Multi-Generational Wealth Building Starts with Planning and Goal Setting

By: Cliff Hockley, CPM, CCIM, Principal Broker, and Senior Advisor

Bluestone Real Estate Services
SVN | Bluestone

Wealth may pay, but it may not stay

That is a piece of conventional wisdom that appears to transcend cultures. A Chinese saying that goes “Wealth does not last beyond three generations”, for example, is essentially stating the same belief as to the American expression, “Shirtsleeves to shirtsleeves in three generations.”

Data does back up these aphorisms. A groundbreaking 20-year study conducted by wealth consultancy, The Williams Group, involved over 3,200 families and found that seven in 10 families tend to lose their fortune by the second generation, while nine in 10 lose it by the third generation. (1)

We have quite a few clients that want to transition their real estate wealth to the next generation. Unfortunately, this is not an easy task given that the education, skill sets, interests, and motivations of the next generation may not align with the builder of the estate. Our goal with this article is to help lay a pattern in place that might be helpful in this transition. Those that have built the real estate empire need to distinguish between management succession and ownership succession.

Children who may succeed you as owners, need not succeed you as managers. This is a concept families have adopted to preserve wealth. Wealth building and preservation is a long-term gain, particularly with real property assets.

The larger the pot of money the more need there will be to hire a professional to manage the funds, especially if the family does not have a member who has the appropriate skill sets to help manage other members of the inheritance group. It takes time and patience to draft the family rules and guidelines.

The Roman philosopher Seneca is credited with saying, “Luck is what happens when preparation meets opportunity.” In other words, luck favors the prepared. (2)

Key Issues to Consider when Maintaining Family Wealth

Goal Setting and Mission

Establish a leadership and governance forum that exists to help an enterprising family achieve its mission and important goals.
- Define family values, mission, and vision statements, which clarify the family’s important principles, purpose, direction, and key objectives. (3)
- Develop a written agreement that can apply, but also can be altered as needed, possibly by a vote of a majority, to grow the family fortune.
- Set annual and 5-year goals to grow and maintain the family wealth.

Practical Matters to Consider

Establish a leadership and governance forum that exists to help an enterprising family achieve its mission and important goals.
Define family values, mission, and vision statements, which clarify the family’s important principles, purpose, direction, and key objectives. (3)
Develop a written agreement that can apply, but also can be altered as needed, possibly by a vote of a majority, to grow the family fortune.
Set annual and 5-year goals to grow and maintain the family wealth.

Family Communication

Develop a system to bring the best family talents to the top.

What level of reporting is required?
- Frequency and content;
- Means of communication;
- Transparency;
Informed consent on large decisions;
Decision making from generation to generation;
Charitable giving such as forming a foundation to preserve the family legacy;
Hiring and managing the right people (i.e., attorneys, CPA, property manager) to successfully grow the family wealth.

Development of Family Leaders

Transitioning from a generation that has built the wealth to a next generation is often awkward. It is critical to begin transitioning responsibility and developing a system of management prior to when it absolutely must occur.

We have repeatedly seen families lose significant amounts of money as the generation that built the wealth begin to experience failing health or reduced mental capacity. The time to develop the next generation of managers is when the original group is still functioning at a high level.

Critical to this is defining roles and qualifications. In some cases, families need to add professionals to their management teams when the next generation either lacks interest or capacity. As with any job, it is important to define standards and requirements. This can be difficult with siblings, cousins, and family members, but it is critical.

An example of a requirement built into the governing documents is below:

“Any family member having a “significant” decision-making financial responsibility role within the family enterprise is required to have at least an undergraduate degree, taken at least one class in real estate and finance, and five years of “progressively responsible experience” working in a corporation not controlled by the family. The defined “significant” as “any role capable of obligating more than one percent of the family’s liquid assets during the calendar year”. At least one of the key players needs to understand accounting principles, GAAP.

Roles such as executor, medical power of attorney, positions on the family foundation, family council, or simply a beneficiary all have responsibilities and expectations connected to them. Have a family conversation to align expectations, set standards for competence, and check the next generation’s buy-in for the essential roles needed for your successful wealth transition. (4)

Summary

It takes years of active planning and information sharing to put in place the next generation of decision-makers. You must decide if you want to pass on your estate when you die or create a real estate “fund” so to speak. If you do want to pass your wealth along, you will allow the next generation to learn from you and grow their education, decision-making ability, and wealth as well, thereby leaving a legacy. These decisions are not easy. By the time your children reach their thirties, you need to engage in some serious decision-making and decision sharing to develop the processes that will allow a successful inheritance process.

References

(1) https://business.smu.edu.sg/master-wealth-management/lkcsb-community/how-beat-third-generation-curse
(2) https://www.thewilliamsgroup.org/post/wealth-and-relationships-starting-conversations-in-2022
(3) https://www.thefbcg.com/resource/what-do-family-councils-do/
(4) https://www.thewilliamsgroup.org/post/wealth-relationships-roles-and-responsibilities