Keeping It over the generations

[audreyh1]

If were in your shoes, I would focus on spending more money to have fun when I am still alive.

We certainly plan to gift what we can while living.

I’m more focused on managing things to be able to help out family as needed while we all age. Heirs are siblings, all younger.

 

[marko]

^^^^dunkelbau, See the post from marko just prior to yours. Maybe a trust would do the trick best?

My point, and as the article sort of states, is that a professionally managed and independent entity is often the key.

Rather than hoping (not a strategy) that the direct heirs will have the financial maturity, skill and discipline to continue the legacy, an independent management can suggest trusts, corporations and other vehicles that can dole out income to the heirs while maintaining and growing principal.

The main benefit is that while I've personally seen "mailbox money" go horribly wrong on the lives of some recipients, that scenario impacts only that one individual. Having several heirs lose out because grandpa trusted brother Mikey to manage the wealth, only to turn out to be a drug addict who blew it all, is inexcusable.

By generation three, everyone should be born into understanding that the main principal creating the income is not "their own money" but rather belongs to a "family business" of sorts and that their only claim is to the income benefit that they receive.

 

[Gumby]

My point, and as the article sort of states, is that a professionally managed and independent entity is often the key.

Rather than hoping (not a strategy) that the direct heirs will have the financial maturity, skill and discipline to continue the legacy, an independent management can suggest trusts, corporations and other vehicles that can dole out income to the heirs while maintaining and growing principal.

The main benefit is that while I've personally seen "mailbox money" go horribly wrong on the lives of some recipients, that scenario impacts only that one individual. Having several heirs lose out because grandpa trusted brother Mikey to manage the wealth, only to turn out to be a drug addict who blew it all, is inexcusable.

By generation three, everyone should be born into understanding that the main principal creating the income is not "their own money" but rather belongs to a "family business" of sorts and that their only claim is to the income benefit that they receive.

A good concise summary of the issue. What sized estate do you think would be the minimum to make this cost effective?

 

[marko]

A good concise summary of the issue. What sized estate do you think would be the minimum to make this cost effective?

Only guessing, but I'd say above $5-$10MM depending on the number of heirs expected. If there's a lot of heirs, the income becomes negligible and it stops being "wealth" and is merely "a lotta money", likely best to just distribute it and be done.

Key becomes on how to construct things to accommodate generations yet to be born and guardrails to insure against "wealth rot" (used to be called something else), that is, who, in future generations are included.

Nowadays, it's not hard for a successful, small, privately owned business or farm to be valued in the $50-100MM range when grandpa decides to hang it up and none of the children are interested.

The main question for the benefactor is to decide if he/she is interested in creating a multi generational legacy. As noted earlier, large amounts suddenly thrust upon the "shaky" can be disastrous. Trusts are often the answer, but what to do with shaky's residue becomes a question. Large amounts and few heirs tend toward legacy considerations; relatively small amounts with many heirs, a simple distribution may be the answer.

 

[Markola]

^^^^ Fascinating. I’m going to guess that it’s easier for a smaller group of heirs, such as during the second generation, to decide to raid the trust and break it up. I think that’s what my mother and her dysfunctional brother did with their generation-skipping trust the minute they could. I haven’t looked into because it’s water over the dam and I don’t want my mother to feel judged. I spot checked land prices there recently and estimate their inheritance would now be worth $18M, so ouch. Timberland there is often managed to try to generate a 4% yield. I can’t help but wish the terms of that trust for my brother and me had been more water-tight.

 

[luckydude]

^^^^ Fascinating. I’m going to guess that it’s easier for a smaller group of heirs, such as during the second generation, to decide to raid the trust and break it up. I think that’s what my mother and her dysfunctional brother did with their generation-skipping trust the minute they could. I haven’t looked into because it’s water over the dam and I don’t want my mother to feel judged. I spot checked land prices there recently and estimate their inheritance would now be worth $18M, so ouch. Timberland there is often managed to try to generate a 4% yield. I can’t help but wish the terms of that trust for my brother and me had been more water-tight.

I know it's tempting to second guess business/investment decisions made by older generations and wonder "what if". I know I have played that game myself, especially when it comes to sale of RE properties that have subsequently appreciated significantly.

