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A strategic approach to estate planning design
Some families do well in general transitions, but many fail — some fail miserably. Those who thrive from generation to generation are rare, but not as rare as some think. These families tend to be strong, resilient and deliberate. But most importantly, they are paying attention to the real threats to wealth.
These threats revolve around failures of communication, trust, cohesion and preparation — which can be summed up as failures of family culture. By addressing these breakpoints, you begin to eliminate the greatest cause of the loss of financial wealth — failures of family culture.1
These families understand that successfully navigating wealth is a bit like flying a jetliner — two well-matched wings are required. These are the wings of structural estate planning on one side and family preparation on the other. One strong and one weak wing won’t do. Failure of either wing is catastrophic. Yet in many families who flounder, the “planning wing” has received disproportionate attention — trusts are established, advisors are in place, tax strategies are adopted, investment approaches are calibrated. The planning is superb. It all looks terrific on paper. But these complex structures comprise only one wing of the plane, and the other equally important wing — the wing of family preparation — is neglected.
Different family cultures require different estate-planning structures. Creating estate-planning structures that match your family culture is critical. Identifying misalignment between culture and structure can help families — in collaboration with their professional team — understand the importance of preparation for the plans that have been created. This practice can help mitigate everything from family legal battles to untoward effects of too much wealth by promoting positive family interactions and outcomes.
Once a misalignment between culture and structure has been identified, the families and the wealth holders can decide how to course-correct. They will either do the work to build a family culture equal to the sophistication of their planning or simplify the plan to match the capabilities and competencies of the family. Some will seek to do both and engage in a dynamic process in which planning and preparation evolve. They will identify an aspirational goal and then slowly build out the plan and actively engage in preparation as they do that — adjusting both planning and preparation as they go.
For families that seek to match planning to preparation, it is important to understand the nature of family culture. It is clear that family culture will eat estate-planning structures for breakfast, lunch and dinner. Plans fail not because they are bad plans but because they must work in human systems, which by their nature are messy. These human systems are driven by group culture. Culture can be understood as the unseen driver of family behavior. Every family has invisible “software” that encompasses its beliefs, perspectives, attitudes and actions. Families who successfully curate their cultural software take charge of writing their own operating systems.
Three primary conditions underlie this inattention to culture and are challenges for families taking charge of their cultural development:
Concern about confronting challenging family dynamics or historical behaviors can leave culture unaddressed. Family members may believe that discussing challenging issues could worsen financial outcomes and relationships. While that is certainly possible, if discussions are navigated thoughtfully, a family can rewrite its cultural software.
Families are complex. Navigating that complexity requires frameworks (such as those outlined in this article). It also requires dialog and the collective development of beliefs, perspectives and principles that guide the actions of the family.
Often families contain a confusing array of conflicting beliefs, values and roles. To establish a productive family culture, leaders of the family find ways to facilitate accountability systems for appropriate behavior. Family meetings and policies help to create a cadence of consistency that can align the family.
Family leaders who plan for transition as a culturally embedded process serve the long-term interests of their family much more effectively than those who don’t. This planning allows you and your advisor to play a proactive long game so that you are not only tactically reducing estate taxes (which are not the greatest threat to wealth), but strategically matching the structures you are creating to the capacities, capabilities and true needs of the people who are inheriting the wealth. The goal of your planning shifts from merely saving taxes to creating structures that are much more likely to survive the test of time.
In surveying the families we work with, we have found that there are three basic or strategic approaches to estate plans. Plans typically fall roughly into one of these pathways. We find that understanding these pathways helps wealth holders decide on what type of plan they want to leave behind for their families. Each pathway requires different levels of preparation and different levels of teamwork on the part of the family members. Any pathway is a valid choice — the question isn’t which pathway is “better,” but, rather, which pathway best fits your family and will most likely allow them to flourish over generations.
