From the November 2008 issue of Wealth Manager Web • Subscribe!

November 1, 2008

PASSING IT ON

The only people who are certain that inheriting wealth will solve their problems, I suspect, are those who have never been wealthy. Quite often, a large inheritance turns out to be more of a curse than a cure. As William K. Vanderbilt (grandson of the Commodore) reportedly grumbled: "Inherited wealth is a big handicap to happiness. It is as certain death to ambition as cocaine is to morality."

This isn't the fault of wealth managers, who spend a goodly amount of their and their clients' time setting up dynasty trusts, charitable trusts and family foundations. But despite these well-laid plans, studies show that six out of 10 newly created family fortunes are gone by the end of the second generation. By the end of the third generation, nine out of 10 once-wealthy families are broke.

A major factor in this shocking 90% breakdown rate is parents' failure to communicate values that their children and grandchildren can absorb and thrive on. We all know instances of clueless kids squandering an inheritance through overspending, mismanagement or self-sabotaging addictions. Parents also unthinkingly make estate-planning decisions that destroy family harmony, as when they give control of the family business to an inept son or daughter instead of to a better-qualified but less-favored sibling; or when children of a first marriage are blindsided by a parental will that leaves everything to a new spouse and kids.

In the next several years, an enormous amount of wealth is expected to pass to the baby boomer generation--$41 trillion between 1990 and 2044, according to the often-quoted estimate by John Havens and Paul Schervish of the Boston College Center on Wealth and Philanthropy. Wealth managers have an opportunity to help clients make this transfer in a way that can lead to personal and family harmony and empowerment, and improve the quality of others' lives. Failure to meet this challenge, on the other hand, may promote more reckless spending, poor decisions, conflict and pain.

Bringing Generations Together

To begin transferring an emotional legacy from one generation to another, it's crucial to have better, deeper and more thoughtful communication about the things that truly matter. In recent years, clients have invited me to facilitate retreats where family members can discuss the kind of future they desire and the financial decisions they would like to see made for the next generation. Parents have the opportunity to communicate the deeply held values that constitute their emotional legacy, inspiring children and grandchildren to embrace this legacy as a basis for their own empowerment.

These experiences have been so satisfying for all involved, with outcomes far exceeding my own expectations, that I enthusiastically recommend family retreats as a vital step in planning intergenerational wealth transfers.

When to Suggest a Family Retreat

Some wealth managers are already firm believers in regularly scheduled family retreats. "To be stewards of the family wealth, it's important for the next generation to learn the technical side, the emotional side and family values with regard to money," says John Waldron, chief executive of Waldron Wealth Management in Pittsburgh. His goal is to meet with client families twice a year, although he admits, "Realistically, it's once a year."

A retreat program can be started whenever the younger generation is ready. "We like to get involved early, as opposed to later," Waldron says. "I think it is extremely important that the kids start learning about money conceptually at an early age, around 12 or 14, when they are ready to understand the family's stated objective or 'mission statement' with regard to money. Then they can begin digesting the family's philosophy from an emotional standpoint when they are in their late teens to early 20s." As they reach college age, the process may step up. "We like to have interim sessions with the kids, or Web conferences, to keep the process going," he says.

If it's difficult to get clients together on a regular basis, a family transition is an ideal occasion for a retreat, says Susan Bradley, CFP, founder of the Sudden Money Institute and co-author with Mary Martin of Sudden Money: Managing a Financial Windfall (Wiley, 2000). A transition might be any big pivot point, she says, such as a parent's retirement, the sale of a family business or the birth of a first grandchild.

Why Go to All the Effort?

Family retreats can be complicated and expensive to pull together, especially the first one. Work and schooling have to be put on hold and clients pulled away from commitments and leisure. Rod Zeeb, chief executive and co-founder with Perry Cochell of the Heritage Institute in Portland, Ore., has learned that wealthy clients typically respond well to the idea of a retreat when he asks them, "If there's no training, and you dump all this money on the kids, what's going to happen?" He also notes that parents tend to embrace the opportunity to pass on their life lessons and values in a family forum.

In the early stages of organization the clients and their advisor should agree on the goals of the family retreat. At Waldron Wealth Management, the focus is on raising the younger generation's awareness in five areas, according to Krishna Pendyala, Waldron's chief operating officer and coach. First, he says, they need to learn to appreciate their good fortune without being pounded over the head with it. Using real-life examples from their own age group--anecdotes about Paris Hilton or Lindsay Lohan, for example--helps them "get it" on their own.

Second, Pendyala says, it's best to inspire children to a calling--not just lecture them on the "right" things to do in life. As any parent can attest, children seldom respond well to preaching by their elders.

Third is helping them learn the fundamental role of money in their lives. "Basically, you can do four things with it: earn it, spend it, nurture it and give it away," Pendyala says. ("We say money can be compared to alcohol," John Waldron adds. "It can be dangerous when you use it irresponsibly, and it can derail your life experience and the attainment of family goals.")

