Wealth Education

The "shirtsleeves to shirtsleeves" phenomenon describes a historical trend where family wealth is often dissipated by the third generation. This issue transcends cultural boundaries; in Italian it is “From stalls to stars to stalls”; the Spanish use “Those who don’t have it make it, those who have it lose it”); in Japan, it’s “Rice paddies to rice paddies in three generations”; the Scots prefer “The father buys, the son builds, the grandchild sells, and his son begs.”  The cause of this phenomenon is almost always rooted in lack of preparation.  

History has shown us that wealth comes in many forms, and each generation has demonstrated creativity in developing new avenues for creating wealth, from business ventures, inventions, innovations, to the more recent wealth centers of sports, entertainment, technology, and branding. Transferring wealth to others is relatively easy; we have many legal tools and techniques to transfer wealth tax-efficiently, however, transferring the skills to manage, maintain, and grow family wealth is dramatically more difficult.  Ultimately, affluent families aim to empower subsequent generations to succeed and carry the legacy forward, yet few apply an organized approach to equip their children with the tools and knowledge to achieve that goal.  Wealth education involves considering the current challenges, proactive planning, and teaching the younger generations core financial skills so they may be self-sufficient and capable stewards of a family legacy.

Information Sources

One of the primary challenges facing wealth education is how today’s generation gets their information.  In previous generations, information was transferred verbally, through reading and writing, and mostly by doing.  These sources had been consistently applied for many years.  However, the current generation is far more influenced by digital information sources.  Reading books has been largely replaced by digital writings, podcasts, or videos.  In person meetings have shifted to virtual Zoom meetings and text messages.  Actual experience is shunned in favor of theories pieced together from social media platform “influencers”, most of whom have no credentials and are focused more on getting likes and subscribers than disseminating accurate information.

While it has always been the karmic event that the younger generation would tell the senior generation how things should be, there was some solace in the fact that, with some time and experience, the younger generations would mature and better understand that their views were overly simplified.  That evolution has slowed.  Younger generations do not seek out experience as they once did.  The technological revolution has created more distance as the immediate availability of information on a smart device often makes the younger generations believe they have the answer and no more action is needed.  They do not question nor vet the information.  Technological sources don’t always provide the right information, or even accurate information, requiring efforts to dispel bad information.

Awareness

The first step in understanding wealth education is identifying the underlying goals and acknowledging the gap that exists between what families aim to achieve and the plans in effect. There have been several studies of planning strategies used by affluent families and the various behaviors that drive them,[1] which produced eye-opening results; while 75% of business owners had a succession plan, only half had implemented the plan. While almost all participants (93%) had tax reduction as a goal, only 27% took steps to address taxes associated with transferring the business. According to the study, 89% of the family business owners were “very” or “extremely” concerned about protecting the family's wealth, but almost three-quarters (73%) had no asset protection plans in place.

While successful families are sophisticated, they are often so focused on their ventures, and generally insulated from others in general, that wealth education issues are not addressed until after a problem has developed, at which point options are more limited.

Communication and Expectations

Discussing wealth issues is challenging for both wealth creators and their descendants. Common problems include a lack of transparency, where the senior generation withholds information for privacy or to avoid overwhelming heirs. Conversely, there is a risk that too much information might lead to a sense of entitlement or reduced motivation among children.

A Catch-22 situation often arises where wealth creators either feel that their children are “counting the money” if they ask too many questions; or conversely, are disinterested if they distance themselves from the family wealth or ask few questions.  One of the most common complaints from wealth holders is that children seem to lack the drive and passion to achieve, despite their enormous advantage of more formal education, family experience, and resources. 

From the younger generation’s perspective, there is a burden of expectations, whether real or perceived, to be as successful as their parents.  If they succeed there will always be the doubters who whisper it was only due to the family wealth and connections.  Other children dare not try for fear of being compared to their successful family members and not measuring up.  A simple example; Patrick Schwarzenegger, son of the well-known Arnold Schwarzenegger, had intense press coverage as a young man (regarding his acting career and romantic partners) and is almost always mentioned in the context of his famous father. Perhaps he feels pressure to emulate his father even though he likely has very different interests, skills, and motivations.  In the authors’ experience, more of the younger generations lean towards the distancing side of the equation, not from disinterest, but to avoiding being judged as over-privileged.

Younger family members often feel they are intruding if they ask questions about family wealth.  Others feel disconnected from the wealth, or believe that they are seen as having no value to add, due to the prevalence of various trusts, entities, advisors, and directives.  The lack of validation is usually the result of a strong desire for control by the wealth creators, which can marginalize their children. 