In this first pathway, each heir receives some fixed amount and the balance goes to taxes or to charity. This pathway usually results in the disappearance of the wealth within a generation or two— which is precisely what the person setting up the plan intends.. Typically, such plans arise from a desire to create self-sufficiency in future generations and concerns about enabling entitlement among children. It can also be motivated by a desire not to saddle children and grandchildren with the complexities of trusts and entity management.
Metaphor: In explaining these strategies, we use the analogy of the goose that lays the golden eggs. In division, the eggs are given to the children and the goose (or bulk of accumulated capital) goes to charity or the government.
Structures: Division estate plans are basic; they don’t include generation-skipping trusts, entity planning or other complex structures designed to last for extended periods of time. At most, these plans educate grandchildren and/or give them a jumpstart on their financial life, but terminate quickly after that.
Skill sets required for success: For such plans to be successful, beneficiaries must have financial literacy (that is, knowledge of how to effectively earn, save, invest and spend their money). If children are to be self-sufficient, they must know now to fend for themselves in the financial world.
When things go bad: When there is inadequate preparation, wealth erodes rapidly from such things as overspending, failure to hold productive employment and psychological issues such as mental illness, addiction or the inability to maintain stable social connections.
Preservation is the predominant approach of many wealthy families and advisors. Here, the patriarch and matriarch adopt a complex structural matrix of entities designed to reduce taxes and exercise control after death. The anthropologist George E. Marcus, noted that, in wealthy families, children don’t inherit wealth — they inherit formations, defined as complexes of structures that hold wealth and advisors who manage that wealth.2 The hallmarks of a preservation pathway are active professional capital management and passive beneficiaries with strictly limited authority or responsibilities. These plans can work very well if heirs are well prepared to work within the structure and have enough financial self-sufficiency not to drain the trusts prematurely. Adequate preparation allows preservation strategies to maintain assets for two or three generations. Inadequate preparation often tips over into failures to launch, attitudes of entitlement and even lawsuits. If the family is growing, the “law of large numbers” will eventually deplete the wealth as the depleting capital will have to support more and more people.
Metaphor: Here our goose is entrusted to third-party farmers charged with keeping the goose healthy and productive. Eggs are distributed to the beneficiaries who use them as they see fit. Eventually, the law of large numbers and the limits of productivity exhaust the goose, and she dies.
Structures: The structures in a preservation strategy usually involve complicated interlocking trust structures and entities. Professionals with fiduciary obligations to both present and future beneficiaries manage these structures and entities.
Skill sets required for success: Family members must not only develop financial competency, but also develop a sophisticated wealth competency. They must learn to understand the structures and work effectively with the advisors who support those structures. These tasks are often supported by family meetings, a common vision and commitment to core family principles.
When things go bad: When there is inadequate preparation, this pathway is arguably the most difficult pathway is arguably the most difficult to successfully sustain: Legal entitlement often slips into indolence. Most often, the family begins to demand more than the structures can produce.
The family actively manages the complex structures that were passively employed under the preservation strategy.2 The hallmark of this approach is that the family manages pooled capital together. (In the division pathway, each family member is responsible only for their share of the capital given to them.) The structures either work or fail based on the ability of the family to collaborate productively. Professional advisors play a supporting role in advising and consulting on technical issues. Often, these families inherit direct ownership in operating companies, which requires them to become excellent owners, board members and business managers.
Metaphor: In this scenario, the family develops the skills to be goose farmers. They are careful not to demand too many eggs; the optimal care and comfort of the goose is what is most important.
Structures: Sustainable structures for growth require deliberation and family decision-making. Often, capital is distributed among actively managed assets, such as real estate holdings and operating companies, as well as more traditional diversified portfolios of passive asset classes. In this pathway, structures such as family offices, operating companies, trust companies and family foundations become part of the planning.3
Skill sets required for success: Over and above the other skills, families who succeed focus on the culture of the family and on teamwork. Capital is invested in the personal development of individuals and the collective evolution of the family.
