Checklist of Best Strategies to Consider—and Pitfalls to Avoid— After Your Family Experiences A Significant Wealth Event

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Checklist of Best Strategies to Consider—and Pitfalls to Avoid— After Your Family Experiences A Significant Wealth Event

Financial Planning  |  November 21, 2018  |  
Russ Norwood

First generation wealth creators have many new opportunities, but along with new wealth comes many responsibilities and challenges.

For many families, a financial windfall can be life-changing— an opportunity to take their lifestyle up a notch and create a legacy for future generations. Unfortunately, American families don’t have a great track record in that regard. According to a 30-year study by the Williams Group, three-quarters of wealthy families failed to successfully transfer their assets to the next generation.

Shockingly, the assets of nine out of ten families were completely lost before reaching the third generation.

The study concluded that the failures were primarily the result of mismanagement and poor communication among unprepared family members. In many cases, the lack of a shared values and purpose doomed the family legacy.

If you expect to receive a financial windfall—the sale of a business, a stock option award, an inheritance—it is important to consider the long-term impact of your financial decisions. Successful families of wealth share many of the same attributes. Chief among them, they plan and build a strategy to pass their knowledge and wealth on to the next generation, and for the next generation to pass it on to their heirs.

It requires some upfront work, creativity and organization, but they are rewarded with multi-generational legacy.

Here are six key steps to ensuring a successful wealth transfer:

1. Hire a Family CFO

Families with new-found wealth need the advantage of an independent, unbiased mind to ensure the family’s affairs are being planned, managed and executed efficiently and in accordance with the its strategic goals and objectives.

The CFO, who reports to the family CEO – typically the patriarch, matriarch or senior family member, is usually an independent wealth management firm with multiple layers of expertise and resources. Because of all of the planning disciplines involved, the CFO oversees a group of advisors that incudes legal counsel, tax professionals, risk management specialist and an investment manager.

2. Assess Your Family’s Current Condition

The next step is to create an inventory of your family’s financial and human assets. In addition to its value as a repository of information, it becomes the initial benchmark for measuring the family’s progress going forward.

The first component is a set of financial statements to include a balance sheet (assets and liabilities), an income statement (income and expenses) and a three-year projection for each. Second, create a list of all the important people inside and outside of the family who will have a role in the family’s future. The list should include a brief assessment of each person’s strengths and weaknesses along with a description of the role you believe they could play. Next, identify any existing legal structures (trusts, corporate entities, etc.) that have been put in place to protect assets from creditors, litigators, ex-spouses, and taxes. Finally, create a list of any entities or actions that could threaten your family’s ability to achieve its goals.

3. Create a Family Mission Statement

Once a family has had the opportunity to take inventory, it needs to be able answer the crucial question, “What does having wealth mean to us?” And the answer should be clearly articulated and memorialized in the form of a Family Mission Statement. Creating a Family Mission Statement is an opportunity for self-reflection in which the family’s values, beliefs, and ambitions are crystallized:

  • What is the purpose of maintaining and growing our wealth?
  • What is our family hoping to achieve over the short-term and long-term?
  • How do we prioritize our financial and non-financial goals?
  • Are there any charitable or moral ideals we would like to transfer to our successors?

The answers to these questions should be articulated and memorialized in the form of a Family Mission Statement. This process requires collaboration between the senior and junior family members, but ultimately is the responsibility of the family patriarch and matriarch, or other governing family members. Over time, this Mission Statement may evolve as control of the estate transfers to future heirs; however, all family members should understand the Family Mission Statement, and its fundamentals should serve as a guide for family decisions and actions that will share their future.

4. Prioritize Goals and Assign Responsibilities

After the mission statement is formulated and adopted, it’s time to craft a strategy to realize the family’s ambitions. This plan must outline specific near-term and long-term goals, the actions and parties responsible for these goals, and an expected time horizon for achieving these goals. Accountability is key. Every thoughtful strategy must include contingency plans, as life has many twists and turns that are completely outside of your family’s control.

Part of the strategy is to determine who will make decisions and the process surrounding those decisions. This not only requires the participation of family members, but also those important partners that serve them – asset managers, attorneys, accountants, and the family CFO. Clearly defining each person’s role in the family decision-making process will create order and accountability inside the Family Enterprise.

5. Build Your Family Infrastructure

After the family’s mission and strategy are in place, the next step is to build a framework of governance to formalize the family’s decision-making process. This may involve the separation of senior family members into those responsible for decision-making and those not responsible for decision-making today. The governance framework also identifies the role of non-family decision-makers and advisors and what role they will play.

Understanding who will be the final decision-maker, whether the decision-making process will be democratic, and whether non-family members will be involved in the decision-making process, is also important.

The ultimate objective of a family’s governance framework is to ensure that all essential family matters are addressed and resolved with speed, logic and fairness, and with the focus always on achieving the family’s mission.

6. Plan for Wealth Succession

Understanding early on that senior family members will not be around forever is critical in preventing multi-generational destruction of resources. But there is only so much time one can give toward educating the next generation. Therefore, it is imperative for a thoughtful succession plan to be in place that not only handles the tax efficient transfer and control of assets, but also accounts for the transfer of knowledge and responsibility to the next generation.

This process must include formal education, empowerment, and experience for junior family members. This can include “shadowing” senior family members, employment within and outside of the family business, workshops with outside experts specializing in inter-generational wealth transfer, and many other more novel approaches. This process must be designed to promote leadership skills and instill the family’s culture and values to the next generation of leaders ultimately ensuring they are capable of making well-informed decisions to perpetuate the family’s future

This is the opportune time for the family to come together around a shared ambition that can benefit future generations as well as their community. It may be the only chance you have to avoid becoming another statistic.

About Venturi Wealth Management

Venturi’s core mission is to help organize, plan, and manage all aspects of wealth for families and entrepreneurs with substantial assets and complex business and personal financial lives—so you can focus on doing the things that matter most to you. We manage more than $1 billion in assets, a significant portion in house, often eliminating additional layers of management fees. Founded in Austin, Texas, Venturi incorporates the city’s entrepreneurial energy into everything we do for our clients.

Partnering with the right people to help manage your financial livelihood is not a small step. The issues are complex. You may want to use an advisory firm to hold guide you through the process.

For more information, please contact Russ Norwood, CEO and founding partner at (512) 220-2040, or russ@venturiwealth.com; or Mike Sanders, President, at (512)220-2044 or msanders@venturiwealth.com


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