Expectations, internal or external, have a very real impact on the younger generations and the value of transparent communication between the generations to close these perception gaps cannot be overstated.

While various professionals can assist the younger generations in addressing wealth issues, the family should not be solely reliant on professionals for guidance. The goal should be to provide junior family members enough information and assistance to develop business acumen an exercise independent judgment that can be supplemented, not displaced by, the professionals.

Once a clear awareness of the problem exists and communication has been established, it is important to look at the potential risk areas that exist in transferring wealth to the next generation.

Risk Areas

There are multiple avenues of risk in maintaining and transitioning wealth. There are more than a few spendthrift beneficiaries, but the most severe risk to wealth transitioning is lack of planning.

Even a simple task like purchasing a phone requires some degree of planning, even if it is mostly unconscious; we read about coverage, plan pricing, phone deals, select a storage amount and color, and check availability.   Amazingly, many employ less thought in managing wealth than buying a phone.  They spend almost the entirety of their time and effort trying to make money and almost forget to expend any effort to keep it.  The recipients of the family wealth need to learn, think, and then apply core lessons.  Let’s explore some of the risk areas:

            Taxes.  Tax is a factor in virtually all transactions.  There are taxes on income, capital gains, sales, social security contributions, estate transfer and gifts, to name a few.  Failure to plan for taxes unnecessarily directs large percentages of resources to the federal and state governments.  In most cases, some advance structuring can reduce ongoing taxes (i.e. income and capital gains) to a decent extent and dramatically reduce, or even eliminate, special event taxes (i.e. capital gains, estate, gift).

            Overconcentration.  Often a family generates its wealth from a single endeavor.  Due to the success and comfort with that asset type, the family tends to reinvest in the same type of assets expanding the portfolio further.  This is very common in real estate, restaurants, and operating businesses.  However, no single asset class, not even cash, is suitable to be the bulk of any family’s investments. There are inherent risks in every asset class.  For example, a family, heavily invested in crypto, lost the patriarch in late 2021.  Six months later the dramatic crypto melt down left the family balancing which coins to keep, limits in transferability, and sharp declines in valuation.  No matter how well an asset class has performed, there should be measures in place to diversify and mitigate risk. 

            Concentration problems are not limited to assets but also to control.  Many businesses and families have control concentrated in the wealth creator and that person makes all major decisions.  However, when that point person is sick or dies, a large gap can develop where there is no suitable replacement manager or management team.  When all is so reliant on the point person, even those close to the situation can struggle and may not have even basics in place (e.g. authority to sign a check, the passcode to the safe, access to key outside suppliers/vendors, etc.).

            Overly-Broad Management.  The inverse is also true -- when a family tries to include too many family members in decision-making.  This committee management style can lead to an unwieldy process and strained relationships.  As the family size increases with each generation, the problem magnifies.  Consider that even the largest corporations do not have boards that have double digit participants for this very reason.

            Poor Investing.   Many recipients of inheritances are ill-equipped to manage significant assets as there are intricacies in managing larger and more sophisticated assets and coordinating asset managers.  Using traditional portfolios of stocks and bonds as an example, it can easily employ a single primary asset manager who diversifies and manages some portions (usually equities) and supervises a few specialty asset managers (e.g., fixed income, international).  As the portfolio size and sophistication grows, so too does its management.  The number and sub-specialization of managers increases, for instance in areas such as commercial real estate, alternative investments, private equity, natural resources, and commodities.  With a much broader investment platform, the family needs to develop a clear investment plan, goals, risk tolerance, and vision along with management hierarchy and accountability.  Family portfolio management is akin to operating a sophisticated business with multiple departments and having a board of directors to maintain the overall vision.  Few beneficiaries have deep enough experience to do this effectively. Many are left relying heavily on an asset manager to choose other asset managers and get the “best” investments available.  We have also seen younger generations view the investment pot as so vast that they can try more exciting (and riskier) investments; restaurants, movies, fashion, tax shelters, or investing in a friend’s business.  The emotional investments can drain resources and disrupt the balance of a plan.  Perhaps a small percentage can be discretionary, but without overall fiscal discipline and a detailed plan, an estate can be rapidly depleted.  It is hard to achieve a goal, control risk, and stay on track when the mantra is simply “make more money.” This can be remedied fairly easily with advanced preparation, exposure, and implementation of a cohesive plan.  These lessons apply to virtually all investments and endeavors.

Professional Coordination.  As the younger generation needs to manage assets, it too needs to manage its professional team, not just in choosing those familiar with wealth issues but also in coordinating efforts.  Some family members tend to see individual professionals as task-specific implementers and provide them only with the information relevant to the project at hand and often neglect to alert and harmonize with other team members, unaware of cross-relationships. For instance, a family engages an attorney to prepare a limited liability company to own a property, but the property and casualty insurance agent was not involved and the liability insurance names individual owners rather than the LLC, leaving an unnecessary liability gap.

