and others have much less stable or effectively non-existent foundations, making them less capable of successful planning.

Consider two more examples of family businesses dealing with continuity planning:

• The parents/founders of a successful family business withheld estate plans from their adult children for decades because they didn’t want their children’s spouses (the daughters/sons-in-law) to be privy to such “personal” information. When the founders passed away, the children inherited significant shared real estate, but they were poorly prepared to deal with the assets because they had no prior knowledge of the inheritance.
• A wealthy multi-generation business family met with the private banking division of a major bank to discuss continuity planning. The meetings resulted in the recommendation of several “best practices” as groundwork for the planning, including the development of a family council and family vision statement. The discussions failed to take into account that the two senior family leaders hadn’t spoken productively to each other in years, and thus they were unwilling to work on the prescribed items in any depth. Not surprisingly, the family achieved no meaningful continuity planning.

In both cases, the families lacked the proper foundation on which to build effective continuity planning, but for different reasons. While that may seem obvious or even intuitive after the fact, too many business families, families of wealth, and their advisors fail to take foundational factors into account—they don’t assess the family’s capacity to develop and implement a continuity plan. So it’s no surprise that many families either fail to develop a meaningful plan in the first place or create a plan that they’re not able to implement effectively. Part of the problem is the ubiquity of prescribed “best practices,” as suggested by the example above and described in the box below.

The Myth of Best Practices

Some professional service providers latch onto “best practices” as a selling tool for family businesses and families of wealth interested in vehicles for wealth continuity (such as investments or insurance products). After all, the term sounds catchy and promising—how can the “best” be a bad thing? The problem is that by touting best practices to their potential clients, everyone fails to take into account the fit between the practice/product and the family making use of it. Because a given practice must be tailored to a given family situation, there is no such thing as one best practice for all. The family context must be considered very carefully before going forward with any continuity plan element.

So, when it comes to wealth continuity planning, taking a one-size-fits-all approach is never ideal. We can think of such planning using a medical analogy. For thousands of years, it didn’t really matter whether sick patients followed their doctors’ advice: most medical practitioners were more “quack” than healer, and complying with their recommendations might actually have resulted in greater harm than good in many cases. But that situation changed in the twentieth century with the advent of effective treatments in many areas, from penicillin to polio vaccines. Thes...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright
• Contents
• Acknowledgments
• Chapter 1 Introduction
• Chapter 2 Learning Capacity
• Chapter 3 Familyness
• Chapter 4 Safe Communication Culture
• Chapter 5 Commitment to Personal Development
• Chapter 6 Effective Leadership of Change
• Chapter 7 Putting It All Together
• Index