Most families must hone business competencies as owners, managers, governors and directors. These families are typically characterized by regular whole-family gatherings and eventually develop moderating governance structures such as family assemblies, constitutions, policies and councils. The entire family becomes a learning community with an intentional commitment to its own evolution through mentoring and experiential learning. Leaders arise as “torchbearers” in each generation out of a deep commitment to family cohesion.
When things go bad: These plans tend to fall apart because of failures of collaboration, failures of family commitment and insufficient or hard-to exercise exit and re-entry for family members who have different interests.
In recent research, we asked which of these pathways families are adopting. What we discovered is that 45% of families are on a preservation pathway. Division is being followed by 22% of families. Families adopting a growth pathway stands at about 17%, and about 16% of families remain undecided.4
What we find in working with families as they are thinking about which pathway is best for them is that they are constantly calibrating what is possible in their families. They are looking at multiple factors that include tax considerations, family dynamics, varying skill sets in their children, the ability of their children to make collective decisions, how much time people will be willing to spend on these issues and so on. At the end of the day, the pathway needs to fit your family. In helping families determine which plans are likely to succeed for them, it is useful to consider what type of family they are planning for.4
More than a quarter of survey participants noted that stewardship and handling money wisely were top concerns. As you consider your own estate plan and weigh the importance of communicating about stewardship, what pathway resonates most with you?
After working with many hundreds of families in family meetings and in advisory work, we have seen that the families we work with fall into roughly five different groups. These groups are loosely defined. In reality, families don’t fall neatly within a single type but can be located along a spectrum, with independence and simplicity characterizing one end and interdependence and complexity at the other. We have found that there are healthier and less healthy versions of each of these types — none is inherently better or worse than the others.
The types of families are:
The individualist family: These families don’t have a great deal of contact with each other. Each family unit has its separate life, and they might or might not get together for holidays. People in these families are usually busy with their own lives and fully engaged in their own concerns. They call each other infrequently and may or may not follow each other closely on social media.
The connected family:
This family is closer and, as such, is more complex than the individualist family. The family members would say they care deeply about each other. If asked, they would place a high value on their extended family. They talk frequently and gather for holidays. Otherwise, each family unit is largely separate from the others and communication remains mostly factual, centering on the activities and events in the lives of family members. Often there is one person who serves as the clearinghouse of family information (for example, everyone finds out from mom what is happening in the lives of their siblings). These families will often rely on social media to retain these loose connections and bonds. These families typically have no shared assets and their goals do not include building wealth as an extended family group.
The tribal family:
These families are exceptionally close — much closer than the connected family. They spend significant time and energy in being a family together. They often see each other multiple times a year and they are in near constant contact with each other. While connected families often have a connector, in tribal families, people naturally reach out to one another and they know what is happening in one another’s lives by direct contact. It is important to these families that the cousins know each other and grow close as part of the family tribe. Often the sibling group (or a portion of them) choose to live in the same city to be near to family, and this can extend into the third generation. In the second generation, there will often be some relatively simple common assets (such as a vacation home or educational trusts) that must be managed collectively.
The economic family:
These families are often “all in” on owning and operating assets together. They may have a family business, real estate that is jointly owned, and investments they share. This type of family will be connected enough to be in business together and have the skills to resolve differences and make decisions for the collective good. The family may have established a foundation or multigenerational trusts that family members manage together. Many families will have a family office that must be managed and directed. When they meet, they might build in social time and see it as an opportunity for cousins to get to know each other as future leaders and owners of the family enterprise.
