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Family Wealth Preservation

2 Crucial Tips for Preserving Multigenerational Wealth

Families Lose Their Multigenerational Wealth at These Critical Tipping Points. Recognize Them?

Families that have worked extremely hard to build wealth find it even more difficult to preserve multigenerational wealth. Often, the concern is that a wealthy family could go from “shirtsleeves to shirtless in three generations.” The first generation creates the wealth, the second generation consumes the wealth, and the third generation starts all over again.

With the great wealth transfer coming, the way that future generations handle family wealth could make or break the family’s legacy. According to a 2020 survey by RBC Wealth Management, which surveyed over 100 “Next Gens” of ultra-high net worth families from the U.S., the UK and Canada, 54% of Next Gens are worried they will lose their family’s wealth, and 44% are worried their children will lose the family’s wealth.

While there are many tax, legal and investment strategies that can be used in multigenerational wealth management, there are two critical factors that will have a greater influence on wealth preservation than anything else: recognizing tipping points and viewing family wealth as an enterprise.

The surprising thing is that neither of these are technical strategies, per se. They are both about mindset and taking a new perspective.

Recognize Tipping Points to Break Old Wealth Management Habits

When it comes to preserving multigenerational wealth, one of the most important steps in the process is recognizing tipping points. A tipping point occurs when the strategies that led to success in the past are no longer effective. Recognizing tipping points requires a new mindset and strategic vision for how to achieve your goals in the future.

Here are some key tipping points families should be aware of:

  • A first-generation wealth creator has accrued a significant amount of wealth outside of the business. Now, the wealth creator is not only responsible for running a business, but also overseeing significant personal wealth. This dual responsibility has become a burden.
  • There is a transition in leadership between the first and second generation within the family, the family business or both.
  • A successful family business is about to be sold, netting out more liquid wealth than the family has ever had to manage.
  • The structure of the family wealth has become so complex and so ungainly that family leaders no longer have a purview of their entire holdings and feel out of control.

These are the critical tipping points that families with wealth should recognize, understanding that the strategies they’ve used in the past to manage multigenerational wealth may not work as well in the future.

The risk to these families is that if they keep doing things the way they’ve always done them, their wealth could dissipate significantly, despite their best efforts and intentions.

Think of Multigenerational Wealth as a Family Enterprise

Families who recognize tipping points like these in their own family business should accept the importance of a mindset change. Rather than viewing their business and personal wealth in isolation, families should view their wealth holistically as a family enterprise. This can seem like a strange concept at first, maybe a bit too formal, but it is very important.

Many multigenerational families realize wealth from a business, often a family business. To their way of thinking, the family enterprise is the family business, not their collective wealth and values that they wish to preserve for generations to come. This is where the shift in mindset needs to take place and here’s why:

Many families have so much complexity in their wealth that they need to treat it like a business if they are to preserve their wealth long-term. When it comes to running the family business, most families should recognize the following as important steps:

  • Have a core mission, vision and value system that the business is organized around and expected to follow.
  • Have strategic leaders in key positions, such as a CEO, CFO, COO or other roles.
  • Have independent advisory boards to help set strategic direction.
  • Mentor young people so they mature in their roles and become future leaders.
  • Report accurate information so that stakeholders can make informed decisions.
  • Have a long-term strategy with milestones and regular meetings with stakeholders.
  • Make course corrections when market changes require them.

Business owners would not think these situations are too formal or restrictive to running a great business. In fact, they are essential. But, when it comes to managing family wealth, which often has the same level of complexity as a traditional enterprise, these formal structures are often missing.

If your family comes to one of the tipping points, it is best to think of the family’s wealth as an enterprise and put a plan in place to manage intergenerational wealth the way you would manage a successful business. This guiding principle could greatly increase the likelihood of preserving wealth for generations to come.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Estate Planning & Asset Protection in an Hour and The Legal & Tax Aspect of Investing: Asset Protection; Estate Planning, and Tax Efficiency. This is an updated version of an article originally published on August 13, 2018.]

©All Rights Reserved. April, 2021.  DailyDACTM, LLC d/b/a/ Financial PoiseTM

About Robert Legan

Robert Legan leads Whitnell’s Family Office Services practice, serving as a strategic advisor for families to help preserve, grow, and transfer family wealth. Robert is passionate about helping families navigate the complexities that come with wealth and collaborating with family members and advisors to implement integrated solutions.

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