There once was a wealthy man who married and divorced his wife six times because he loved to throw lavish parties and travel to exotic locales — and because the family trust that named him as beneficiary didn’t stipulate against multiple marriages, says Tom Rogerson, Boston-based senior managing director and family wealth strategist with Wilmington Trust.
The moral of the story is that parents may very well devise strategies to motivate their children, but those strategies can backfire if they fail to communicate across the generational divide. That helps explain why family governance has become an increasingly popular tool for high-net-worth grandparents, parents and children to work together to set rules on their wealth, Rogerson says.
“Years ago, it started with this concept called incentive trusts,” Rogerson told AdvisorOne in a recent interview. “Families would say things like, ‘If you earn a dollar, we’ll pay you a dollar out of the trust, or if you get married, we’ll pay for the wedding and the honeymoon.’ The problem was that there were tremendous unintended consequences, like the guy who remarried the same woman six times and had all these wonderful weddings and honeymoons paid for because the trust simply didn’t stipulate anything different.”
Manipulative parents, conditional love and hostile children create the conditions for incentive trusts that don’t work, as the case of the six-marriage man makes clear. But as the field of family estate planning has developed, wealth managers are learning that well-designed plans aren’t only about wills, taxes and property. Now they are looking to the field of family governance, which involves regular intergenerational meetings to agree on a written set of values and shared goals. And yes, behavior and psychology figure into the equation.
‘You never would have been good enough’
Rogerson (right), a big advocate of family governance, joined Wilmington Trust in 2011 after serving BNY Mellon Wealth Management as managing director of family wealth services. He credits Harvard University’s former senior philanthropic advisor Charles Collier for teaching him the importance of asking high-net-worth people the essential questions about what they want to preserve beyond wealth and for introducing him to “the grandfather” of family governance, James Hughes, an attorney and author of Family Wealth: Keeping It in the Family, who recommends that families write a mission statement and mentor one another through peer review.
In addition, Rogerson participates in the attorney John Warnick’s Purposeful Planning Institute national conferences and twice-monthly conference calls to share best practices for legacy families and families in business. For example, while Warnick’s “Seven Secrets of a Purposeful Legacy” says that trusts are usually named after their tax identity, such as a marital or dynasty trust, clients should be encouraged to give their trust a symbolic name with emotional content to promote family harmony, such as “unity trust,” according to Investment Advisor contributor Olivia Mellan.
“Remember,” Rogerson says, “high-net-worth parents are often Type A entrepreneurs who are very successful financially, and they hear about trusts and think, ‘Great, I’ll put this all together and then tell my children what they are going to do.’ That’s more a symptom of the problem than the solution. If you are the beneficiary of a trust that was set up by your parents, who have now been dead for 10 or 20 years, and you’re still living under these rules and regulations, doesn’t it seem as if they’re saying, ‘I’ve had to take care of you even though I’m dead. You would never have been good enough’?”
The grandson who preserved his family’s trust
Rogerson then points to a story with a happy ending involving a three-generation meeting he attended with an ultra high-net-worth family from the Midwest whose grandfather wanted to set up a long-term, generation-skipping dynasty trust. Prior to the meeting, Rogerson had encouraged the entire family to read Hughes’ family wealth book.
As Rogerson recalls, the grandfather told his family, “Look, I want to set up a trust. How should I design it so that instead of distributing to you, it would invest in you? The reason I’m concerned about this is because my parents set up a trust for my family when I was young, and I think the reason my younger brother is so demotivated and entitled and never did anything with his life is because this trust did it to him, and I’m really concerned about setting up anything in my will that would do the same thing to you.”
The man’s grandson, a philanthropically minded young man in his early 20s, listened and thought about his grandfather’s wishes and what Hughes wrote, and said: “Why don’t we set up this particular trust as an endowment, and if somebody wants money from this trust, why don’t they apply for it?”
All three generations agreed, and now the family’s $50 million-plus trust requires that a family member who seeks funds must apply for the money based on an application that considers one of four criteria:
1) How is this an investment in my human capital?
2) How is this an investment in my intellectual capital?
3) How is this an investment in my social capital?
4) How is this an investment in my financial capital?
“Originally, they started off with the grandparents reviewing the applications, but within a year or two, the grandparents said, ‘Since this trust is going to be around after we’re gone, it really makes sense for you guys to come up with a process as a family,’” Rogerson recalls. “So they came up with a family council, and from that, they’ve gotten into all kinds of things. They plan family vacations, family meetings, but what started this whole thing off was this particular conversation around how to set up this trust.”
Many families continue to set up trusts in the traditional way, Rogerson says, but he believes that conventional wisdom is unhealthy for unconventional levels of wealth.
“If you have $50 million or $100 million, there’s enough there that you can really damage people,” he concludes. “If you’ve got a child with a problem — psychological, emotional, drugs, spousal abuse — would dumping $2 million in their laps solve the problem? It might not only not solve it, but make it 10 times worse.”
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