Kids, Wealth, and Consequences E-Book

Richard A. Morris

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg
• Sprache: Englisch

Seitenzahl: 391

Veröffentlichungsjahr: 2010

Beschreibung

Leaving children with a substantial amount of money can be a boon or a burden. High-net-worth parents need to give their children an education to navigate today's complex world. The question becomes how to raise children with a sense of reality and balance, imparting a strong work ethic, and making them good stewards of their wealth. Kids, Wealth, and Consequences enlightens high-net-worth parents about the unique issues they need to explore. The book addresses the "hard" financial issues, such as investing and estate planning, as well as the "soft" emotional issues relating to values, family, and communication. Morris and Pearl detail strategies and techniques to help parents raise children who appreciate and know how to manage the wealth they inherit. Richard Morris spent many years working for his family's multimillion dollar business, and learned firsthand the challenges of business ownership and family wealth. Jayne Pearl is an experienced journalist who writes about families, family businesses, and money.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Foreword

Acknowledgements

Introduction

SECTION I - Financial Choices

Chapter 1 - Calculating Your Family’s Future

Self-Survey for Intergenerational Equity

What Is Money For?

Current Spending versus Future Intergenerational Equity

Other Factors

Comparing 1929 and 2008

Where to Go from Here

Chapter 2 - To Trust and How to Trust

A Little Disclaimer

Self-Survey about Trusts

Intelligent Trust Design

Trustee Selection and Oversight

When and How to Tell/Involve Beneficiaries

Handing Over Trust Control

Chapter 3 - Portfolio Management

Self-Survey about Portfolio Management

Asset Allocation

Asset Location

Portfolio Manager and Advisor Selection

Breaking Up Is Hard to Do

SECTION II - Intellectual Choices

Chapter 4 - Financial Literacy

Self-Survey about Financial Literacy

Financial ABCs

Financial Values

Imparting Financial Values

Financial Boot Camp for Teens

Chapter 5 - Skills and Experience

Assessing Financial Skills

Schedule Spontaneous Time

Create Class Time

Play Games

Expose Kids to the Real World

Chapter 6 - Goals and Purpose

Self-Survey about Goals and Purpose

The Importance of Goals and Purpose

How to Find Goals and Purpose

How Parents Can Guide Children to Find Their Purpose

What If Purpose Just Doesn’t Surface?

SECTION III - Spiritual/ Emotional Choices

Chapter 7 - Success and Happiness

Self-Survey about Success and Happiness

Transitory versus Sustained Happiness

Traits of Happy People

What Drives Drive?

The Success Trap

Can Wealth Help You Find Happiness?

Chapter 8 - Communication

Self-Survey about Communication

The Instinct to Avoid Talking about Money

Chapter 9 - Navigating the High-Net Worth Environment

Self-Survey about Your High-Net Worth Environment

Media and Money

“Old” versus “New” Money

Keeping Up with the Neighbors

Transcending External and Internal Economic Shocks

Discretionary Wealth

Staying Safe and Secure

Taking Inventory of Your Lifestyle and Values

Connections and Disconnections between Wealth and Lifestyle

SECTION IV - Integrating Your Choices

Chapter 10 - The Family Glue

Self-Survey about Family Glue

The Ingredients of Family Glue

Strengthening Your Family Glue

When All Else Fails

Chapter 11 - Pulling It Together

Getting on Track

Integrating All the Pieces

Intergenerational Equity, Revisited

Designing Your Choices

Appendix 1 - Checklist of Financial Skills Assessment

Appendix 2 - Money Messages

Appendix 3 - Inventory of Your Lifestyle

Appendix 4 - Strengthening Your Family Glue

Appendix 5 - Self-Surveys

Appendix 6 - Unintended Consequences

Appendix 7 - Teachable Moments

Index

About the Authors

Also available from

Bloomberg Press

Family Wealth Transition Planning:Advising Families with Small Businessesby Bonnie Brown Hartley and Gwendolyn Griffith

Family: The Compact Among Generationsby James E. Hughes Jr.

Family Wealth—Keeping It in the Familyby James E. Hughes Jr.

The Dilemmas of Family Wealth:Insights on Succession, Cohesion, and Legacyby Judy Martel

Money Well Spent:A Strategic Plan for Smart Philanthropyby Paul Brest and Hal Harvey

A complete list of our titles is available at www.bloomberg.com/books

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This book is available for bulk purchase at special discount. Special editions or chapter reprints can also be customized to specifications. For information, please e-mail Bloomberg Press, press@ bloomberg.com, Attention: Director of Special Markets, or phone [phone].

Copyright © 2010 by Richard A. Morris and Jayne A. Pearl. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of CongressCataloging-in-Publication Data:

Morris, Richard A.

Includes bibliographical references and index.

