How do you measure your wealth? Most of us immediately think about bank accounts, investments, or real estate. Thinking more broadly, we might include skills we’ve acquired, a social network, and health. In fact, all of these are equally valid definitions of wealth. Wealth is really what makes us flourish as human beings. That includes not only material goods but also relationships and personal development. Wealth is from the Old English word wela, meaning both “wealth” and “wellbeing.” Categories make concepts easier to understand and act on. At The Grupp Law Firm, we call this holistic view of the family’s wealth as Heroic Wealth. There are three categories for Heroic Wealth: Family Character, Family Activities, and Family Goods.
Heroic WealthTM
Family Character: “who the family is.” This includes the individual family members, their health (mental and physical), their habits, values, and vision.
Family Activities: “what the family does.” This includes the family’s business and philanthropic activities. Perhaps most importantly, it encompasses how the family members relate to each other in order to build trust and communication.
Family Goods: “what the family has.” This includes the family’s financial and real property assets.
This article describes some of the tools and steps that a trustee, family leader, or family office executive might take to ensure that the family is building all three of these forms of wealth. These steps may be especially suited for an officer of family governance and education within the family office. The scope of this article is not to get into specific estate planning strategies or financial plan details. Instead, it suggests some ways in which families can build their Wealth holistically.
How to Build Family Character
Family Constitution
Successful transfers of wealth occur when there is continuity between generations. By drafting a family constitution, the family comes together to communicate its shared values to subsequent generations. The family constitution is a morally (rather than legally) binding document. It defines the family’s vision and mission and broadly explains the legal structure and asset or business operations of the family enterprise. Ideally the document is a living and collaborative document that family members actively participate in writing, reading, and updating.
Family Wellness Check
Most families do not stay under one household for long. By the time the third generation takes on leadership of the family enterprise, there may be dozens of family members in various locations nationally and internationally, spanning four or more generations. In this case, it is important not only to have family assemblies and retreats, but to connect on a more frequent level. Is each family member flourishing, or at least have basic needs met? Consider a wellness check, perhaps a phone call from a trustee or the family office, to each household to ensure that no valued family member is slipping through the cracks.
Ongoing Education
Constant learning is the key to constant growth over time. The family should have a curriculum that provides learning opportunities to family members at every age and ability level. Topics could include financial literacy, entrepreneurism, and leadership. For example, provide families with a family education “scope and sequence.” This document could map out topics and resources for family members at different stages. A good time to kick off a family education program using fun, relational activities might be at a family retreat. Follow up content and communication could happen virtually for the rest of the year.
How to Build Family Activities
Philanthropy
Many families donate money to charitable organizations reactively by addressing an immediate need or as a last-minute tax reduction strategy. When families create a giving mission around intentional philanthropy, they can decide their target areas of interest and then track the impact of their gifts. Not only does this have a greater positive effect for charitable organizations, but it will benefit the family as well. Philanthropy, especially if centered around a Private Foundation, is an excellent way for the family to come together to make decisions that are at the heart of who the family is. The rising generation can also become involved in philanthropy as a learning experience in administration of the family enterprise.
Family Identity
Even though not all family members may be active owners directly engaged in family governance, all family members are still owners in the family. It makes a great difference whether these members act in the best interests of the family. Fostering a robust sense of ownership among members not engaged in governance can come through identity-building relationships and activities. For example, there may be a bi-annual family retreat to strengthen relationships among different generations and family branches.
Another common activity is an annual democratic Family Assembly that has some decision-making over education decisions and has the ability to ratify and alter the family constitution. At these Family Assemblies, family leaders can reiterate the family’s vision and apprise family members of the mission (actions) being taken to achieve this vision. By remaining informed, family members who are not active owners can still appreciate their shared purpose in the family enterprise. Ultimately, each family member needs to feel that they belong in the family. Each family member’s actions have a direct impact on the wellbeing of other family members.
Heroic Wealth Assessment
When families start on the task of building wealth for a multi-generational legacy, they first need to assess where they are and set goals for where they want to be. To that end, The Grupp Law Firm has developed a 33-question, qualitative assessment for clients to self-assess the current state of a family’s Heroic Wealth. The questions are qualitative because it is important for clients to identify what the goals for flourishing are for their own families.
Based on this holistic Wealth Assessment, the family’s advisors can assemble a metric to chart the growth over time of the family’s Heroic Wealth. Quarterly reports can serve as a holistic summary of the family’s Wealth and place individual life events of the family or asset management updates into the context of the whole. The family can update their metric as they reach goals and as their situation changes.
How to Build Family Goods
Estate Planning
A robust estate plan is essential to reduce tax liability for estates in excess of the unified credit. The unified credit for married couples is $24.06M in 2022, but sunsets to approximately half that amount in 2025. Even for high-net-worth families who are not likely to pay estate taxes, asset protection trusts can reduce the chance of losing assets to frivolous lawsuits. A properly funded living trust allows the estate to avoid probate at the grantor’s death. It also allows for incapacity planning. No matter whether your family is high-net-worth or ultra-high-net-worth, a properly funded estate plan can significantly protect your Family Goods. For more information on estate planning, read here and here.
Micro/Macro/Integrated Financial Planning
Ultra-high-net-worth families require sophisticated financial plans in order to steward their resources. These plans need both to generate cash flows now and to build capital for future generations. In order to meet the family’s financial demands with a financial plan, the family’s wealth services advisor needs to have a view of the big picture as well as the individual parts of the family’s estate. Therefore, the wealth advisor may want to consider employing a three-level strategy, composed of a Macro Plan, a Micro Plan, and an Integrated Plan.
The Macro is a high-level look at how to achieve the family’s overall needs and goals through time. The Micro Plan creates a financial plan for each entity within the family’s estate structure. The Integrated Plan compares the Macro Plan to the Micro Plans and examines whether the inter-entity cash flows necessitated by the estate plan structure support the overall goals of the family according to its total SAIL (spending, assets, income, and liabilities).
Entrepreneurship
Families often go through a lifecycle in which significant wealth is created through the ownership (and sometimes the sale) of a closely held business. This wealth is then stewarded through the next generations. However, families almost always grow and spend faster than typical investment returns can build assets. This is why many “century families”, to use Dennis Jaffe’s term, are generative. They continually produce, rather than consume. In order to concretely support new business ideas, the family could put aside money in a fund, and appoint a committee to decide on which family ventures to invest in. In return, the family could receive accountability for the business endeavors of its members. Investment in entrepreneurial ventures within the family is one of the best chances that a family has to grow its Character, Activities, and Goods at the same time.
A private family trust company (PFTC) is an ideal trustee in the event the family holds many unique and hard to value assets such as multiple closely held businesses and direct investment in real estate holdings. In the PFTC, trustee liability in internalized to the family, and so the family has greater latitude to hold or pursue entrepreneurial ventures with funds held in trust in ways that a traditional institutional or individual trustee may be unwilling to.
Summary
The family’s Heroic Wealth lies in its Character, Activities, and Goods. Families who wish to have a multi-generational legacy would benefit from a comprehensive plan that addresses each of these. We have provided some strategies on how families can build each of these three forms of wealth.
Disclaimer: The above content is for educational purposes only. You should not construe any such information or other material on this site as legal, tax, investment, financial, or other advice.