 

[luckydude]

Only guessing, but I'd say above $5-$10MM depending on the number of heirs expected. If there's a lot of heirs, the income becomes negligible and it stops being "wealth" and is merely "a lotta money", likely best to just distribute it and be done.

Key becomes on how to construct things to accommodate generations yet to be born and guardrails to insure against "wealth rot" (used to be called something else), that is, who, in future generations are included.

Nowadays, it's not hard for a successful, small, privately owned business or farm to be valued in the $50-100MM range when grandpa decides to hang it up and none of the children are interested.

The main question for the benefactor is to decide if he/she is interested in creating a multi generational legacy. As noted earlier, large amounts suddenly thrust upon the "shaky" can be disastrous. Trusts are often the answer, but what to do with shaky's residue becomes a question. Large amounts and few heirs tend toward legacy considerations; relatively small amounts with many heirs, a simple distribution may be the answer.

Being a 4th generation inheritor on DM's side and a 3rd generation inheritor on DF's side and seeing all the issues, infighting and disputes regarding the running of family businesses, not to mention of the challenges of reaching consensus on business decisions as ownership is diluted further with each succeeding generation, I am assuredly not a fan of "dynastic" family businesses and prefer that assets are divvied up and distributed to heirs at the earliest possible convenience provided that estate and tax planning is done properly.

As I have mentioned in another thread elsewhere, I now co-own one of the family businesses with second cousins whom I've never met. They are for all intents and purposes perfect strangers. We have nothing in common other than a common ancestor. Our circumstances are entirely different, as are our financial and personal goals. When there are 50+ people who have shares in a business and no one has controlling interest, decision making and consensus become virtually impossible. Things don't get done and get dragged on year after year. And things just get worse as people die off and shares are further diluted with each passing year.

My dear GGF might have thought that it was a great idea to create a "family legacy" that can live on and unite the family. I am sure he had the best of intentions, but it has become the worst of nightmares. DW and I would never want to do that to my kids, so my intention is to have them divvy up our estate upon our passing. Let them each manage their own, sink or swim. Hopefully by the time DW and I kick the bucket, we would have passed enough of our LBYM values and investment experience to them for them to be able to manage their share of inheritance responsibly. If after all that, they still can't manage properly, that's on them. We would have done the best we could, and that's good enough for us.

 

[marko]

Being a 4th generation inheritor on DM's side and a 3rd generation inheritor on DF's side and seeing all the issues, infighting and disputes regarding the running of family businesses, not to mention of the challenges of reaching consensus on business decisions as ownership is diluted further with each succeeding generation, I am assuredly not a fan of "dynastic" family businesses and prefer that assets are divvied up and distributed to heirs at the earliest possible convenience provided that estate and tax planning is done properly.

As I have mentioned in another thread elsewhere, I now co-own one of the family businesses with second cousins whom I've never met. They are for all intents and purposes perfect strangers. We have nothing in common other than a common ancestor. Our circumstances are entirely different, as are our financial and personal goals. When there are 50+ people who have shares in a business and no one has controlling interest, decision making and consensus become virtually impossible. Things don't get done and get dragged on year after year. And things just get worse as people die off and shares are further diluted with each passing year.

My dear GGF might have thought that it was a great idea to create a "family legacy" that can live on and unite the family. I am sure he had the best of intentions, but it has become the worst of nightmares. DW and I would never want to do that to my kids, so my intention is to have them divvy up our estate upon our passing. Let them each manage their own, sink or swim. Hopefully by the time DW and I kick the bucket, we would have passed enough of our LBYM values and investment experience to them for them to be able to manage their share of inheritance responsibly. If after all that, they still can't manage properly, that's on them. We would have done the best we could, and that's good enough for us.

1) A hefty quarterly check comes in the mail.
2) I cash the check.
3) I don't think about it again for another three months.

 

[SunGuy]

Yeah, you need to impart values that your kids will want to pass on to their grandchildren.

Give them an allowance and teach them how to budget and plan for saving for things they want.

Show them the bills and receipts and explain how the parent(s) work to pay for everything.

As they get older, show them how bank accounts works, time value of money, compound interest etc.

Most rich people lead very vapid spoiled lives, the 1%ers have no real values, frequent drug and alcohol and food, traveling (jets are huge CO2 polluters, look at how much damage Taylor Swift does) and spending habits that are out of control.

