They say that a family’s wealth only lasts three generations:
- Grandparents work hard at creating wealth, likely through family businesses, savings and reinvestments of profits.
- Their children, having observed the sacrifices of their parents, build upon the wealth. While they reap some of the benefits of established businesses, they are inspired to preserve the wealth and pass it along to their children, just as their parents did to them.
- The grandchildren, however, are often far removed (in distance, time and relationship) from the influence of the wealth originators.
For many families, this eventually leads to a sense of entitlement, adrift in objectives and an ultimate loss of wealth. But with proper safeguards in place, specific education and formalized expectations of relatives, families can work to protect their wealth, prepare themselves for the demands and responsibilities of generational wealth and preserve a family business for multiple future generations. Consider these five ways to preserve generational wealth and protect your family business for years to come.
FOSTER A SENSE OF LEGACY, COMMUNITY AND PHILANTHROPY.
Build a curriculum around the legacy of how the family’s wealth came into being, including impacts beyond the immediate family. Connect family members with the employees and surrounding communities that have aided in the family’s wealth creation and emphasize the importance of giving back.
PRIORITIZE CONTINUING FINANCIAL EDUCATION.
Proper education can prepare family members to preserve wealth and assume roles of fiscal responsibility. Emphasize lifetime learning by holding family meetings in which subjects such as financial literacy, money management, strategic planning and family social impact are taught.
SET EMPLOYMENT EXPECTATIONS.
Have formalized requirements for those family members seeking employment with the family business. Consider requiring family members to have at least a year of outside employment (allowing them to gain experience from working with others and to learn new skills) before being eligible for any position within the family business.
ADDRESS WEALTH PROTECTION.
It can be an uncomfortable conversation to have, but choices have consequences. Address any threats to the family’s wealth before they arise. Consider creating a formal covenant that requires children to have prenuptial agreements, which ensures the family business ownership always remains within the family.
ESTABLISH A FAMILY CODE OF CONDUCT.
Setting clear expectations about behavior and communication can help guide family conduct in ways that protect the business, especially in instances of disagreement. All family members should formally agree to respect each other, promote confidentiality, adhere to ethical and lawful behavior and communicate honestly. When such thoughtfulness is put into a formal family business preservation plan, and when family members accept responsibilities and commitments, wealth can benefit a family much longer than three generations.
Greg Sellers is a Member in the Tax Division and a leader of the Estate and Trust Service Area at Warren Averett. Greg has over 37 years of experience in public accounting, specializing in estate, gift and trust tax planning and compliance. Greg frequently presents on topics such as estate planning, charitable gift planning, use of trusts in wealth transfer planning, and collaboration among professional advisors.
Greg Sellers / 334.260.2350 / [email protected]