The fourth area of consciousness-raising is helping young people understand what it takes to sustain the components of their lifestyle. In one family retreat, Waldron asked the young adult participants how much they thought it had cost to fly them in on private jets. "Guesses were everywhere," he says. "When we told them the cost, they were flabbergasted: 'That's more than my two-month draw on my trust!' Next thing, we heard them saying, 'Dad, why did you fly us down here on our private jet? We could have flown commercial!'"

The final item on Pendyala's agenda is helping the younger generation become aware of taxation and the laws affecting estate distribution, which helps drive home the point of becoming responsible and knowledgeable. When all five areas are covered in a retreat, young family members usually come away with a more realistic understanding of their inheritance, improving the chances of a successful intergenerational wealth transfer.

Structuring a Retreat

Retreats run by the Waldron team usually last three days. The first two are dedicated to family business and the third to fun, featuring some group activity that promotes team-building. A recent retreat was held at a racetrack, with everyone learning how to be part of a racing team.

Older and younger family members have distinct roles in the "business" part of the retreat, Waldron explains. "First, the senior generations in the room tell the family story. Here's our history; here's what you didn't know; here's what we believe is our mission and our role as stewards of this money. Then senior family members leave the meeting, and we talk to the young adults about the 'facts of money.'"

With young people in their 20s, Waldron may introduce philosophical issues such as "How would you use the family resources to make the biggest impact on the family and the community?" or "What would you do differently?" These issues are explored in breakout sessions, and then everyone reassembles to discuss what evolved.

Family Council: the Heritage Approach

Zeeb, who wrote Beating the Midas Curse with Cochell (Heritage Institute Press, 2005), recommends a slightly different tack. In the Heritage training program for estate planners and other advisors, communication begins outside the retreat in a process called "guided discovery." The advisor interviews the family elders, inviting them to tell stories from their past that made a difference in their lives. They are then asked to explain what they learned from these people or events. Underlying values tend to surface in this process, while the advisor records and then edits their personal history into story format.

A second part of guided discovery is the creation of a vision statement, which essentially answers the question, "If you could look at your family 50 years from now, what would you want to see?" The answer to this can serve as a template for estate planning, helping to guide all of the family's advisors toward the stated vision.

To disseminate their views, the senior generation is encouraged to establish a Family Council. Typically, junior members of the family are selected to be its officers. "In the first retreat, the parents present their personal history and unveil their vision statement," Zeeb says. "They share these with the family, and we explain that the Family Council is the first step toward their vision." From then on, the council meets regularly on matters requiring a family consensus. Each year's event has a theme: in Year One, it's communication; then empathy; and next, leadership.

An unusual aspect of the Heritage Institute's approach is a "pre-inheritance experience." The older folks give the younger generation a sum of money--typically between $25,000 and $500,000-- with advice to the effect that "Our goal is to help you learn how to work together as a group. For the first couple of years, we'd like you to learn how to deal with this money and invest it. If you do a good job, we'll match or increase the amount next year." Great investment returns are not the objective; what matters is that young family members learn how to communicate and work together well, establish relationships with their own team of experts and devise an investment strategy. This educational experience promotes a better transfer of leadership to the next generation.

A Tale of Two Retreats

To illustrate how a family retreat can help resolve issues that may sabotage a wealth transfer plan, consider these examples from my own experience.

1. Clarifying family consensus. "Bill" and "Kate" suddenly found themselves very wealthy after Bill's business was sold. Among their concerns were how much money to give their adult children, and in what form (a lump sum? a monthly stipend?). Bill was worried about impairing the kids' work ethic and drive to succeed, but Kate felt this wasn't a problem and wanted to make the gifts substantial. They were also considering selling one or two family properties and were unsure how their children would react to this.

To make complicate matters, theirs was a blended family. Two of the four kids were from Kate's first marriage, and the other two were Bill's. Some step-siblings, all in their 20s and 30s, had difficult relationships with one another.

We arranged a two-day retreat at the parents' home in Maine. Before this meeting, I interviewed everyone by phone and email, including the referring financial advisor, who would not be present at the retreat. These conversations clarified for me how the family members felt about the gathering, what they expected and hoped it would accomplish, how they felt about their new wealth, and how each of them "sat with" the others.

I explained that in addition to the whole family getting together, we would meet in many different permutations: Parents together, children with their birth parent, children individually and so on. I also told them I would teach them "mirroring," a simple way to help create a safe climate for deeper, more empathetic communication. We would use it during the entire retreat, and if they found it useful, they could employ it in their own lives afterward. I coached them on this technique as soon as we convened.

When Bill and Kate shared their vision and principles with the rest of the family, the feedback told them a lot about their children's values. The agenda evolved as the parents clarified their needs and concerns and the kids weighed in with their own issues. The discussion illuminated each child's maturity of judgment regarding expenditures, investments and charitable giving, and helped lower any unrealistic expectations of each other. Bill and Kate decided to focus more on charitable giving as a couple, inviting the children to participate as they showed interest. They felt the retreat was a "complete success" and "better than we ever expected."

Several changes in financial strategy came out of the discussions. One example was the couple's decision to spend some of their new wealth on travel and other life experiences with their children, instead of trying to maximize their estate. But ultimately, I think the family benefited most from learning to listen empathetically to one another with the others witnessing the process.

