Much research in my industry has focused on the question of what factors actually impede the wealth transfer process. While we have written extensively about the confiscatory nature of the estate tax system, the tax code alone is not the only culprit.
Ask any trusts and estates attorney about what it means when we say there is a failure of wealth transfer, and our stories are plentiful: Children losing their incentive to be productive working adults due to having more wealth than they need; family planning that incites generational litigation; poor architectures for investment management of the family’s capital; and the failure to carefully plan for the estate tax regime.
What Worries Parents
The vast majority of our firm’s clients want to ensure that their children are emotionally mature, are productive in some type of work of which they can be proud, and appreciate the value in perpetuating the family’s business or philanthropic legacy.
Trusts and Estates lawyers have been aware for years of the general factors that worry y affluent parents about the effect of wealth on their children. According to a survey of affluent Americans*, 55% thought their children naive about the value of money, 52% were worried about children spending beyond their means, and (maybe most importantly) 50% were worried that their children’s initiative may be ruined by their affluence.
So what are the measurable factors that impede parents from dealing with these concerns and thus inhibiting the process of transferring wealth from one generation to another? Luckily, the failure of wealth transition has little to do with lawyers or other tax professionals! But the pie chart on the next page speaks for itself, and two particular factors are quite interesting.
Taking Aim: Root Causes of the Failure of Wealth Transition
According to one study, 60% of the transition failure was attributable to breakdown of communications and trust within the family.
According to a survey of affluent Americans*, 55% thought their children naïve about the value of money, 52% were worried about children spending beyond their means, and (maybe most importantly) 50% were worried that their children’s initiative may be ruined by their affluence.
15% of the failure to transfer wealth effectively is generally attributable to ALL other causes, including such logical culprits as legal and tax planning that is not carefully implemented (Luckily as the chart indicates professionals like attorneys, accountants and other financial advisors bear little blame). But the largest component of this 15% category is primarily due to the lack of a family mission statement. For affluent families, this may be the second most important document after one’s last will and testament. Such a statement defines the family’s long-term mission of how the family capital is to be deployed. For many of the families it defines the goals and expectations for the descendants as to the critical roles that the family business (or philanthropic initiatives) play in being the adhesive that keeps the family together, and it is helpful in reducing the ambiguities that inevitably arise relating to the questions of family governance and perennial tax issues.
All of this clearly points to another conclusion. While attorneys may be quite competent in their knowledge of the tax code and in drafting all sorts of trusts with funny acronyms (GRATs, IDGTs, GSTs, QPRTs, FLPs), such work is in fact only one small piece of a complex mosaic of factors that is of value to family in helping them navigate the successful transference of their hard earned capital.
Families that don’t succumb to the above-referenced failures have been guided by their professionals, who have integrated these strategic family services into their discussions with clients. They understand that when their wealth reaches a large or critical level, the family no longer needs to strictly define success as financial. Rather, successful families extrapolate out and start defining how their wealth will impact their descendants over many generations and how they can make a difference in the communities they touch. Interestingly, it is this type of planning that lends itself to greater tax efficiencies and greater retention of family capital. After all, what is the point of the transfer of capital, if the end result is your children sitting on a beach in the Caribbean sipping margaritas on your dime?
*US Trust Survey of Affluent Americans XIX,