 

[Markola]

^^^^^ I have spent a 31 year career in philanthropy and can verify that any “most rich people” stereotype just does not hold up. The human species is far too varied.

 

[Markola]

I know it's tempting to second guess business/investment decisions made by older generations and wonder "what if". I know I have played that game myself, especially when it comes to sale of RE properties that have subsequently appreciated significantly.

Exactly right. My mother raised two sons as best she could after my father flaked out, including years before she inherited anything when we were very small, and I know and appreciate that she did her best.

I have another question, if you don’t mind. There was a thread here a while back exploring how some very wealthy people essentially live on tax free debt that they take on against their assets, then keep rolling it forward until it is discharged at death. Have you seen a strategy like that happen with your family members and family businesses?

 

[street]

Being a 4th generation inheritor on DM's side and a 3rd generation inheritor on DF's side and seeing all the issues, infighting and disputes regarding the running of family businesses, not to mention of the challenges of reaching consensus on business decisions as ownership is diluted further with each succeeding generation, I am assuredly not a fan of "dynastic" family businesses and prefer that assets are divvied up and distributed to heirs at the earliest possible convenience provided that estate and tax planning is done properly.

As I have mentioned in another thread elsewhere, I now co-own one of the family businesses with second cousins whom I've never met. They are for all intents and purposes perfect strangers. We have nothing in common other than a common ancestor. Our circumstances are entirely different, as are our financial and personal goals. When there are 50+ people who have shares in a business and no one has controlling interest, decision making and consensus become virtually impossible. Things don't get done and get dragged on year after year. And things just get worse as people die off and shares are further diluted with each passing year.

My dear GGF might have thought that it was a great idea to create a "family legacy" that can live on and unite the family. I am sure he had the best of intentions, but it has become the worst of nightmares. DW and I would never want to do that to my kids, so my intention is to have them divvy up our estate upon our passing. Let them each manage their own, sink or swim. Hopefully by the time DW and I kick the bucket, we would have passed enough of our LBYM values and investment experience to them for them to be able to manage their share of inheritance responsibly. If after all that, they still can't manage properly, that's on them. We would have done the best we could, and that's good enough for us.

Thanks for sharing your experience. I can see how complexed it could be with so many involved.

 

[marko]

Thanks for sharing your experience. I can see how complexed it could be with so many involved.

But there are easier ways. Many times, multi generational wealth is simply a matter of an independent wealth management outfit in charge of investing and managing a large bucket of cash. Monthly, quarterly or annual disbursements are made to beneficiaries with very little involvement on their part.

Every few years, some papers need signing and a vote or two made, but it really can be that simple.

As I noted earlier, a check comes in the mail every three months and I cash it.

It gets complicated when an actual business is involved with many shareholders but many times the wealth has moved beyond "making and selling things".

As Bill Weld once said " we don't make money, we have money"

 

[luckydude]

But there are easier ways. Many times, multi generational wealth is simply a matter of an independent wealth management outfit in charge of investing and managing a large bucket of cash. Monthly, quarterly or annual disbursements are made to beneficiaries with very little involvement on their part.

Every few years, some papers need signing and a vote or two made, but it really can be that simple.

As I noted earlier, a check comes in the mail every three months and I cash it.

It gets complicated when an actual business is involved with many shareholders but many times the wealth has moved beyond "making and selling things".

As Bill Weld once said " we don't make money, we have money"

Thank you for sharing your experience, Marko.

I agree that a professional management team brought in from outside to manage a dynastic family business is the best approach in the long run.

The problem is getting the timing right and consensus from the family to do so. Often the founder of a family business gets his children involved in the business, and his children do so with their children in turn, until the extended family members are so entrenched in the family business that's it's virtually impossible to get everyone involved to agree to bringing in an independent management team. This was the case with my family.

Obviously, your personal experience shows that it is possible to successfully maintain family wealth across multiple generations. Unfortunately, it didn't happen with my family in the sense that while the wealth is still there, the management of said wealth has become contentious and riddled with conflicts and infighting. I think there are many factors in play as well luck involved in determining success or failure, and sometimes even the best laid plans don't pan out.

