The Wealth Formula BY JENNA GUENTHER MANAGING DIRECTOR, WEALTH STRATEGY

Transcription

1 The Wealth Formula BY JENNA GUENTHER MANAGING DIRECTOR, WEALTH STRATEGY

2 The Wealth Formula BY JENNA GUENTHER MANAGING DIRECTOR, WEALTH STRATEGY DOES WEALTH = FINANCIAL ASSETS? A young boy recently received a pirate s treasure chest filled with fake gold coins ( doubloons as he calls them) for his fifth birthday. After spending several hours sorting through them and his rather large pile of real coins, he went to his mother and exclaimed, Mommy, look how much money I have! I m rich! His mom could have replied, Yes son, you are rich! Instead, she gave him a big hug and responded, You are rich in more ways than just the coins in your treasure chest. The boy looked up at his mother with his big brown eyes, and his brow started to furrow. What do you mean, mom? I can buy lots of stuff with this money! Having money means I m rich, doesn t it? Does it? While the young boy was correct in saying he could buy stuff, at least with the real coins, he was off the mark in his innocent belief that having money alone makes you rich. There s so much more that goes into being truly wealthy. For families, it s their human, intellectual, social and financial capital. 1 For individuals, it s relationships, passions, joy, security, health, comfort and many other things. For the boy in our story, it s the undying love he receives from his mother, father and two sisters; it s the sweet notes he sends to his grandmother, never once questioning if she ll write back because he knows that she would do anything for his happiness; it s his knowledge that his teachers and friends are there to help him overcome any obstacles he may face as a kindergartener; and finally, it s his growing love for himself and the belief that with the support of those he loves, he can do or be anything. There s so much more that goes into being truly wealthy. For families, it s their human, intellectual, social and financial capital. 1 Now, for him, anything may end up equating to a very large sum of money, much more than he currently keeps in his treasure chest. His mother s hope is that if she keeps reminding him about what it really means to be wealthy, his hard-earned riches will be just a part of his overall net worth. Why? Because she s seen firsthand the challenges that 1 Hughes, James E. Jr., Family Wealth Keeping It in the Family, Bloomberg Press, New York,

3 Insights The Wealth Formula Families can choose to invest some of their financial assets in the development of family relationships. wealth creates, especially when it comes to family relationships and the survival of those relationships over time. She knows that wealth is more than money and that you have to focus on building meaningful and healthy relationships in order to grow your human, intellectual, social and even financial capital. WEALTH = FINANCIAL ASSETS + FAMILY RELATIONSHIPS At first, this wealth formula may seem simple: if you cultivate meaningful relationships and accumulate financial assets, you ll increase your family s wealth. On paper, however, the formula doesn t illustrate the additional complexities and expectations that are often present when significant wealth is involved. These complexities and expectations can result in walls being built between family members and damaged relationships that can last for generations. For example, we frequently see grandparents and parents at odds with each other, and all of a sudden the parents ban the grandparents from spending time with their grandchildren. Sound familiar? It s particularly challenging for the senior generation to get it right with their children when financial assets are at the center of the family members discord. For instance, parents may not agree with how their children are spending money or with how entitled children feel about receiving additional assets. INCREASE WEALTH BY INVESTING IN FAMILY RELATIONSHIPS If you take family relationships out of a family s wealth, all that s left are financial assets. And, while money may provide financial security and allow family members to pursue their passions, it can t buy or replace the love, joy, security and comfort that come from close family relationships. One of our esteemed colleagues, senior wealth coach Amy Zehnder, boils it down to this: There are three things money can t buy: self-confidence, self-esteem and self-worth three things that are crucial parts of every person s ability to love themselves and ultimately develop deep relationships with others, including family members. We agree. Money can t buy meaningful relationships, but families can choose to invest some of their financial assets in the development of family relationships. One example would be to have younger generations take responsibility for creating and facilitating situations where two or more generations spend time together, learn together or work together. It could be something as simple as encouraging grandchildren to help their grandparents clean out their garage or something more challenging like having the children plan the next family vacation or meeting. Imagine how thrilled the grandparents would be if they just had to show up to a family vacation that was planned by younger generations, complete with a talent show performed by the grandchildren and great grandchildren! It doesn t matter what the occasion or event is, it just has to create an opportunity for different generations to build bonds and craft memorable moments; moments that build family relationships and, ultimately, trust; moments that facilitate healthy communication 2

