Determining
The Family Legacy
The estate planning process begins by developing the Family
Mission Statement around your values.
Step two, asks you to define three objectives which are: How
much of your financial wealth do you need to maintain your financial
independence for the remainder of your life? Next, How much of your wealth is
it appropriate to leave your children and grandchildren? Last, How much would
you like to leave to charity? The other steps in the process will be
covered either in the Advisors Corner or past and future issues of this
newsletter.
This issue is almost entirely focused on the factors you
might wish to consider when asking yourself, How much of your wealth to
leave your heirs? While it may seem
un-American or nonsensical to even consider this when everyone knows that the
answer is all of my wealth, it is still necessary to ask oneself “
What’s our mission? Will this help or
hurt our heirs? What purpose are we
attempting to fulfill? Why are we doing
this with our resources versus something else?
What’s the right amount to leave our children?
In Drs. Thomas J. Stanley and William D. Danko’s best selling
book “The Millionaire Next Door” they describe their findings during the 20
years of study and the more than one thousand people that responded to their
latest survey from May 1995 through January 1996. The authors state that, “
most people have it all wrong about how you become wealthy in
How wealthy should you be?
The Millionaire Next Door suggests a simple rule of thumb when computing
one’s expected net worth.
Multiply your age times your realized pretax annual household
income from all sources except inheritances.
Divide by ten. This, less any
inherited wealth, is what your net worth should be. For example, if Mr. Anthony O. Duncan is
forty-one years old, makes $143,000 a year, and has investments that return
another $12,000, he would multiply $155,000 by forty-one. That equals $6,355,000. Dividing by ten, his net worth should be
$635,500.
Given your age and income, how does your net worth match up?
If you are in the top quartile for wealth accumulation, you are a PAW,
or prodigious accumulator of wealth.
If you are in the bottom quartile, you are a UAW, or under
accumulator of wealth. Are you a PAW,
a UAW, or just an AAW (average accumulator of wealth)
The author’s go on to give us some interesting facts. PAWs are builders of wealth and typically
have a minimum of four times the wealth accumulated by UAWs. UAWs
tend to live above their means. The name of the game is being frugal –
PAWs live well below their means. UAW’s
look for immediate gratification
whenever there is extra money.
The chapter that is the most profound in my opinion is the
Chapter entitled “ECONOMIC OUTPATIENT CARE”. It states that many of today’s distributors
of ECONOMIC OUTPATIENT CARE (EOC) demonstrated significant skill at
accumulating wealth earlier in their lives.
They are generally frugal with regard to their own consumption and
lifestyle. But some are not nearly as frugal
when it comes to providing their children and grandchildren with “acts of
kindness”. These parents feel compelled, even obligated,
to provide economic support for their children and their families. What’s the result of this largesse? Those parents who provide certain forms of EOC
have significantly less wealth than those parents within the same age,
income, and occupational cohorts whose children are economically
independent. And, in general, the
more dollars adult children receive, the fewer they accumulate, while those who
are given fewer dollars accumulate more.
There are many forms of EOC - some have a strong positive influence on the
productivity of the recipients. These
include subsidizing your children’s education and, more important, earmarking
gifts so they can start or enhance a business.
The giving of noncash
gifts, which cannot be readily traded in for a new luxury automobile.
Conversely, what is the effect of cash gifts that are
knowingly earmarked for consumption and the propping up of a certain
lifestyle? We find that the giving of
such gifts is the single most significant factor that explains lack of
productivity among the adult children of the affluent. All too often such “temporary” gifts affect
the recipient’s psyche. Cash gifts
earmarked for consumption dampen one’s initiative and productivity. They become habit forming. These gifts then must be extended throughout
most of the recipient’s life.
The main findings of the survey is:
1 Giving precipitates
more consumption than saving and investing.
2 Gift receivers in
general never fully distinguish between their wealth and the wealth of their
gift-giving parents.
3 Gift receivers are
significantly more dependent on credit than are nonreceivers.
4 Receivers of gifts
invest much less money than do nonreceivers.
What can you give your children to enhance the probability
that they will become economically productive adults? In addition to an education, create an
environment that honors independent thoughts and deeds, cherishes individual
achievements, and rewards responsibility and leadership. Yes, the best things in life are free. Teach your own to live on their own. It’s much less costly financially, and, in
the long run, it is in the best interests of both children and their parents.