Reliance on advisors who are product/technique centered can also prove difficult.  The investment plan should fit the family and its goals and challenges, not revolve around the specific technique or product that any given professional is familiar with.  A product decision may appear attractive in a vacuum, but it needs to make sense in light of the overall wealth picture.  Oversight, whether by family members, the family office, or otherwise, is important in ensuring that each piece fits effectively within the whole.

            Lack of Preparedness.  Many times a successful family insulates the younger generations from financial experience unwittingly: the professional team deals with the daily tasks of bill paying, balancing checkbooks, hiring staff, negotiating for purchase of cars and other assets.  Few successful families have their children take the summer and after school jobs that teach lessons school cannot, such as how to get along with co-workers, execute service roles, and the value of a dollar.  This leaves an experiential gap that school and other resources cannot fill. Few people are ready for a leadership role when it is thrust upon them without relevant experience.  Few expect their child to read when they are handed a book for the first time. There is a prerequisite learning process of the foundational building blocks first.  Similarly, it is not reasonable to expect a junior family member, even if a bright adult, to be able to manage significant assets, a business, a team of advisors, employees, etc. without advance preparation, yet this is all too common.  On the job learning, especially when stakes are high, can have serious wealth consequences, thus mentoring and practice make success much more likely.

            Changing Social Norms.  The track of privileged youth has changed during the last generation.  In the past, the path was prepatory school, college, perhaps graduate school, then work at a respectable company to earn experience, develop business and wealth skills, marry and start a family.  There was an eagerness to achieve independence.  Today’s generation however, has a slower development cycle and almost an aversion to being independent.  College is now becoming a five or six year endeavor with children often moving back home while they “find themselves.” Many are still floundering well into their thirties.  What was a stigma of living at home and/or being dependent has become almost a badge of honor.  Many do not view marriage as a prerequisite to reproducing.

With the changing social norms, parents are expecting less of their children, perhaps too little.  The family business is often the engine that drives financial well-being and should be an aspiration, at least for some family members.  However, the notion that there is always room for you at the family business can make it a safety net rather than an ambition to be earned.  Quite a few family businesses have multiple next generation executives who are failed athletes, musicians, actors, or business owners unprepared for what they view as the consolation prize.

            Families also need to be cautious about how open the open-door policy is.  While the tendency is to not turn any family member away, can the business sustain everyone?  Should it?

            The very financial skills that were applied to create the wealth need to be developed by the children to preserve it.  Simplistic, and effective, is early and clear communication to provide perspective and tools to succeed.  Understanding the family’s position – where success originated, currently stands, and could go – allows junior family members to join the process and feel like an important piece of the equation.

Wealth Education

Wealth education is less of a mini-MBA and more of a broad overview.  Primary goals include understanding what comprises the family wealth and where it came from, family ideals and goals, and developing a working understanding of core financial concepts.  Core financial concepts often include (a) limits of family resources, development and management of income and growth, (b) consequences of financial decisions, budgeting and spending, (c) use of reserves and contingencies in planning next steps and how those steps impact other plans and family members, (d) borrowing, (e) investing and asset allocation, (f) risk profiling and mitigation, (g) understanding asset and liabilities and performance; and (h) how to use financial information and professionals effectively.

Preparation.  Expose children early and often to wealth issues so the foundation is in place and all else they learn has context.  A major distinction, that takes time to internalize, is that wealth is not limited to money but a variety of factors comprising a whole.  Innately we know that children learn best from a variety of exposures, which is why most go to school outside the home, have tutors, coaches, etc. so they can learn from multiple sources.  That too extends into the business world.  Children can gain a great deal of insight and experience working for other people, companies, and in different fields before entering the family business or creating their own. Working for non-family members is often a greater incentive for success and achievement (failure is considered more “real” in the world outside the family business than within).

            As an example, the author was involved with a family where the senior generation had created wealth through a series of business ventures. The two children were in their thirties, well educated and traveled. The parents began including the children in financial discussions to groom them for a future role of running the family enterprise. At the first meeting, the parents were surprised as the children’s’ lack of business foundation left them essentially lost – neither of the children had ever written a check, did not understand a mortgage, had never hired or fired an employee, and never had seen a financial statement before. Despite their intelligence, resources, and educational background neither child was prepared to manage any of the family assets, let alone the family businesses. This was not caused by any intentional act of the parents or the children, but rather a lack of life experiences of creating, or working one's way up, a company and understanding common business realities.

