Statistically it have been proven, throughout history and in every country, that 70% of a family’s wealth is lost when it transfers to the next generation. By the end of the third generation, everything you have worked so hard to build, will probably be gone and your great grandchildren will have no knowledge of or benefit from your hard work. If your family wealth includes a business or real estate investments, the additional complexity these asset introduce into your family will make any transition even more difficult. If you think your family is the exception, I suggest you think again.
Entropy, the “Second Law of Thermodynamics states that the state of entropy of the entire universe, as a closed isolated system, will always increase over time. The second law also states that the changes in the entropy in the universe can never be negative.” What exactly does that mean? In layman’s term, entropy is the concept that everything in the universe always moves towards it lowest, common denominator, or its simplest form unless overridden by another physical or chemical law. In other words, deterioration (entropy) will always increase over time. The easiest example is a cube of ice. If left at normal room temperature, it first melts into water, and if left long enough, it evaporates into a gas. We know we can reverse the process by applying other laws. We can combine two hydrogen atoms with one oxygen atom to get water, then freeze the water by lowering the temperature to get the ice cube. The law of entropy is just as valid in families. In their natural state families want to move from a complex to a simple state. Without a commitment to spending the time, energy, and money to keep entropy from happening, it will.
Traditional estate planning using the “divide and dump” methodology does not work. It reinforces entropy. That is the typical plan of dividing by the number of children so everyone gets an equal share. At Family Wealth Leadership we encourage our families to form a for-profit family holding company that retains most of the family’s assets in the holding company rather than distributing everything to the heirs. I will get into more detail in future messages as to why this is important and the benefits, but for this message I want to focus on building the foundation of a purposeful family.
Purpose: I use this in two contexts. First, overcoming entropy must be purposeful. You have to want to conquer it. You must purpose to keep it from happening! Second, you and your family must define and clarify what your purpose is in this world. Without a clear purpose that everyone shares and is committed to, there will be nothing to hold your family together. Everyone will go their separate ways.
Principles and Values: There must be sound moral, ethical, spiritual, social, and financial values, laws and principles that everyone accepts and strictly adheres to, even at the risk of their own detriment if it benefits others and the family.
Plan That Protects, Preserves, and Promotes Family Values and Purpose: I have said this several times, but it is important to repeat it. It is critical that there be a relentless commitment by everyone to build up and not let anything tear down the family’s capital. That Includes financial, human, spiritual, intellectual, and social capital. In other words, there must be a constant pursuit of excellence. Anything that depletes or erodes any form of the family’s capital should be avoided and killed quickly.
Process: The process is how the plan is implemented. There should be standardized processes and systems that are replicable and repeatable so they can be learned and applied in every generation. However, there also needs to be a process for constantly analyzing, testing, and questioning the continuation of systems and processes and modifying, discarding, and initiating new systems when necessary and beneficial.
People: People are the most important component in a family and the greatest source of joy and conflict. Unfortunately, the conflict too often overrides and destroys the joy. The conflict is usually in two primary areas. The first is in relationships. Starting the day each of us enters this world and must interact with parents and siblings, there will be hurts, fights, disagreements, and insensitivities that damage or destroy relationships; and those conflicts will impact the family’s financial wealth negatively. The second form of conflict centers on money. Even in families with good relationships, money tends to cause those relationships to deteriorate. Whether the people are causing the money problems, or the money is causing people problems; if both are not addressed in unison and carefully crafted and coordinated, the family will not achieve significance.
Preparation and Participation: Every job I ever had, and I suspect you will concur, required OJT, On The Job Training. Even when it was mowing lawns, I learned how to push the mower (when I was ten years old we couldn’t afford a power mower) in straight lines going back and forth. When I was old enough to be hired by someone who had a power mower, I learned how to pull the cord to start it, fill the gas tank, check the oil, and attach and detach the grass catcher. There were no manuals to read; I just did it? If you are like me, you learned to operate your computer, tablet, and Smartphone by turning it on and playing with the features and apps. As Nike says, “Just do it!” Why then do families expect their children and grandchildren to manage money and wealth without preparation and participation under the supervision of people who can guide and teach them what works and what doesn’t work? Yet, that is exactly what most families do. The kids are unprepared and inexperienced when dad and mom die and transfer millions of dollars to their care. The Plan and Process mentioned above must incorporate a training program, systems, and structures that teach and offer hands-on experiences–the opportunity to fail and succeed.
Philanthropy: I will talk more about this later, but philanthropy is the one tool that has the greatest opportunity for uniting a family around a common purpose, with shared values and principles, and a platform for teaching and setting an example for subsequent generations of what brings true joy in life. It is the one area where it is at least possible to avoid conflicts, greed, and jealousy.
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