4 and lay a foundation for easier, safer and more productive communication about difficult subjects: life issues, estate and inheritance expectations, business management and succession, shared-use assets, the numbers, etc. BUILDING TRUST MAKES TALKING ABOUT MONEY EASIER Let s talk about the numbers and how they fit into the wealth formula. It s obviously easier to quantify a family s financial assets than to assign a value to its relationships; however, it s not as easy to assimilate the financial assets into the lives of family members in a way that doesn t harm their relationships with each other. Families are all different, and they each have their own unique set of intricacies and challenges that factor into this process. Some families are really successful at bringing together financial and relationship assets and have fostered healthy connections in the process; others have not been as successful at it and have harmed healthy relationships or even divided family members along the way. Most families are somewhere in the middle, often at a loss as to what to do or how to proceed. Ironically, this hesitation is often rooted in the desire to not damage family relationships. This work has to be done now to increase the likelihood that your family s wealth formula will continue to increase in value. So, if your family is still working on an assimilation plan, where do you start when the only thing you know for sure is that you don t want the assets you ve created to become a negative force in the lives of your children or on your family s relationships? A good place to begin is to honestly assess the primary underlying question: Do I have the necessary trust and confidence in my children that if I leave the financial assets to them outright, it won t destroy their lives or the relationships between them? Most parents believe this to be true, but the reality is that upon the death of the second parent, relationships change and unspoken expectations can quickly divide the family. Therefore, the bigger question becomes, Have I clearly communicated my core values and expectations to everyone while I m still alive? However difficult it may be to answer these questions, some discomfort in trying to answer them is far better than letting your children guess or interpret your unspoken intentions or wishes after you re no longer alive. This work has to be done now to increase the likelihood that your family s wealth formula will continue to increase in value. Lack of Family Communication We know of a couple who have serious doubts about their children receiving financial assets from them. Yet, they don t talk about these issues at all. Of their two sons, one is doing well in his education and career, the other is not. In part because of this complicating dynamic, the parents plan to leave their estates in trust. As can be expected, the dialogue that surrounds the two sons is very different because of the different levels of trust and confidence in each of them. Dad told only one of the sons the approximate value (significantly downplayed) Continued on next page 3

5 Insights The Wealth Formula Whether it s picking the rightsized gift to make or deciding how assets should be distributed from a trust fund, the confidence you have in your heirs will influence your decisions. Continued from previous page in his trust. Guess which son? When asked what their expectations were about the use of the assets by their sons, the couple had a difficult time answering. It became clear after a lot of introspection that, although the sons will someday know the details, they are not now to know the current amount of assets and are not to rely upon, need, want or really ever use the money. The couple is struggling with how to deal with their current belief that the benefits of earned financial assets cannot be inherited, yet they don t want to give the money to charity. Their inability to communicate these concerns to their sons has had a detrimental impact on the time they spend with them, and their estate plan remains unsigned. Think about the level of confidence and trust you have in your own heirs. How does that confidence and trust (or lack thereof) affect your decisions to share or distribute assets? Does it also affect your relationships with your heirs and how you spend time together? Whether it s picking the right-sized gift to make or deciding how assets should be distributed from a trust fund, the confidence you have in your heirs will influence your decisions. Consider now what your heirs or children have to do to build your trust and confidence in them. When and how will you make them aware of your expectations and concerns so they know how to gain your trust? Leaving younger generations in the dark about your thoughts and wishes can be counterproductive and lead to more communication breakdowns. And jumping into these conversations without the proper preparation can lead to defensiveness or confrontations that don t benefit anyone. COMMUNICATION IS AN INVESTMENT IN FAMILY RELATIONSHIPS Even for those families who have already made a decision to leave a large portion of their estate to charity or a foundation, communicating and fostering meaningful family relationships is still very important. Imagine the heirs surprise and the possible legal fallout if this decision is not communicated with them and there is a legal battle over the estate. If you are considering leaving a large portion of your estate to charity or a foundation, it would be helpful if you shared this decision with your children and heirs so they can be prepared for what lies ahead and manage their lives accordingly. Better yet, you might think about involving your children and your grandchildren in the family s philanthropic activities as a way to build stronger family relationships. If charity is the chosen route, making decisions about your family s philanthropic giving can be a magical, positive experience. Involving younger generations in selecting organizations to support, giving them a voice on the foundation s board or even putting them in charge fosters self-esteem and personal growth. Bottom line: make sure you are maintaining family relationships as you reflect on next steps and communicate with your family about why you are taking your chosen actions. 4

