I am currently reading a book entitled Family Fortunes by brothers, Bill and Will Bonner. In addition to their own family, they have research other successful families to find out how they managed to transition wealth over multiple generations.
There are really only two alternatives other than giving wealth to charity or the government in the form of taxes. The first is using traditional estate planning, which I call “Divide and Dump.” This is the simple formula of dividing by the number of children and passing the wealth in equal shares. Three children, everyone gets a third. Four children, everyone gets twenty-five percent. History, and our own experiences in working with families, confirms this is the surest way to validate the 70% statistic of wealth being lost at each transfer. Shirtsleeves to shirtsleeves in three generations. $1,000,000 becomes $27,000 by the time it reaches the fourth generation. The primary factors in this erosion are breakdowns in communication, a major lack of trust within the family, and little or no forward planning.
The second alternative is to create structures that retain the wealth within the family in order to continuously support all family members for numerous generations. We encourage families to create a family foundation for their philanthropic desires, but giving money away doesn’t build wealth, although it can have great value for building strong families. The structure I want to discuss is what we call the Family Holding Company and why it is the best opportunity for building a family’s fortune. My definition of fortune is not limited to a financial interpretation, but includes being fortunate to be part of a strong and united family. I’ll start with a quote from the book.
“Getting a fortune by running a business is the best and most common way to get and maintain a fortune. Here is why: 1. It is a more permanent form of wealth than just cash. 2. It usually provides an onward stream of income that can be used to support a family and/or add to its wealth. 3. It is dynamic and alive, not moribund. It requires attention. 4. It causes family members to work together toward a common goal. 5. It helps family members understand the value of money and how it is earned. 6. Over time, businesses give families a way to leverage their own skills and knowledge.”
While many families already have a family business that sells products or services, that business usually creates more complexity, derision, and divisiveness in the family than building unity. Not every family member is involved in that type of business, nor is there any intent that all family members benefit from its operation. The family holding company differs in that it specifically addresses the needs and desires of the entire family and seeks involvement from everyone. The family holding company may ultimately own the traditional family business, but it also seeks to own other investments and encourages and assists every family member to be successful in their own right, whatever their chosen profession.
I agree with the Bonner brothers’ list, but will add a few more. Number six hints at this, but the family holding company is a wonderful opportunity to teach and educate children about economics, the value of work, producing something marketable, the importance of serving others, relational skills, teamwork, risk analysis, cash flow management, and the list goes on.
My second addition is the family holding company offers a greater degree of leverage. I am not referring to debt, but to the “being a big fish in a small pond” concept. A $50,000,000 company can do a lot more than an individual with $10,000,000. The bigger company will receive more favorable treatment and see more opportunities. It can also have a wider degree of diversification. Think in terms of buying income-producing real estate or investing in other businesses. The $10,000,000 individual may only be able to buy one property. The family holding company could buy an office building, a retail center, and some apartments, from which all family members will benefit.
Third, not all family members will need, or want, to be involved in the operations, but they can still benefit financially, educationally, and in setting the course for the company as a shareholder because they have a stake in making it successful. A successful business makes successful stakeholders. They can keep their professional jobs. Not everyone will be interested in managing the holding company, but some will. In today’s world, it has become more difficult for college graduates to find work. The family holding company could offer them a salaried, productive position until they find work in their chosen profession. This is much better than having the kids move back into the parent’s home and supporting them financially. It improves their self-image and confidence as opposed to feeling entitled and worthless.
Society has raised, and is raising, generations that have little or no financial savvy or stewardship skills. They may get book knowledge in school, but unless they go into a business profession, they will be financially dysfunctional. Involvement in the family holding company, having to analyze investment opportunities, reading financial statements, and taking risks will prepare the artists, teachers, musicians, athletes, physicians, and scientists in the family to better manage their own financial resources. Additionally, they will have access to input and advice from other successful family members. Where else can anyone get this quality of education and real-world, hands-on experience?
Finally, let me emphasize the value of the authors’ fourth point. Without a reason to come together, families tend to disintegrate relationally. Other than holidays and birthdays, there is little reason to meet. Children and grandchildren are spread out over the globe, and getting even a telephone call is rare. Even when members live in the same area, family meetings are infrequent and social only. Requiring participation in the family holding company business meetings and family enhancement activities increases contact and connections that can build strong family ties. Remember, a lack of trust, communications, and planning are the problems. Add a lack of training and preparation and we’ve described most families. Building a significant family legacy requires a structure that consistently brings the family together to plan, communicate, and rebuild trust.
As the Bonner brothers stated, “Getting a fortune by running a business is the best and most common way to get and maintain a fortune.” Whether a family business already exist, or not, your family should consider the merits of having a family holding company. Every high net worth family should be operating as a for-profit business if they wish to have a legacy, build and preserve a fortune, and make a significant contribution to themselves and the world.
If you would like to find out more about investing, business planning, business and family progression planning, inter-generational wealth transfer, legacy creation, family coaching, family office services, and all the ways you and your children can give, and how effective philanthropy can positively impact your family, you can email me at firstname.lastname@example.org or visit our website at www.familywealthleadership.comm. Telephone: 949-468-2000
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