At this point, my preference for how to pass down my estate to my kids is largely informed by my personal experience, which unfortunately has been quite negative. I think at the end of the day, we as parents try to do what we think are the best for our kids based on the information we have at hand and our own personal experience, and that's really the best that we can do.

 

[luckydude]

Exactly right. My mother raised two sons as best she could after my father flaked out, including years before she inherited anything when we were very small, and I know and appreciate that she did her best.

I have another question, if you don’t mind. There was a thread here a while back exploring how some very wealthy people essentially live on tax free debt that they take on against their assets, then keep rolling it forward until it is discharged at death. Have you seen a strategy like that happen with your family members and family businesses?

I believe you're referring to the pledged asset line strategy. To my knowledge, I haven't seen this strategy deployed in my extended family. I think one reason is that the family wealth is tied up in a privately held business, and shares in such business are notoriously difficult to value. Another reason I believe is that the anual dividend checks are quite generous and enable most family members to maintain a very good lifestyle without having to resort to additional outside liquidity.

 

[luckydude]

^^^^^ I have spent a 31 year career in philanthropy and can verify that any “most rich people” stereotype just does not hold up. The human species is far too varied.

+1

 

[harllee]

I was the first in my family to go to college. DH and I have never inherited anything but we have built a nice nest egg from our own labors. We have no children. We have been involved in several charities we feel passionately about and that is where most of our money will go at our deaths, if we have anything left. But we are not waiting until death to help these charities. We give most of our IRA Required Minimum Distributions to these charities every year through Qualified Charitable Distributions from our IRAs. It is very satisfying to see our money to go to good causes while we are still alive.

 

[Stormy Kromer]

I was the first in my family to go to college. DH and I have never inherited anything but we have built a nice nest egg from our own labors. We have no children. We have been involved in several charities we feel passionately about and that is where most of our money will go at our deaths, if we have anything left. But we are not waiting until death to help these charities. We give most of our IRA Required Minimum Distributions to these charities every year through Qualified Charitable Distributions from our IRAs. It is very satisfying to see our money to go to good causes while we are still alive.

I admire you, sincerely, very much. Wish I was more dedicated.

 

[marko]

I was the first in my family to go to college. DH and I have never inherited anything but we have built a nice nest egg from our own labors. We have no children. We have been involved in several charities we feel passionately about and that is where most of our money will go at our deaths, if we have anything left. But we are not waiting until death to help these charities. We give most of our IRA Required Minimum Distributions to these charities every year through Qualified Charitable Distributions from our IRAs. It is very satisfying to see our money to go to good causes while we are still alive.

Have you considered creating a structure that would go further? By that I mean a trust or other vehicle that would provide for your charities "in perpetuity".

Rather than leave say, $1MM at the time of your death in one shot, a well crafted trust/foundation might distribute an inflation adjusted $50k a year for hundreds of years, well beyond what the core $1MM would deliver.

My hometown has some charities set up by old sea captains 200 years ago that are still paying benefits, scholarships and helping those in need.

Almost identical to the generational wealth discussed here, your charities, instead of a set of relations would be the beneficiaries.

My single, childless brother has done this and the trust that pays us benefits has a portion paid to a charity as well (and has since around 1902).

You might have to divert your current giving in order to build up a balance but in the long, long run your charities could be way ahead.

Just a thought. God bless either way.

 

[harllee]

Have you considered creating a structure that would go further? By that I mean a trust or other vehicle that would provide for your charities "in perpetuity".

Rather than leave say, $1MM at the time of your death in one shot, a well crafted trust/foundation might distribute an inflation adjusted $50k a year for hundreds of years, well beyond what the core $1MM would deliver.

My hometown has some charities set up by old sea captains 200 years ago that are still paying benefits, scholarships and helping those in need.

Almost identical to the generational wealth discussed here, your charities, instead of a set of relations would be the beneficiaries.

My single, childless brother has done this and the trust that pays us benefits has a portion paid to a charity as well (and has since around 1902).

You might have to divert your current giving in order to build up a balance but in the long, long run your charities could be way ahead.

Just a thought. God bless either way.

I don't think I am going to have enough left at the end to set up anything in perpetuity. I like giving while I am alive to get the QCD tax benefits plus I like to see how the money is being spent. Some of the charities have endowments set up and I am giving to those. Your idea is a good one for people whose estates are larger than mine.