"I believe the family feels they now have better information on which to base some of their most important decisions," their financial planner wrote me. He felt the meeting also succeeded in conveying the parents' sincere desire to handle the inherent challenges of their situation, and in laying the foundation for good communication in the future. Ideally, this blended family will continue to hold yearly retreats that allow them to revisit their values, goals and issues, and see how well their money is helping them get where they want to go.

2. Getting an estate plan back on track. At stake in this case was a poorly functioning wealth transfer plan now in the second and third generations. "Elaine," a 70-year-old divorcee, and her brother "Ted" had inherited a fortune from their father, but they didn't have easy access to the money. Elaine's younger son, "Mark," ran the family business and controlled the purse strings. Whenever Elaine or Ted needed money, they had to go to Mark. Although everyone got along quite well, the disbursements were unpredictable and communication about the money was unclear. Everyone was dissatisfied enough with the situation to agree to Elaine's suggestion of a family retreat.

As usual, I interviewed each of the family members before we arrived at the retreat site in Arizona. (The family didn't have a wealth manager to discuss the situation with.) At the first get-together, I taught empathetic communication to Elaine, Ted, Mark, and Elaine's older son, "Joe," who practiced it with each other as I coached and fine-tuned their mirroring and validation skills.

Several agenda items emerged in this initial discussion: first, to help Mark communicate more clearly with the others and disburse money more regularly; second, to get him the support he needed to be less overwhelmed and reactive; third, to figure out a better way for family members to communicate with one another; and finally, to determine whether parts of the business should be developed or sold off.

As Elaine told me later, "In my father's world, you just didn't talk about money. This process opened up all the lines of communication." Even Ted and Joe, who had started out with pretty strong doubts about the value of the retreat, shared their hopes and frustrations about their lives and the family business, in particular.

All in all, the meeting accomplished even more than the family members had anticipated. Mark learned that the others were interested in the business, appreciated his efforts, and wanted to help and support him. Joe ended up feeling more valued as part of the team. Ted's desire for financial independence eased as he became more knowledgeable about the business and felt more involved in the decision-making process.

Best of all, the retreat re-established channels of communication among close relatives who had nursed silent grievances for years. Mark now sends updates about the business to other family members, and the whole family connects in bi-weekly conference calls. "It's cleared the air so much," Elaine says. "The whole atmosphere is different when we talk now."

Things of Value vs. the Value of Things

When you propose a family retreat, be prepared to depart from your usual mode of thinking. "You're helping to integrate the financial side and the human side, which takes a new skill set, tools and a lot of patience," says Susan Bradley, who trains advisors to coach clients through transitions. "It's immensely rewarding, but very different from the traditional financial planning approach." If you're unfamiliar with what's involved, or are uncomfortable with therapeutic techniques, you may want to partner with a therapist or counselor.

I encourage you to help more wealthy families communicate things of value to their children, rather than focus on the value of things (as Rod Zeeb puts it). By enabling your clients to share and pass on their mission and values, by teaching their kids how to handle their emotional and financial legacy responsibly, you will make them an enormously valuable gift: The preservation of a family legacy for generations to come.

Mirror, Mirror

Listening and reflecting techniques may help free up communication among family members who have too much experience in pushing each other's buttons. My preferred tool is Harville Hendrix's mirroring exercise, which is done in pairs of a speaker and a listener. The ground rules are that the listener must empty his or her mind in order to enter the speaker's world. Only when it is his time to speak is he allowed to regain his own viewpoint.

The exercise begins with each person offering an appreciation of the other. It continues as follows:

Step 1: Mirroring The speaker says a few sentences about whatever topic we are discussing. The listener "mirrors" this comment, playing it back as close to verbatim as possible and ending with "Is there more?" The speaker "sends" a few more sentences, which the listener plays back by saying, "You want to make sure that..." (repeating whatever the speaker just said). "Is there more?" Eventually, the speaker says, "No, there's no more."

Step 2: ValidationThe listener enters more deeply into the mind and heart of the speaker by tuning in, in the most compassionate, non-judgmental way possible, to what "makes sense" from the speaker's perspective. For example, if the speaker says, "I feel anxious about giving you too much money all at once," the listener validates this with a response like "It makes sense that you feel anxious about giving me too much money all at once, because in the past, I have been an overspender." Then the listener should ask, "Is there any part of your message you'd like to hear validated that I haven't included?" If so, try to validate it.

Step 3: Empathy Once all the validations have been shared, the listener deepens her empathy about the speaker's emotions by saying, "I imagine you might also be feeling..." with an appropriate term such as angry, sad, hopeful or relieved. (This should be just one word--"angry," for example--not "angry because..." or "angry about..."). Then the speaker and listener switch places to create a climate of mutual respect.

This exercise may sound laborious, but it slows down family members' habitual communication patterns: Failing to listen carefully, interrupting, injecting their own opinion or agreeing without fully grasping the emotional impact of the other person's perspective. In this safe space, they learn to listen more deeply when others are speaking to them.--OM

Olivia Mellan (moneyharmony@cs.com) is a speaker, coach, business consultant and co-author with Sherry Christie of The Advisor's Guide to Money Psychology.

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