Transfer Values with Wealth for a Lasting Legacy

by Daryl Dagit, Savant Capital Management

“Money isn’t the most important thing in life,” author and motivational speaker Zig Ziglar once said, “but it’s reasonably close to oxygen on the ‘gotta have it’ scale.”

Studies have shown that 70 percent of family wealth is lost by the end of the second generation, and 90 percent by the third generation. The proverb that describes this is international in scope: “Shirtsleeves to shirtsleeves” (in the United States); “Wealth never survives three generations” (China); “First-generation traders, second-generation gentlemen, third-generation beggars” (Mexico); and “Clogs to clogs in three generations” (Ireland).

The bottom line is that wealth gained by one generation will most likely be lost by the third. So how do you structure a succession plan that works—and stays in place generation after generation? The successful families I have worked with find the solution lies in using a team of advisors, investment planners and tax planners, as well as having a family governance plan in place.

Investment planning needs to be done with a plan in place. Money managers often rely on conventional wisdom and flawed assumptions. Many times family wealth is lost following assumptions, versus using evidence-based investing. Successful families use a broadly diversified portfolio; watch for broadly diversified asset classes, hidden costs and unnecessary or unknown portfolio risk; and use tax management techniques. The key is having a plan and sticking to it, not allowing emotions to enter into decision making.

Simple procrastination can end up costing the family millions of dollars in taxes. There are several techniques available for effective tax planning, such as intra-family loans, charitable lead annuity trusts (CLAT), charitable remainder unitrusts (CRUT), irrevocable life insurance trusts (ILIT), grantor annuity trusts (GRAT), intentionally defective granter trusts (IDGT), and a family limited partnership (FLP) or a family LLC.

Family governance is equally as important as saving money on taxes and making good investments. Have you prepared your family for wealth? Do they understand how to manage the $100,000 or $10 million that is to be left to them? Many of my clients ask how much they should leave to their children. They want to know how much is too much or not enough. My question to them is: what have you prepared them for?

William Vanderbilt, grandson of Cornelius Vanderbilt, once stated, “It has left me with nothing to hope for, with nothing definite to seek and strive for. Inherited wealth is a real handicap to happiness.” On the flipside, we have the Rothschild family, which has strived for generations through family governance.

Ethical wills have been around for thousands of years, offering a way for you to write down your family mission statement and pass on your values and wishes. It’s a way to guide the future trustee of your estate. An ethical will must be positive and not only articulate your vision, but also explain where the family came from and how they got there. It should give advice and your hopes for present and future generations.

Successful succession planning means having a plan, communicating that plan to the generations to follow, and having the family work together towards a goal. No matter how much you plan to leave behind, have you educated your children on how to manage it? iBi

Daryl Dagit is the Market Manager, Financial Advisor in the Peoria office of Savant Capital Management. He can be reached at (309) 693-0300.