The four dimensions of family wealth: How to create a living legacy and invest in the next generation

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by Heather Carnes

Wealth. Legacy. Sustainability. Long-term impact. These ideas around planning a family’s vision for the future are as unique as the family itself.

For many, the idea of legacy planning can be daunting, but it’s crucial to a family’s long-term success. In fact, according to a study from BMO Wealth Management, only 28 percent of respondents are aware of their parents’ legacy wishes.1 And the report cites that failure to maintain wealth is often a result of lack of communication and trust among generations.

Many connect family wealth strictly to financial sustainability, but legacy planning is about much more than that. Mahesh Patel, a hotelier and founding attorney of Patel and Associates, PLLC, with more than 25 years of experience in the business, said, “While everyone sees legacy planning in a different light, to me, it’s a smooth transfer of assets during your lifetime and death, while preserving maximum assets and maintaining family harmony.” He adds, “Preserving wealth is great, but preserving family harmony – at least in our culture or any culture, for that matter – also is very important.”

To assess the broader aspects of legacy planning, and the other factors that contribute to family unity and harmony, hoteliers should consider the four dimensions of family wealth, a concept adapted from CBIC’s Principles for a Successful Family Legacy.2

  1. Human: The skill sets, talents, and emotional maturity of everyone in the family.
  2. Cultural: The overall identity of a family, including communication skills, collective values, and how decisions are made together.
  3. Social: How a family is connected to its community, and the overall mission of how they’ll contribute to the world.
  4. Financial: Assets and financial strategy that make up the family’s portfolio and resources for the future.

When all family members understand and embrace these different dimensions of family wealth – both individually and collectively – they’re able to better plan for and create a meaningful and sustainable legacy.

1 HUMAN

Understand Family Dynamics and Contributions

Families need to honestly assess the talents and abilities of the next generation, and combine them in a way that will contribute to long-term success. “One of the issues is that there’s not an honest assessment of the family,” Patel said. “If you haven’t assessed the next generation and what they bring to the table, then you’re doing yourself a big disservice.”

While some may be truly committed to the craft, there could be others who are happy with the status quo. “It’s important that they don’t interfere with those who really want to make progress,” Patel said. “This can result in wasting a lot of time and money.”

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2 CULTURAL

Compromise and Communicate Openly

Open communication is crucial to succeeding through generational transitions. Conversations should contribute to the long-term vision, and everyone should recognize that communication styles can be quite different.

“The older generation has been raised in an environment where there’s a different level of respect for cultural nuances, and the next generation has a different way of viewing things,” Patel said. “I see a lot of dysfunction that’s a result of a clash between generations.”

These differing views have to be dealt with to make group decisions, and everyone should be involved in the conversation, regardless of position or involvement in the business. “It’s not just sons or daughters that have to be brought into the discussion, it’s also sons-in-law and daughters-in-law,” he said. “I’ve seen cases where families have self-destructed because they had a conflict of personalities, different objectives, and they never got on the same page.”

3 SOCIAL

Uncover Your Family’s Mission

Family leaders need to guide the next generation on its mission in life and overall objective, Patel said. Whether that’s through accumulating wealth or an aspect of community service, you need to insert your values into your enterprise.

“Usually, it’s never openly discussed, and it needs to be brought to the forefront,” Patel said. “We’ve been blessed with opportunities in America, and we need to come to the table to say, ‘We have enough resources; so what are our long-term goals? Are they to keep adding on or making community contributions in response to our blessings?’”

To add to the complexity, newer generations seek a stronger connection to business decisions. In fact, according to The 2017 Deloitte Millennial Survey, more than three-quarters of millennials consider business as a force for positive social impact.3 “Millennials want a higher aspirational mission,” Patel said. “They don’t want you to say, ‘Go out and add one more hotel per year,’ or ‘Add on a Hilton or Marriott brand.’ They want to understand the why behind it.”

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Legacy Planning: Questions to Consider

Answer the questions below to know where you should focus your approach as you begin your planning journey.

  1. What are your personal goals and vision for the transfer of ownership and management of your company?
  2. Is your successor equipped to handle the pressures of owning the family business?
  3. Do you have family issues that need to be resolved when it comes to making decisions?
  4. Have you executed a buy-sale agreement that will outline the details and process in the event that one day you might require a transfer of assets?
  5. Have you carefully considered how your plan can help reduce estate taxes?

4 FINANCIAL

Ensure the Basics Are in Place

Of course, the foundation to legacy planning lies in creating a comprehensive financial plan. “My honest recommendation is to have the basics covered,” Patel said. “Unfortunately, a lot of people just don’t have it all in place.”

At a minimum, hoteliers should have an estate plan in place. But they can often get distracted with other things, such as ego-driven conflicts, Patel noted. “If you don’t have the basics in place in your portfolio, then the other things don’t matter.”

Patel said he often encounters hoteliers who use the same operating agreement over and over, sometimes being 10 to 20 years old. “To protect yourself, you need to revisit the original agreement and put in control mechanisms now, so if you don’t get around to the buy-sell agreement, you’re still somewhat protected.”

CREATE A WORKING PLAN TO SERVE YOUR FUTURE

Human nature is often a stumbling block to legacy planning, because no one really wants to think about their own death or incapacity. But one of the biggest benefits to starting now is it gives you the opportunity to course-correct. “Your plan becomes a working document that you can experiment with,” Patel said. “You can assess what works and what doesn’t. But at least you’re in the process rather than reacting to an emergency.”
In addition, if families aren’t planning in advance, they put themselves at risk for potential loss of market value. If not thoughtfully and strategically planned, Patel said unnecessary taxes also can eat up a lot of your estate, and your risk exposure increases dramatically. He added that the current increase in the estate/gift tax law, where a husband and wife can pass a combined $22.8M estate/gift tax free until 2025, present an avenue to pass wealth to the next generation at minimal costs.

When approached collaboratively, legacy planning can put your vision front and center, and ensure that every decision made has everyone’s best interests in mind. “I encourage everyone to plan now,” Patel said. “Otherwise, you’re setting your family up for issues in the future.”

REFERENCES

  1. www.smartbrief.com/s/2017/04/americans-need-more-estate-planning-survey-indicates
  2. https://view.publitas.com/cibc-pwm/legacy-planning-introduction/page/1
  3. www2.deloitte.com/content/dam/Deloitte/global/Documents/About-Deloitte/gx-deloitte-millennial-survey-2017-executive-summary.pdf
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