The integrated family has the hallmarks of both a tribal family and an economic family. They spend a great deal of time together and in the third and fourth generation have a great deal of structure — not only on the economic side but on the family side as well. These families develop family constitutions, family policies, and family educational plans for the rising generation and so on. When they meet, they have not only business meetings, but family meetings where they discuss matters of significant importance to the family. Some of this effort is directed to maintaining family cohesion and some is pointed to ensuring that there is healthy interchange between the culture of the family and the cultures of the economic entities. In short, the integrated family will combine the complexities of both the tribal and the economic family. In looking at the division, preservation and growth pathways above, it is easier to see which type of plan will stand a better chance of working in different types of families. For example, we have seen wealth creators create a foundation (which requires governance, wealth and philanthropic competencies and therefore properly belongs in a growth pathway) in hopes of taking their individualist family and trying to move them to become a more tribal family. This simply doesn’t work — this structural solution will not change the essential culture of the family (at least not without a lot of hard work). Preservation can work well in both individualist and connected families. Some growth strategies (such as a generation-skipping educational trust, a family bank or foundation) might work in a tribal family. Passing on a business or common investments stands a fighting chance of success if the family is an economic or integrated family. Thinking through what kind of family you have —and being honest about that — and then creating structures that are designed to match the family type as well as the skills and capacities of the rising generation can avoid a great deal of future heartbreak and controversy.
Each pathway requires different time commitments and different skills, such as task, relationship and technical skills. Understanding the type of family you have will help you choose the right pathway for your family. For example, an individualist family requires little time or energy, minimal relationship skills, some task skills (e.g., financial competency) and few truly technical skills (like how to do philanthropy at scale or run a business). An economic family, with operating companies, diverse investments and a foundation, will have to devote a great deal of time and energy to these endeavors and will need substantial relationship skill levels to navigate conflict and differences in personalities. The family will also require solid task skills to accomplish collective goals, and their technical skills will have to be solid to manage the complexity of the assets they hold together. Many of the families we work with are considering moving from being a connected family to being an economic family. It is helpful for them to consider what this commitment actually means and whether the trade-offs are worth it to them. They often are, but it is helpful to go into this commitment with open eyes as to what it means. Moving toward this goal in small steps is often helpful, and most families that make this move do so with the aid of family consultants and facilitators who can help them along the way.5 Moving between family types is often turbulent, and outside support can make a big difference.
Is one pathway “better” than another? No. All of the pathways involve trade-offs. Division plans have the virtue of simplicity and allow family members the freedom to go their own way but often leave opportunities on the table. Preservation plans relieve the burden of managing wealth from the lives of beneficiaries but run the risk of creating financial dependence. Growth allows the family to sustain wealth for many generations but requires a high personal investment in learning together. What is essential is that successful plans account for both the culture and capacity of the family to bring the chosen pathway alive in ways that enhance the lives of beneficiaries. Finding the right pathway for your family helps to ensure that the plan will be successful not only on paper but in the lives of the people you seek to benefit.
What we find in working with families as they are thinking about which pathway is best for them is that they are constantly calibrating what is possible in their families. They are looking at multiple factors that include tax considerations, family dynamics, varying skill sets in their children, the ability of their children to make collective decisions, how much time people will be willing to spend on these issues and so on. At the end of the day, the pathway needs to fit your family. In helping families determine which plans are likely to succeed for them, it is useful to consider what type of family they are planning for.
2 Once the planning and culture “wings” are aligned and the family is launched, some families move to a different stage not discussed here. A rare few move into an “expansion” pathway where — in our goose analogy — the egg (and the goose) are sold to buy more geese.
3 Once the planning and culture “wings” are aligned and the family is launched, some families move to a different stage not discussed here. A rare few move into an “expansion” pathway where — in our goose analogy — the egg (and the goose) are sold to buy more geese.
The opinions, assumptions, estimates and views expressed are as of the date of this publication, are subject to change and do not necessarily reflect the opinions and views of Bank of America Corporation or any of its affiliates. The information does not constitute advice for making any investment decision or its tax consequences and is not intended as a recommendation, offer or solicitation for the purchase or sale of any investment product or service. Before acting on the information provided, you should consider your circumstances and, if necessary, seek professional advice.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.