Webster’s defines courage as “mental or moral strength
to resist opposition, danger, or hardship.”
It implies firmness of mind and will in the face of danger or
extreme difficulty. Courage can be
developed, But it cannot be nurtured in an environment that eliminates all
risks, all difficulty, all dangers.
It takes considerable courage
to work in an environment in which one is compensated according to one’s
performance. One of the greatest
entrepreneurs and extraordinary sales professionals of all time, Ray Kroc,
looked for courage in selecting potential McDonald’s franchise owners and
executives. Kroc actually welcomed
cold-calling sales professional. He told
his secretary to “send all of them in.” Why? Because it’s not easy finding
people who have the courage to be evaluated strictly on their own
performance.
The Forbes article from issue
Jacobs, now 80, the son of poor Lebanese immigrants, has not changed
his mind. “One of the worst things I
could do, “ he says is indulge them to the point where they don’t have the
opportunity to make their own failures and successes that they can say are
theirs and not their parents’.”
Home Depot Chairman Bernard Marcus, 68, agrees that
inheritances can be a “terrible burden for some.” He’s decided: “If my kids want to be rich,
they’ll have to work for it.” He plans
to leave almost all of his $850 million in Home Depot stock to the Marcus
Foundation, which supports education and the handicapped.
‘The parent who leaves his son enormous wealth generally
deadens the talents and energies of the son,” steel magnate Andrew Carnegie
wrote in 1891. There’s a subtlety to all
this. In older societies old wealth was
prized above new wealth. There is a
tendency in our society to show contempt for inherited wealth and to admire
self-made wealth. “How could they be
worth anything in our culture if they were all made by somebody else, their
Daddy?” asks Aldrich.
“Many wealthy people
crush their children inadvertently,” says billionaire Herbert A. Allen, 56, of
investment banking firm Allen & Co.
“ If you’re the child of a wealthy person and your first paycheck is
totally meaningless, you’ve had something taken away from you.” John Train, investment adviser to wealthy
families, agress. Giving too much to
children, he says, is “irrational. It’s
like giving them a no-appetite pill.”
Langone: “Someone once said: ‘Money is like manure – put it
in a pot and it stinks. Spread it around
and it grows things.” Warren Buffett,
states “that parents should leave children enough money so they do anything,
but not so much that they could nothing.”
The Whitman Institute coined a term they call Affluenza which
refers to the liabilities attached to inherited wealth. The money that buys power, privileges and
luxuries can just as easily damage a child’s self-concept and motivation to
achieve . . . (with) a range of symptoms: immaturity, boredom, selfishness,
lack of motivation and work ethic, lack of self-discipline, alienation,
aimlessness, rebelliousness and suspiciousness.”
In John Sedgwick’s book “Rich Kids” (published1985 and out of
print) states that “to come into money
is the universal fantasy- hitting the jackpot, winning the lottery. What about the lucky souls who strike it rich
at birth? John Sedgwick spent nearly a
year traveling the country to interview the young heirs and heiressess to
John Sedgwick, in the prologue section of his book states,
“among the papers left by his father
when he died in 1976, my mother found a document that was a revelation to
me. It was titled – A Guide To Life,
and it explained about my inheritance and what my father expected me to do with
it.” My father wrote “Fundamentally, I
believe there are but two basic goals to life (1) personal happiness and (2) a
determination to help make the world a better place to live in. It is my observation that long term happiness
cannot be obtained by seeking it directly, but only as a
byproduct of success in the second objective.
Of course, immediate happiness can be secured and rightly by a good
dinner, a good tennis match, an interesting trip, but if one spends one’s
entire life doing that I suspect, though I never tried it, that no matter what
the variety of amusements eventually a life devoted to them would be boring.”
“Then he outlined the financial details of the inheritance
which he termed no great fortune, explaining that I could expect
$100,000 on turning twenty-one.
“In order to succeed in any role one must be willing to work
long and hard. Of this you have given
fine evidence, it is a quality almost more important than brains. You are ambitious, which is a good
thing. I hope all the foregoing will
prove helpful to you now and in the future.
Never forget we are very proud of you and love you very deeply.”
The author goes on to say that when he turned twenty-one I
received enough money to begin to ponder what I have come to see as a fundamental
Rich-Kid dilemma: What is the money for?
