DOLLARS & SENSE
Riches to Rags
We’ve all met entrepreneurs who have built successful businesses and then sold them or left them to their children. The intention was that their families would reap the rewards of a lifetime of hard work. No doubt, these entrepreneurs had visions of leaving a legacy to their heirs—one that would last for several generations. But throughout history, as far back as biblical times, the tale of riches to rags in three generations shows how difficult it can be to make the money last.
Usually, a business is most productive and successful while the founder is still alive and involved. However, too often the founder neglects to share key information about the business, leaving heirs without an understanding or appreciation of the values of hard work and thrift, which made the business thrive. In addition, flawed estate plans can fail to adequately define who exactly will inherit the wealth and how it will be protected and controlled. Throughout history, these very issues have extinguished great wealth in short periods of time.
Today, sobering statistics show that the children and grandchildren of fortune-building parents will lose 65 percent of the wealth in the next generation and 90 percent by the following generation. Contributing factors can include taxation, marital claims, misappropriation, mismanagement and family strife. But often, it boils down to the negative personal effects of inherited wealth. By this we mean that second and third generations often inherit without critical prior guidance regarding the purpose and objective of money. They seldom take the time to understand the values that created the inheritance in the first place, which are essential to maintaining a healthy relationship with their newly obtained wealth.
However, with a sound plan in place that doesn’t have to happen. An estate-planning attorney is a vital member of the high net-worth business owner’s advisory team. It is the attorney’s responsibility to create the documents that will protect the wealth from taxation and destruction from other inside Statistics show that the children and grandchildren of fortune-building parents will lose 65 percent of the wealth in the next generation and 90 percent by the following generation. family influences, such as creditors, spendthrift heirs, matrimonial claims, and future legal assertions.
Of equal importance is assisting the siblings in cr eating “family governance,” a means of regulating the involvement of the entire family structure, which highlights the vision of the founder and the original aims and wishes of how this wealth should benefit heirs in the future. Ultimately, the plan must ensure that the wealth is protected, properly managed, and that the family members will lead healthy, happy and meaningful lives for generations to come.
A key planning tool being utilized today by high networth business owners is the use of a Family Office Services group. These advisory team members have the cumulative expertise to assist the founders in establishing and executing proper succession planning, family governance, investment management, estate and tax planning, family foundations, and other philanthropic designs for their future heirs.
History has taught us that it is hard to create wealth, harder to keep it, and hardest to give it away prudently. As King Solomon warned, “An inheritance gained hastily in the beginning, will not be blessed in the end.” LEGAL, INVESTMENT AND TAX NOTICE: This information is not intended to be and should not be treated as legal advice, investment advice or tax advice. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. Steven V. Greenstein is Executive Vice President, Wealth Services, for The Sanibel Captiva Trust Company.