It’s not for everyone

Family wealth is usually defined as business, real estate, or financial assets jointly owned by family members rather than a single individual or nonfamily partners.  In wealth management circles it is also usually considered multigenerational wealth or dynastic wealth, assets to be passed along to living beneficiaries and future generations, rather than spent.

However, that is not always the way families view family wealth.  In some families it is seen as a stockpile of money to finance otherwise unaffordable lifestyles, to “help out” family members who really don’t need help, or to cushion family members from having to be productive members of society.

In families that take that approach, family wealth is not actually viewed in multigenerational terms even when there is enough money or other assets to pass on for at least several generations to come.

The multigenerational view and the stockpile view are two very different ways of looking at family money, and they tend to generate very different outcomes.

What’s the difference?

True multigenerational family wealth exists for family members to manage so that the assets grow and are tapped only for part (if any) of the returns.  These families understand that wealth is squandered mainly by investing it unwisely, failing to diversify, spending too freely, or suing one another.

These families engage in family financial education, family governance, and other wealth preservation practices.  They use mechanisms such as a family bank to set expectations and establish rules around the uses of family wealth.  They not only encourage, but insist upon, values such as stewardship and investment in family members’ human capital.

In contrast, the stockpile view of family wealth ignores or underuses such long-term wealth preservation practices.  These families tend to see family money as their primary source of income.  They fail to teach investing and business basics to their children, who often get the idea that the wealth creator created the wealth for them to spend.

Then, however, family units multiply as children grow into adulthood and have children of their own.  That can make preserving family wealth a huge challenge.  If wealth must be continually divided among more family members, it cannot go as far.  To address this, as well as other problems of wealth such as affluenza, insecurity, and learned helplessness, family members must become wealth creators themselves.

This calls for the wealth creator to instill certain values about wealth in the family and to promulgate certain approaches to family-owned assets.  These values and approaches begin with the concept of family wealth.

Better together?

When it comes time to pass assets to the next generation, a wealth creator or owner has the option of either passing his or her assets collectively to family members or dividing them among family members (or some combination of the two).  Wealth advisors call this the decision to “keep the money together” or not.

Keeping the money together can benefit the whole family, for several reasons:

  • First, some assets, such as a business, real estate, a farm or ranch, a collection, or copyrights, patents, or other intellectual property, may not be readily divisible.
  • Second, even if the assets can be sold and the proceeds readily divided, they may be worth more in the future if they remain whole and in the family, due to market conditions, future appreciation, or other factors.
  • Third, family-owned assets can provide an ongoing source of wealth for children and grandchildren and for future generations—if they are well-managed and have good prospects going forward.
  • Fourth, a family can benefit from keeping a purely financial portfolio together as family wealth. Larger sums under management typically allow for greater diversification, garner higher levels of service from wealth managers, and can justify certain expenses, such as a family office.
  • Finally, the family and future generations can benefit by having agree-upon rules about the uses of family wealth and ways of perpetuating and building those assets for the benefit of future generations. In the context of family governance [link to post The Keys to (Good) Family Governance], this takes certain uses of family money off the table.  Doing that reduces the chances of assets being squandered, badly invested, or lost to family lawsuits.

A “good governance” approach to family money enables the wealth creator and the family to define legitimate uses of family money.  From the standpoint of long-term wealth preservation, the most legitimate uses are to nurture the family’s human capital—that is, family members’ health, education, and development—and to assist family members who find themselves in true need.

This discourages family members from becoming dependent on family wealth while still enabling them to tap that wealth for agreed-upon purposes.  Those purposes might include taking advantage of educational, vocational, entrepreneurial, cultural, investment, or other opportunities.  They might also include ways of addressing health or disability issues or emergencies that may arise within the family.

However, unless a family has a long and respected tradition of inherited wealth and its uses (and even then), none of this happens automatically.

How family money happens

Family money comes about only when the wealth creator or owner (and spouse, if present) create genuine clarity about the uses of wealth.  They must clearly define the concept of family money, and set clear expectations around this concept.

They must also prepare their beneficiaries to inherit the assets.  This means setting certain expectations and understandings among children and other beneficiaries, and for future generations.

For example:

  • They must understand that wealth consists of more than money.
  • They must earn their own livings and become wealth creators.
  • They can use family assets only for certain purposes, under certain circumstances.
  • They must be stewards of—rather than consumers of—wealth.
  • They must increase and pass on family wealth to future generations.

Family wealth cannot be unilaterally tapped by a family member for his or her own use without the consent of the rest of the family or some governing entity, such as a family council.

Family wealth is about investment and growth, not consumption and depletion.  Providing opportunities for education or entrepreneurial ventures and assisting family members facing difficult challenges differs from financing homes, cars, and vacations that family members cannot otherwise afford.

The alternative to “keeping the money together” is to split ownership among all beneficiaries, equally or not.  Given that a business or real estate is not as divisible as money, a business or property should generally either be sold and the proceeds passed on to the heirs or kept, owned, and managed through sound family governance structures and practices.

This post focuses on the value of family money as a concept and practice.  I realize that considerations beyond the scope of this post also affect the keep-or-sell decision and the decision to keep assets together or divide them.  Those other considerations may involve complex legal, tax, retirement, business, and family issues, and those issues—as well as the family money issue—should be sorted out well before the assets are passed along.

Yet unfortunately, many wealth creators make these decisions based on gut feelings, skewed advice, children’s or spouse’s wishes, or their own family histories.  Some think that “keeping the money together” will keep the family together, when it won’t or may even create conflicts.  Others think dividing assets equally is the fairest approach, when it may not be.

So, as with so many issues covered at this site, I am suggesting that you proceed very intentionally and with full consciousness of the impact that your decisions about your wealth will have on your family.

The real secret to family wealth

The real secret to family wealth is that it is not for every family.  Perpetuating family wealth takes time, effort, and commitment that some families are simply not willing or able to devote to the project.

Some families are too large for their level of assets, too wracked by conflict, or too late in their lives.  For them dividing the money, or selling the business or real estate and distributing the proceeds, may be better.  Then, each heir might have an opportunity to develop his or her own family wealth.

Families who are willing and able to do what it takes to perpetuate family wealth can enable their children, grandchildren, and generations to come to live fuller, freer, and, yes, richer lives.  But, again, it takes time, effort, and commitment.

To learn more about establishing and preserving family wealth—and about the uses of a family bank—get a copy of my book, Family-Proof Your Wealth [link to landing page for book or Amazon page].