Management.  Too much time in one field can lead to a limited view.  Similarly, if family management is done exclusively by family members we lose that vital neutral view.  Most company boards have members from outside the company, and outside the company product field, specifically to engage a broader and less emotional viewpoint.   So too should a well-balanced family management team incorporate those from outside the family.

We also must plan for continuity, so the exit of any one person does not disrupt the ventures and operations.  The management team usually consists of some members from each adult generation who are seasoned in the family enterprises and there are periodic changes as some step out, retire, or otherwise make room for new participants.   A rotating board can enhance creativity and desire to be part of the family ventures.

Expect More.  Being part of the family business or management team should come with an expectation of success.  If we expect very little we often get just that.  The bar should be set high to create a healthy climate to succeed and grow.  Not that failure is frowned upon, but rather it is part of the road to better things and the family will work together to achieve.

Some feel that trusts are the tool of choice for guiding a family.  Trusts are a common, and one of the best, tools in the planning repertoire, though trusts do not replace wealth education. Trusts can encourage desirable behaviors (e.g., educational degree, participation with charitable endeavor) but cannot guarantee a result.  Behavior alone does not necessarily mean the values have been instilled or information learned, merely funds have been used as a carrot to elicit a behavior.  Transition of skills and legacy works best by creating a plan that suits the family’s current and future goals, adhering to the plan, and making adjustments as needed to suit changing circumstances.

Hands-On-Learning

Wealth education, like all other education, is a continuing process and works best when designed to fit the individual participants.  A variety of tools are available to assist, such as developing a family mission statement, designing plans that complement it, coordinating family meetings, practical lessons from hands-on management roles, and individual coaching.  Business and entrepreneurship can be an excellent platform to teach children business lessons, as it is learning by doing - designing a business plan, raising capital, preparing financial projections, demonstrating leadership, sharing a vision, understanding the role and value of human capital, and marketing and selling the concept.  Often we find a business area that the junior family has an interest in, or a unit of the family enterprise, or an individual passion of that child. Next, we brainstorm the mission statement and the major concepts and goals. In this process they learn how to take the vision, share it with other people to develop an interest and, most importantly, how to sell the concept. Then we move onto developing the financial projections: predicting revenue stream sources, expenses and their timing, where strategies and efficiencies can be applied, and then develop a sensible business plan. Once the business plan is fully fleshed out, we determine which consultants, employees, and strategic partners are worthwhile to approach and foster the key business connections. Junior family members will have to develop a sense of leadership and vision to get other participants to buy into the business platform.  Moving onto the capital raising portion - the ability to sell is critical to success, but rarely taught nor practiced.  Whether successful or not, the business becomes something of the junior member’s creation, their brainchild, to nurture, grow and develop. The learning-by-doing approach has been very successful in teaching business lessons in a non-academic environment, which is often much better received.

Conclusion

Wealth education is a balancing act, to encourage wealth holders to consciously prepare the next generation for their eventual role as contributors to the family legacy and create active, eager participants.  From understanding the problem and raising awareness of the preparation gaps, to improving communication, articulating expectations, and understanding risk, there is much to consider when preparing the next generation to undertake the management of the family’s wealth.

It is incumbent upon the senior members, and the family’s advisors, to start early and actively involve younger family members in the family enterprises through a mindful education effort that includes real-world experience and transparent involvement in the family’s existing business operations. With this base and experience, children will be empowered to succeed, preserving family legacy through the transition of wealth to the next generation. 

About the Author:

Adam Chodos, Esq., CPA, is the managing member of Chodos & Associates, LLC, a boutique private client law firm, with offices in Boca Raton, FL and Greenwich, CT, focusing on wealth consulting, asset protection, wealth preservation, business succession, and advanced estate planning.  Previously, Mr. Chodos practiced law at the New York headquarters of Sidley Austin Brown & Wood and with Ernst & Young, LLP as a certified public accountant.  He holds a B.A. in economics, summa cum laude, from the University of Pennsylvania and a J.D., high honors, from Duke University.  Mr. Chodos is a member of the New York, Connecticut, and Florida Bars.  mail@adamchodos.com

Please note that the information contained in this article is for informational purposes only and should not be construed as legal advice on any subject matter and does not create an attorney-client relationship. No reader should act, or refrain from acting, on the basis of any content without seeking appropriate legal or other professional advice based on their particular circumstances. As laws and rules change frequently, this article contains general information and may not reflect the most current legal developments. The author expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this article.

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[1] This article references the general findings of several studies but quotes the statistics from the June 2008 “Protecting the Family Fortune” study conducted by U.S. Trust.