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Heritage Planning, Pt. 1: The 3rd Element of Successful Multi-Generational Planning

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“Heritage planning” has officially become a buzz term. Many industry players are rebranding themselves using the term, while many others are standing by, wondering exactly what “heritage planning” is and how they might best position themselves.  There are a few basic concepts involved—and many good reasons for discussing the topic, now more than ever. In this series, I will explore the topic and suggest ways that you can use the approach for the betterment of your clients, and you.

In 2005, a study by Allianz found that leaving a legacy was far more important to people than leaving money to their heirs, and the terms with which this was enumerated were quite dramatic. The survey found that 77% of both baby boomers and their parents rated “values and life lessons” as the most important legacy they could receive or leave. Only 10% of boomers said that financial assets or real estate were as important as an inheritance. “Many people wrongly assume that the most important issue among families is money and wealth transfer; it’s not,” Ken Dychtwald, the noted gerontologist and designer of the survey, said that “what we found was the memories, the stories, the values were 10 times more important to people than the money.”

You have probably seen or heard about the studies that conclude that 90% of the time family fortunes are lost by the end of the family’s third generation. As it turns out, this phenomenon is not new. Since ancient times, the majority of inheritance plans have failed. Over 2,000 years ago, a Chinese scholar observed: “Wealth never survives three generations.”  In thirteenth century England it was said, “Clogs to clogs in three generations.” In nineteenth century America the expression became “From shirtsleeves to shirtsleeves in three generations.”  Even Adam Smith commented on the phenomenon in The Wealth of Nations: “Riches, in spite of the most violent regulations of law to prevent their dissipation, very seldom remain long in the same family.”

Many people have been observing this pattern for a long time, but while it has consistently been acknowledged by so many throughout history, when it comes to potential solutions, there has almost always been deafening silence.

If 90% of families fail to keep the family and its fortune together for more than three generations, what do the other 10% do differently?  And what would it mean to my family if we were a part of the 10% who succeeded?  Exactly what is a successful family? These questions, and countless like them, rang through my mind.

I’ll cut to the chase and outline some of the answers I’ve arrived at, before circling back to the critical journey I underwent to get there in the next article in this series. I will address the last question first. Today, in my role of working with families, I define a successful family as one in which:

  • the individual members of the family lead productive, fulfilling lives;
  • the family itself works and plays together regularly
  • the family’s financial assets are used to achieve the things that matter most to the family. 

Families that achieve this intentionally do so by adding what I like to call the third element to their planning—a component called Heritage Planning.

The three elements of successful multi-generational planning are distinct and separate, but work together to create success that is lasting. You are most likely already familiar with two of the three. These three elements are: Financial Planning, which prepares and protects your assets during your lifetime; Estate Planning, which prepares your assets for your family; and Heritage Planning, which prepares your family to receive their inheritance.

I would suggest that the word “inheritance” is a loaded term. We receive and pass on two kinds of inheritance, not one. The first, the financial inheritance, is the one with which we are most familiar. It is the one around which advisors have long built their practices.  But the studies tell us (as does hard-earned experience for those of us who have been at this business for a few years) that there is a second, more important inheritance that we also receive and pass on.  I like to term this a person’s “emotional inheritance.” Think of it as the sum total of the values, stories, wisdom, life lessons and family traditions—that which makes every family unique and special. Emotional inheritances are different for every person, and unique to every family. But they can be discovered, shared and folded into planning.  

We know that passing values and life lessons to future generations is the key to success for families who have kept their family and fortunes together for generations. It has been the key for centuries.