6 Family Communication that Worked A group of adult brothers and sisters had been fighting all their lives, and it had escalated to demand letters by attorneys with draft complaints attached. They were on the cusp of litigation. There were multiple different operating companies that the sons were running that they all owned equally: trucking, banking, real estate development, a farm and ranch and an oil and gas business. The sons were working hard to keep the companies running and saleable and wanted to continue to reinvest earnings. On the other side, one of the daughters summarized her needs succinctly, I just want to feel wealthy. A lawsuit would have been devastating to the value of those businesses. Facilitated communications can have a profound effect and break unhealthy patterns of interaction. The daughters didn t understand the state of the businesses. When they asked, they were given full financials they couldn t read, and the sons had no patience to explain them. The family agreed to get together for a couple of days as part of a facilitated family conversation. Their initial bitterness and fighting eventually softened and turned to storytelling about the pranks they had played on one another over the years, each story moving back to a younger age. By the end of the first day, they were crying with laughter as they recanted tales of childhood shenanigans. The next morning, they were able to productively talk to one another again and started recognizing each other s accomplishments. They humanized one another. It was then that the daughters came to understand that reinvesting the capital was important to prepare the companies for sale at a very significant value, at which time they would receive the liquidity they wanted. They recommitted to working together and put together a plan that outlined how and when they would communicate. They also agreed that the sons would, in addition to providing financials, provide a quarterly interpretation of available cash for distribution that the daughters committed to understanding. They all signed a family governance plan that evening. What lead to this dramatic change? By investing a small amount of financial assets into their family relationships, they broke the cycle of unhealthy communication to which they had become accustomed. Instead of looking at one another as objects and barriers to what they thought they wanted, they looked at each other as people again, as family. They put time into building family relationships instead of tearing them down. They talked and, where necessary, they arranged facilitated discussions. They invested in building those family relationships and, as a result, their financial assets grew. 5

7 Insights The Wealth Formula Establish the necessary foundation for building a successful and lasting legacy. TIPS FOR PUTTING THE WEALTH FORMULA TO USE Now, let s turn to your family. Are you focused on building and maintaining family relationships while growing your financial assets? Have you successfully integrated your financial assets and your family relationships? Are you investing in the development of deep family relationships? Here are some ideas to help: If you haven t done so already, look for and engage an organization to help you; one that inspires the hope of meaningful change and resolution about the most difficult and usually the most important aspect of estate planning: wealth impact. Facilitated communications can have a profound effect and break unhealthy patterns of interaction. Address communication and teamwork. Build trust by strategically spending time together and sharing activities. Ask family members to help by taking on some responsibility, such as parents committing to connecting grandparents to grandchildren. Recognize and reward those in your family who focus on the family relationship side of the wealth equation along with those that work with the financial assets. Finally, have fun getting to know each other on a deeper level and take time to celebrate your progress as you continue to grow in all parts of the wealth formula. These few steps may seem a lot harder than they actually are. Implement them thoughtfully, and they can help establish the necessary foundation for building a successful and lasting legacy, a legacy that can make the shirtsleeves to shirtsleeves in three generations proverb irrelevant and help create sustained family wealth that is governed by the formula: FAMILY RELATIONSHIPS + FINANCIAL ASSETS = WEALTH MOM, I AM RICH! It would be unfair to end this paper without telling you more about the little boy and his treasure chest. Did his mother s wish come true? Do his hard-earned riches equate to just a part of his overall net worth? Is he truly wealthy? Yes, yes and yes! With the loving and purposeful guidance of his entire family, he fully embraced the wealth formula: he built meaningful relationships with his parents, sisters, grandparents, aunts, uncles and cousins; he spent many weekends working with his grandmother in her garden and helping his uncle fix up houses; he filled his summers with trips to visit his cousins; he played a major part in planning the family s annual retreats and meetings; and he chose to complete an education in wealth management in order to better understand and manage the financial side of his family s wealth. Now, as a young adult, he is viewed as the family s rising leader, role model and decision maker, and he is fully dedicated to continuing his family s legacy for many generations. It s not always easy but, when the going gets tough, he pulls out that old chest as a reminder of all the real treasures he has in his life. And, because that discussion with his mother so many 6

8 years ago had such a major impact on him, he gifts a treasure chest filled with doubloons to each family member when they turn five. Inside is a note that reads, You are rich in more ways than just the coins in this treasure chest! 7

9 Jenna Guenther earned a bachelor s degree in accounting from Furman University and a master s degree in taxation from the University of Denver Graduate Tax Program. She practiced as a certified public accountant prior to joining Ascent Private Capital Management of U.S. Bank. IMPORTANT DISCLOSURES Investment products and services are: NOT A DEPOSIT NOT FDIC INSURED MAY LOSE VALUE NOT BANK GUARANTEED NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY Wealth impact planning is not fiduciary in nature, and Ascent serves in a non-fiduciary role when providing these services. Wealth impact planning may include wealth dynamics coaching to facilitate your selfassessment of wealth impact planning issues. These services are not psychological or counseling services. Ascent does not engage in the practice of psychology. Wealth impact planning is not legal or tax advice. These services are provided for educational and illustrative purposes only, and do not guarantee the success of any strategy or recommendation. Ascent shall have no liability for losses that result from decisions you make in connection with the services provided. You should consult your tax and/or legal adviser for advice and information concerning your particular situation.

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