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But they'll lose 70 percent of that legacy, and not because of
taxes. By the end of their children's lives -- the third generation
-- nine of 10 family fortunes will be gone.
"The third-generation rule is so true, it's enshrined in Chinese
proverb: ‘Wealth never survives three generations,'" says John
Hartog of Hartog & Baer Trust and Estate Law, (www.hartogbaer.com).
"The American version of that is ‘shirtsleeves to shirtsleeves in
three generations."
There are a number of reasons that happens, and most of them are
preventable, say Hartog; CPA Jim Kohles, chairman of RINA
accountancy corporation; and wealth management expert Haitham
"Hutch" Ashoo, CEO of Pillar Wealth Management.
How can the current generation of matriarchs, patriarchs and
their beneficiaries beat the odds? All three financial experts say
the solutions involve honest conversations -- the ones families
often avoid because they can be painful -- along with passing along
family values and teaching children from a young age how to manage
money.
"Give them some money now and see how they handle it."
Many of the "wealth builders," the first generation who worked so
hard to build the family fortune, teach their children social
responsibility; to take care of their health; to drive safely. "But
they don't teach them financial responsibility; they think they'll
get it by osmosis," says estate lawyer Hartog.
If those children are now middle-aged, it's probably too late for
that. But the first generation can see what their offspring will do
with a sudden windfall of millions by giving them a substantial sum
now -- without telling them why.
"I had a client who gave both children $500,000. After 18 months,
one child had blown through the money and the other had turned it
into $750,000," Hartog says.
Child A will get his inheritance in a restricted-access trust.
"Be willing to relinquish some control."
Whether it's preparing one or more of their children to take over
the family business, or diverting some pre-inheritance wealth to
them, the first generation often errs by retaining too much control,
says CPA Kohles.
"We don't give our successor the freedom to fail," Kohles says.
"If they don't fail, they don't learn, so they're not prepared to
step up when the time comes."
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In the family business, future successors need to be able to make some decisions
that don't require the approval of the first generation, Kohles says. With
money, especially for first-generation couples with more than $10 million (the
first $5 million of inheritance from each parent is not subject to the estate
tax), parents need to plan for giving away some of their wealth before they die.
That not only allows the beneficiaries to avoid a 40 percent estate tax, it
helps them learn to manage the money. "Give your beneficiaries the
opportunity to build wealth, and hold family wealth meetings."
The first generation works and sacrifices to make the family
fortune, so the second generation often doesn't have to, and the
third generation is even further removed from that experience, says
wealth manager Ashoo.
"The best way they're going to be able to help preserve the
wealth is if they understand what goes into creating it and managing
it -- not only the work, but the values and the risks," Ashoo says.
The first generation should allocate seed money to the second
generation for business, real estate or some other potentially
profitable venture, he says.
Holding ongoing family wealth meetings with your advisers is
critical to educating beneficiaries, as well as passing along family
and wealth values, Ashoo says. It also builds trust between the
family and the primary advisers.
Ashoo tells of a recent experience chatting with two deca-millionaires
aboard a yacht in the Bahamas.
"They both built major businesses and sold them," Ashoo says. "At
this point, it's no longer about what their money will do for them
-- it's about what the next generations will do with their money."
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John Hartog is a partner at Hartog & Baer Trust and Estate Law.
He is a certified specialist in estate planning, trust and probate
law, and taxation law. Jim Kohles is chairman of the board of
RINA accountancy corporation. He
is a certified public accountant specializing in business
consulting, succession and retirement planning, and insurance.
Haitham "Hutch" Ashoo is the CEO of
Pillar Wealth Management,
specializing in client-centered wealth management. All three are
based in Walnut Creek, Calif., and advise ultra-affluent families.
[Text from file received from
News and Experts] |
