FINANCE

HOW HEIRS BECOME RESPONSIBLE STEWARDS OF WEALTH

A family’s prosperity may benefit future generations—provided it lasts.

BRIAN LUSTER AND STEVEN ABERNATHY

 

History has shown inheritances are unlikely to remain intact without thoughtful stewardship. Heirs are often ill-equipped to handle wealth they had no role in creating, and, they do not have a full appreciation for the responsibilities associated with caring for these assets. Fortunately great stewards can be made, as one need not have been born with great financial acumen, talent, or luck.

The four hallmarks of great stewardship are very simple: 1) leadership 2) delegation abilities 3) accountability and 4) great communication. The first responsibility of the steward is twofold: lead a team of multidisciplinary advisors and guide family members to adhere to their advice and decisions. The steward typically acts as the communication “lead” between the team and the family. The team’s decisions are intended to serve the interests of and support the family vision.

What must a family employ for success? Family governance is first and foremost— and no two families are exactly alike. When families teach heirs to communicate and work together effectively, their incubator for leadership begins. These early experiences with mentorship and guidance from family members and advisors vary and evolve as heirs grow. What may begin as theoretical eventually will be based on real-world experience and events. This provides grantors and older family members a first- hand look at how the next generation works together. Who are the do-ers, leaders, and problem-solvers? Is there an individual who consistently emerges as the younger generation’s go-to person? All of this is worth noting. How heirs’ skills develop over time will be shaped by their interests, abilities, and talents.

After a lifetime of leadership exercises that began in early childhood, the elder generation will likely have determined a suitable steward. As s/he takes on more responsibility, it is critical for a high-performance team of multi- disciplinary experts, some of whom may be in place already, to work with the emerging family leader(s). The older generation may have established relationships with a team dedicated to managing the family’s financial capital including wealth advisors, attorneys, accountants, and others. As the team ages, when a conscious passing of the reins to the next generation occurs, this creates a far better platform for success than a sudden change in family leadership (i.e. illness, death) which does not take into account the learning curve required to successfully assume management of an affluent family’s affairs. As the new steward takes additional responsibility, the team of experts may be changed, grown, or reduced depending on the needs of the family.

Effective families strive to create high levels of accountability between advisors and the family as well as foster clear communication. The family meeting is likely to be one such in-person forum. Additionally, there may be quarterly conference calls or video chats assembling the team and family members to review objectives and goals related to the family’s mission. When heirs are well prepared the results are clear: the family fortune flourishes, and their educational, philanthropic, and other interests thrive. Growing a family’s resources translates directly into growing a family’s opportunities.

Now, not everyone of the same age group will be tasked with the same responsibilities as not all will be tapped to be the future patriarch or matriarch. If there is more than one competent heir apparent, several decisions might be made by consensus. However, if there are heirs who are unprepared to serve the interests of the family, their participation (and possibly their knowledge and access to shared assets) can be limited. Repeated violation of written stewardship policies, i.e., struggling with addiction, failure to work consistently, or other irresponsible actions are often the impetus for limiting a troubled heir’s access to the family’s capital. However, those in the stewardship role may re-evaluate situations on a case-by-case basis to increase or decrease the participation of the family member in question.

If family meetings are a consistent fixture in the life of an heir who is a future steward, responsible behavior may be modeled as well as incented, perhaps in an Incentivized Trust. Depending on a child’s age, s/he may be given increased responsibility annually. What begins as a modest allowance may evolve into sitting in on meetings with the family’s financial advisor to hear about the overall wealth picture of the family. The burden of responsibility will be on the shoulders of those heirs, groomed over time, whose decision-making skills, knowledge, and responsibility has evolved and grown.

The assets of family members requiring care (i.e., full time in-house assistance or an assisted living facility) can be managed at the steward’s behest. This will vary from family to family on a case by case basis. The law student, who has dutifully honored the family’s stewardship policy from an early age, may be asked to hold the purse strings (or act as a trustee) for a less responsible sibling. In this scenario, the future lawyer assumes both stewardship and responsible ownership of his own trust, and, stewardship of his sibling’s. Such a situation is not without its challenges which might include time constraints, a lack of motivation, guilt, or fear about damaging the relationship with the sibling. Such a scenario should not be left as an elephant in the room—successful families do not shy away from tough decisions.

When future family leaders understand what is at stake, they are less likely to be blindsided by information. Stewards will face tough decisions, such as assuring the care of family member (i.e., a relative in a healthcare facility) occurs. Thus the steward’s role, if there were to be dissent about different scenarios for care, would be to weigh the options and come to the final decision about how resources will be allocated. Ultimately, whether members of the steward’s generation are given the task or not, if all members of the family value the contributions of older family members, the best possible care will be a unanimous vote. A new beach house might have to wait.

Decisiveness, active listening, empathy, and respect are just a few of the qualities successful stewards seek to cultivate. Additionally, they have an ability to see the “big picture” of family wellbeing including the various personalities, individual’s diverse values, their ideas, and the conflicts that occur when different ideas clash. The ability to look forward and constantly ask, “Where do I want my family to be in 5 years? In 10 years? Where do I envision them a generation from now? Or five generations from today?” These questions help a family stay the course and adhere to their ideals.

Transferring knowledge generally takes more than being a good role model. It requires clear, consistent communication and action regarding expectations, priorities, and goals for financial capital. A family meeting offers a regular forum to discuss what legacy a grantor desires to leave and provides heirs the chance to ask questions, voice concerns, and take on more responsibility within the family. Creating a clear plan for the transfer of responsibility as well as wealth can prevent confusion and pave the way for family unity—particularly if a grantor’s plan does not divide assets equally among beneficiaries. Ultimately grantors who have worked hard want to pass lessons learned on to heirs along with their assets—and have them distributed and used as they intended.

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