These habits pose greater dangers than high taxes or low returns
Habits that destroy family wealth or a family business come naturally to many wealth creators and business owners. Some of the habits I cover in this post can emerge over time as one becomes more successful and more protective of their assets. Yet most of them are driven by a wealth creator’s ego and desire for control.
That makes sense, if you think about it. Innovators, entrepreneurs, and people who want wealth and independence would naturally possess a deep desire to control their destinies.
It also makes sense that whoever earns the money or builds the business should get to control it. That’s how it works, from both the legal and moral standpoints.
Yet how you exercise control will shape the future of your family—and their prospects for success and happiness—for generations to come.
Control applied through conscious choice will do far more to preserve and build family wealth or a family business than thoughtless habit, exercises in ego, or control for its own sake.
Here are seven habits with proven power to destroy a family’s long-term wealth or business:
- Keep heirs in the dark.
- Underestimate their capabilities.
- Overestimate financial complexities.
- Try to control their lives.
- Allow conflicts to escalate.
- Believe your estate plan can do it all.
- Dwell in denial.
- Keep heirs in the dark. Withholding financial information from spouses and adult children guarantees that they will be unprepared for financial and business responsibilities. Some parents and family members enjoy keeping others in the dark. Others see secrecy as the best policy. Actually, it’s one of the surest ways to set your family on the road to diminished wealth.
- What to do? Grasp the difference between privacy and secrecy. In this context, privacy means keeping your own financial and business affairs to yourself. Secrecy means keeping financial and business matters that will affect your family members to yourself. Your loved ones have a right to know about things that will impact their lives, so be sure to shed light on those things for those who will be affected by your decisions.
- Underestimate their capabilities. For reasons ranging from gender bias to family dynamics [link to post: Family Dynamics 101], many wealth creators believe they need to protect family members from financial realities. Some cling to outdated memories or inaccurate images of their spouse or children. Yet most (though not all) adults can deal with money issues when you give them a chance. The spouse who claims to know nothing about business often catches on fast. Kids who showed no aptitude for math in school can, as adults, understand an income statement.
- What to do? Be honest with yourself about the extent to which you have given family members a chance. Rid yourself of calcified images of them, if only provisionally, and help them to do the same for themselves. Talk about your wealth and business in positive ways, particularly if you have often talked about how hard it has been to achieve success. Let them know what a blessing success has been. Encourage them to discover and develop their own unique capabilities and to learn the skills they will need to be productive, as well as financially responsible, members of society.
- Overestimate financial complexities. Collateralized debt obligations are complex. Budgeting, saving, and long-term investing are not. Properly presented, the basics of personal financial management can be grasped by most reasonably intelligent adults. Most adults can also understand the risk/return tradeoff, distribution versus reinvestment of profits, and similar concepts. Most can be taught to read investment performance reports. It just takes some effort and patience on both sides.
- What to do? Figure out what your family members should understand and help them to understand it. Some of this will depend on whether your wealth resides in a securities portfolio, real estate, a business, farm, or ranch, or intellectual property. They will probably need structured ways of understanding financial concepts and drivers of performance and risk, and so on. Dedicate time to this on a regular basis. If you cannot do it, enlist the help of a family member, family friend, or advisor who can.
- Try to control their lives. It’s natural to want “the best” for your spouse and children, and you may be tempted to use your resources to influence their life choices. This can even succeed—on the surface. Yet below the surface, a person’s desire to live their own life will endure. It can be difficult enough for a young adult to chart their own path in life without an extraordinarily successful spouse or parent. The presence of one can make it even more challenging, and the presence of a successful and controlling one can make it nearly impossible.
- What to do? While you can certainly decide which life choices of family members to support, I have two caveats: First, how you go about providing or withholding your support is crucial. Second, unintended consequences abound. Take, for example, the common situation of ensuring that your child obtains a prenup. One option is for you to present the prenup as a means of barring the family fortress against the likelihood of barbarian plunder. A second option is for you to discuss the role of wealth in your family, what it took to earn it, the benefits it provides, your intention to have those benefits extend to your child and his or her spouse and your grandchildren—and the need for your family to take reasonable steps to preserve its wealth. Again, how you exercise control is paramount.
- Allow conflicts to escalate. You cannot make your children like or love one another. Siblings may form factions and feuds may fester or flare. But holding certain values and insisting on (and modeling) reasonable behavior can help you to keep feuds out of finances. Family members who reject the family or turn to the courts typically do so when they feel powerless. Parents can make matters better or worse, and either cause or calm conflicts. So, know yourself and understand your impact on your family.
- What to do? First, accept the fact that you cannot control the way your children feel about one another and that family dynamics will at times generate conflict. Avoid encouraging conflict by playing favorites or promoting factionalism, which you can, even unwittingly, as one of the most powerful figures in their lives. Then, institute sound family governance[link to post: The Keys to Good (Family) Governance] so that your family members have ways of addressing any conflicts that do occur around discussions and decisions regarding jointly owned assets.
- Believe your estate plan can do it all. Many parents believe they can control things from the grave or have one or two of their children run the other children’s finances or have an executor straighten the family out—if only they can get the right estate plan in place. Sadly, much (but not all) of the estate planning industry encourages such fantasies. Meanwhile, thousands of wills and trust agreements are contested every year and millions of families are torn apart by benefactors’ decisions.
- What to do? Know that your estate plan is only one tool for preserving family wealth. Others include family financial education, family governance, and mentoring, all of which you can apply only when you’re alive. These tools instill a sense of responsibility in family members along with practices that preserve assets. If you have only financial assets to divide equally among heirs, this is less of an issue. The same is true if you have a business or assets that you will sell so you can divide the proceeds. But if you intend to pass on an operating business or other jointly owned assets to family members, you need to create a family-focused estate plan, share it with your family, and appoint a capable individual as your executor.
- Dwell in denial. An astonishing number of people apparently believe they will never become ill or infirm, never suffer a serious accident, and (It’s true!) never die. Many deny the value of preparing heirs for financial responsibilities or pretend it doesn’t matter. Many see it as too much trouble. We all dwell in denial in various ways simply to get through the day. But if the preservation of your family’s assets is important to you, preparing your heirs should be a far higher priority than your next effort to rebalance your portfolio or cut costs.
- What to do? If you have significant assets, make preparing those who will receive those assets your top priority. It’s not just that they need to be prepared when you retire, downshift, or die. It’s that the sooner you start preparing them, the more prepared they will be. Look at it this way: There are enough problems in life that you cannot avoid. Doesn’t it make sense to avoid the ones that you can? In preparing them you will also improve their lives in the here and now. They will understand money and where it comes from and where it goes. They will develop a better relationship with you, with one another, and with wealth. They will feel better about themselves—more empowered, resourceful, competent, and optimistic about their prospects in life.
Most of these habits that destroy wealth lead to the phenomenon known as unprepared heirs. Yet for all of the times I’ve seen the words “unprepared heirs” I have rarely, if ever, seen the writer place the responsibility for unprepared heirs where it usually belongs—on the parent, parents, or other benefactor who has failed to prepare the heirs.
Of course, some adult children have no interest in or aptitude for financial or business matters. Some just want the fruits of wealth but not the responsibilities that come with it. Some expect to be taken care of forever.
However, in my experience adult children are more often just not given enough opportunities to learn about the family’s finances or business. Relatively few are asked to shoulder the responsibilities that come with wealth early enough in their lives.
But it doesn’t have to be that way in your family.