Shirtsleeves to Shirtsleeves in Three Generations

“The father buys, the son builds, the grandchild sells, and his son begs.” 
                                                                        - Scottish Proverb

 

There is an old saying, “shirtsleeves to shirtsleeves in three generations.” which means that the older generation started with nothing, worked hard and amassed wealth, and by the time their great-grandchildren are in charge, the family is back where they started, with nothing.

GenSpring Family Offices developed a game for its clients called “Shirtsleeves to Shirtsleeves" - its sort of like monopoly and is a way for wealthy parents to begin the conversation with children about money. Each player starts with $25 million. The object of the game is to get through the third generation and still have money left. ( I wonder if this is a learning experience for the children or for the parents?)

U.S. Trust, Bank of America Private Wealth Management sponsored a ground-breaking new study, released in June 2008, called"Protecting the Family Fortune." The study examines the wealth planning strategies and practices — and the behavioral traits that drive them — of ultra-affluent global family business owners.

The study found that while three-quarters of owners of family businesses valued at $300 million or more had succession plans, only 38% had actually implemented them. Further, the study showed that most individuals with succession plans in place are not focusing on tax mitigation issues (73%), even though nearly all participants (93%) reported a desire to lower the tax burden associated with transferring the business.

According to the study, almost nine out of 10 (89%) business owners were "very" or "extremely
concerned" about protecting the family's wealth, but nearly three quarters (73%) of them do not have asset protection plans in place.

Over three quarters (78%) of owners have personal estate plans. However, 89 percent have not updated them after a life-changing event such as marriage, birth or death rendering the plan obsolete.

More than half (54%) of the study participants lacking estate plans reported difficulty dealing with their own mortality, and one quarter (25%) cited a lack of time as reasons for not creating a plan.

"Most family business owners do have basic succession, trust and estate plans; however, too often, they are sitting on shelves gathering dust. Not only do these families need to act on implementing and updating their wealth planning strategies, they need more sophisticated strategies to better protect their wealth," said Mindy Rosenthal, managing director of Campden's North American Business and co-author of the research.

The U.S. Trust survey found that the majority of owners of ultra-high-net-worth family businesses have inadequate business succession, asset protection and estate planning. These families are highly successful in their businesses, but they are much less successful when it comes to passing their companies from one generation to the next. Only 15 percent of family-owned companies last past the second generation.

What’s wrong with this picture? These business owners are bright, articulate, talented, wealthy - why are they missing the boat? There are many hurdles to be overcome, most of them emotional. First, the business owner has to face his own mortality. The next hurdle is the fear of giving up control. Many people know they must do something to reduce taxes but fear giving control of assets to children. Most people want it both ways - they want to retain complete unfettered control over all their assets and also pay no estate taxes. There are techniques that permit transfer of value while retaining significant control and there are ways to protect funds. Learning about these approaches is part of the estate planning process.

Tough family decisions are another emotional stumbling block. Is there a divorce looming for one of the children? Is one of the grandchildren autistic? Will you or your spouse remarry? Who is going to control the family business after the parents are dead? Are any of the children capable of running it? Facing these issues can be so painful that they are avoided indefinitely. Then a real mess is left behind. Avoiding the problem doesn’t make it go away

Facing tough decisions like these is hard. The estate planning attorney can give you options and choices, but ultimately the tough decisions are yours to make. Do you really want to have someone else make these decisions for you after you are dead? Worse, do you want your family to be torn apart with the fighting over your estate?