Was it really mine, or was it somehow still my parents’ or for that
matter their parents’? Was it really free, a pure windfall, like the
lottery winnings, or was there a hidden contract by which one somehow had to
“earn” it? Did it make me “rich”? In short, what did it mean? Inherited wealth inevitably raises vast
questions, for money pervades so much of one’s life. The Question still lingers: how much of me is
my money, and how much of me is me?
The author found that Rich Kids’ felt their greatest
accomplishment was simply to be born, and the fascination is built in from the
start. Rich Kids’ hit it big at
birth. They have started out their lives
at the apex of the pyramid that everybody else spends a lifetime climbing, pay
raise by pay raise. Rich Kids’ live in a
fairy-tale world. Middle-class kids
strive to carve out an identity for themselves; rich kids have one ready-made.
John Sedgwick writes that psychologist Martin E. P. Seligman
once conducted an experiment with caged rats.
He taught one group of rats to push down a metal bar by rewarding their
successful efforts with a few pellets of food.
That group caught on quickly and took to pressing the bar for their food
with zest.
Then he tried out another
group of rats in the cage, but, before putting them in to work on the bar, he
released a shower of pellets in a great gush from the top of the cage. The rats feasted delightedly on the lovely
pellets at their feet. When they were
finished, Seligman watched to see how well they performed the task. These rats did not learn to pull down the bar
for their food nearly so quickly. Some
of them instead just sat around in their cages looking up at the ceiling,
waiting for more food to drop down. They
didn’t make their way toward the bar at all.
And the more free food Seligman Showered on them, the worse the rats
performed. But they didn’t enjoy their
indolence. Given the choice between a
cage where the food just rained down upon them and a cage where they had to
pull the bar for it, they preferred the box where they had to work for their
food.
Seligman discusses this experiment in his book, Helplessness:
On Depression, Development, and Death.
He calls it the “spoiled brat” study and concludes that the randomness
of the rewards for the second group of rats upset any emerging sense of an
ordered universe. The rats were
frustrated that they couldn’t control events through their own actions.
Applying the idea to humans, Seligman writes, “What produces
self-esteem and a sense of competence, and protects against depression, is not
only the absolute quality of experience, but the perception that one’s own
actions controlled the experience. To
the degree that uncontrollable events occur, either traumatic or positive,
depression will be redisposed and ego strength undermined. To the degree that controllable events occur,
a sense of mastery and resistance to depression will result.”
So good fortune can be as disruptive as tragedy. Just as they are setting out into the world,
these lucky heirs come unexpectedly into huge sums that make any further effort
unnecessary. No less than Seligman’s
rats, the Rich Kids greet their windfall joyfully, but soon end up profoundly
confused and dejected. There is no
connection between what they have done and what they have received. So many Rich Kids become imprisoned by their
wealth, yet that doesn’t need to happen.
Hard as it must be to make a fortune, it is easier than
receiving one out of the blue. Earned
money is clearly one’s own, an affirmation of talent, energy, self. An inheritance is none of these things. Instead of being a source of pride, it is a
subject of embarrassment; instead of rewarding accomplishment, it fosters
sloth; instead of belonging to you, you belong to it.
Average Americans, struggling to get by, may not have all
that much in their lives, but at least they have a reason to get up in the
morning, and most likely, a feeling of accomplishment when they go to bed at
night.
As John Sedgwick finished interviewing the fifty-seven Rich
Kids he asked himself – Would I want this for myself? The answer that came to him was no! Only one Rich Kid of the fifty-seven had any
real success that he could call his own.
He found that the Rich Kids are used to immediate gratification, they
don’t put in for the kind of training that woud lead them to a big payoff down
the line. They received their fortune in
an instant: they expect to make their fortune just as quickly.
These Rich Kids can never get out from under the shadow of
their elders; they will always, in some sense, live in their fathers’ houses.
Back to the beginning question – How much should you leave
your heirs? The question is generally,
never asked. Far too often the advisors
forget to play counselor and proceed to assume they know your answer
will be one hundred percent of the assets. What is clear is that you
must prepare the next generation for wealth, it’s a mistake to just leave
it. Thus begins the true process of
estate planning. It begins by developing
a Family Mission Statement that reflects your values. It assumes you have the
answers however it is the Family Wealth Counselor that has the questions.