Hard times create strong people, strong people create good times, good times create weak people and weak people create hard times… or so the saying goes. The lingering question becomes, what balance will allow for strong people to be created in good times?
This is the question that I have seen a multitude of families grapple with over my thirty years in industry. The answer is subjective, and whether parents have found the right balance, or not, will never truly be known until after the next generation has inherited the entirety of the family wealth.
Although the ultra-wealthy rarely need to consider what they can give to their children, the dilemma instead becomes what they should give to find the middle ground between entitlement and hardship.
The best starting point in tackling this issue, in my view, is for the Settlor of the trust to draft a letter of wishes. While not legally binding, a letter of wishes gives the Settlor an opportunity to convey what they would like to happen with the family wealth following their death.
These decisions are incredibly complex as the Settlor must consider what access they wish the next generation to have to the family wealth, whether funds are only to be used for certain purposes – for example education – or at what age the next generation are even to be aware of the extent of the family wealth. If done well, a letter of wishes will delve deep into the root of the Settlor’s values and, often, it transpires that how they want the next generation to be treated in the future, is how they would like them to be treated in the present.
What is deemed to be fair or reasonable when it comes to the distribution of wealth will not only be different for each family, but for each member of that family.
Rather surprising on first glance, family wealth is usually lost by the third generation. When considering the practical factors however, it makes sense that wealth is diluted as families grow, and the number of beneficiaries increases. What can start as £10m between a couple, can easily become £10m between ten grandchildren.
Alongside this practical consideration, generational differences also have a part to play in the dissipation of wealth. The trend – traditionally – is that the first generation builds the wealth without the luxury to enjoy it fully, while the second generation saw the work it took to build wealth but are also able to enjoy it. The third generation, however, are too far removed from the work so, often, only see the enjoyment of the wealth and continue in that vein while depleting the available assets.
It is important that the next generation of a family appreciates the necessity to preserve wealth. Parents have an essential role to play in this, by deciding how much access their children have to that wealth, and what input the children should have in respect to the wealth structures or family business.
Over the years we have seen a vast array of different approaches to this, including varying levels of parents restricting the next generation’s knowledge of the extent of the family wealth. For example, one particularly prudent client, whose assets exceeded $1bn, opted to give his children the impression of only relatively modest family wealth.
The Settlor in this case had not been raised with significant wealth and had amassed his fortune through hard work and savvy investments. It was his desire that his children make their own way in life, rather than be entitled or spoiled.
The idea of “spoiling” children is something every family can relate to, and the wealthiest parents are no different. What “spoiled” looks like to everyone, however, will differ on a case-by-case basis and there is no right or wrong answer.
In the case of the billionaire client, his desire for his children to forge their own careers and generate their own wealth is easily understandable when considering his own wealth journey. We also have clients who have inherited wealth yet chose to limit their own children’s exposure to the family’s assets.
Having the same upbringing does not necessarily result in the same perspective on wealth. An interesting example of this is a substantial wealth structure benefiting three sisters following the passing of their parents. The sisters all had the same guidance and upbringing, but each have very different views on how the next generation should be treated.
One sister believed her children should benefit from lump-sum payments from the trust, while the others want their children to build their own wealth. They also had differing opinions on how and when to introduce their children to the family wealth structures, so sought our advice on this. There is, of course, a middle-ground between allowing the next generation either complete access or no access to wealth.
A couple – now in their late sixties – inherited a substantial sum from the wife’s parents. The couple never viewed the money as their own, as they had not generated it, and had a comprehensive understanding of the dilution risk as their family grew to include children and grandchildren.
In this case, the couple chose to establish saving accounts for their children to fund their private education. When it came to first homes, rather than buying them outright or not helping at all, they provided a modest amount to each of their children via interest-free loans. This allowed them to support their children, while ensuring that the money would, eventually, be returned to the trust fund.
In respect of their grandchildren, they opted to contribute to their school fees, but not pay them outright, again ensuring that the generational wealth pot was not significantly depleted.
While limiting access to funds can provide some security against the loss of family wealth, it does not guarantee that strong children will be created as a result. Equally, there are countless examples of children who had full access to wealth, and yet developed their own strong work ethics and continue to build on their family’s legacy and contribute to the pot.
If there was a one-size-fits-all solution, then we would never see the loss of family wealth between generations. What must, in my view, be a priority for families is finding a service provider who can allow for flexibility over time, in line with ever growing and changing needs. In doing so, all the members of a family can enjoy the freedom to shape good times, and strong people, in their own way.
This article was first published in Thought Leaders 4 Private Client Magazine – Issue 12.