Summary: “High-net-worth individuals learn how to pass on financial, intellectual, and emotional capital to their children, leaving them responsible, well-adjusted stewards of that wealth. This book enlightens high-net-worth parents about unique issues they must explore. It addresses “hard” financial issues such as investing and estate planning and “soft” emotional issues such as values, family, and communication”—Provided by publisher.

ISBN 978-1-57660-348-2 (alk. paper)

1. Children of the rich—Finance, Personal. 2. Estate planning. 3. Wealth—Management. I. Pearl, Jayne A., 1954- II. Title.

HG179.M6627 2010

332.0240083—dc22

2009048896

To Ryan Hommel, whose wealth of love, humor,and music nourish the soulandTo Linda Morris, the inspiration in Rich’s life,who has provided valuable insightsand support throughout the researchingand writing of this book.

Foreword

Richard Morris and Jayne Pearl have taken on a large task. They start with some key questions. How can parents raise their children so that they can successfully integrate into their lives the financial wealth their parents, or an earlier generation, created? How can the children of these parents learn to bring their own dreams to life, rather than be drained of dreams by stewarding the dreams of others? How can these children become self-confident and balanced, with appropriate humility? How will these children learn to distinguish between inheritances that cause entropy and lack of wellness and those that can enhance their happiness?

Morris and Pearl offer us, as parents and grandparents of children and grandchildren who will inherit financial wealth, the questions we seek in the hope that our heirs’ lives will be enhanced, not depreciated, by their inheritance. Their questions to us are frank, yet their meanings can be subtle. I found, as I pondered these questions, that the longer I thought about them, the more valuable my answers became. But I also found that in reviewing my answers hours later, after absorbing Morris and Pearl’s wisdom and compassion about human behavior, my answers often were very different. Please know you are likely to be quite surprised by the courage you will need to answer these questions with the whole truth about your views and actions. As you uncover that second set of answers, you may also feel somewhat diminished by how you’ve handled some of these questions in the past.

As we know, the examined life—a life open to questions—is the life worth living. Living with answers too quickly formed all too often leads to poor results. Morris and Pearl’s iterative process, chapter by chapter, leads parents to deeper and deeper questions—and more profound answers—and they never leave us unaccompanied. Since so many of us find ourselves in Dante’s “dark wood” as we try to help our children avoid lives of inutility, pain, Lethe, and anomie, it is comforting to have Morris and Pearl as our Virgil on this journey to enhancing our children’s lives.

For us as parents, at the core of Morris and Pearl’s work lies a rarely spoken reality hidden in a question so deep it cannot be plumbed. How can we integrate the materialization of another’s dreams—the financial wealth of another—into the dreams of our children and grandchildren so that such wealth does not dampen their capacity to dream and bring their own dreams to life? Too much education on this subject gets its purpose wrong by teaching inheritors of financial wealth about stewarding someone else’s dream instead of teaching them to nurture their own. Who among us, as a young spirit, wouldn’t be at risk of drowning in the vast expanse of an extraordinary person’s great dream—a John D. Rockefeller or a J. Paul Getty, for example—if asked to steward it? Could we have any hope of success if we had not been, with perseverance and a gentle touch, educated to bring our own small individual dreams to life first?

Sadly, this misdirected process is most often activated by a parent’s or grandparent’s great love and hope for this young spirit. Equally sadly, this love often comes without awareness of the deep questions and threats posed to a young spirit by another’s dream. Many parents have no real awareness of the processes and practices needed to integrate another’s dream into the young spirit’s dream.

To better understand this concept, parents might consider how the process works systemically. Each of us has our own blessed inner nature and healthy functioning. When some new life form, in this case another’s dream, enters that complex system (physical, mental, emotional, intuitional, spiritual), the system doesn’t know whether the integration will be healthy or not. So the system responds by seeking to integrate this foreign matter while keeping its T-cells ready to fight.

If the system can safely integrate this new form, then it has adapted to it. Adaptation is the critical action that helps a person change to new situations encountered during a lifetime. The capacity to adapt to a new challenge gives an individual one more quality to call on to survive and flourish. Is the individual—or system—resilient? Every time a system adapts, it changes. Only a resilient person—having courage, gratitude, humility, fortitude, prudence, joy, love, and compassion for self and others—will be strong enough to take in this foreign body—another’s dream—adapt to it, and flourish.

A person seeking to steward another’s dream, without his or her own having been born and emerged, will be weakened. The dream will certainly submerge and drown the individual. Parents and grandparents, whose love, wisdom, and compassion lead to the nurturance of the human, intellectual, and social capital of their children and grandchildren, reduce the odds of the child’s drowning. Such nurturance vastly increases the odds that those they love will learn not only to swim but also to use the vast ocean as their laboratory for the evolution of their creative selves and their dreams.

Morris and Pearl’s questions and discussions get to the heart of the process of parents’ nurturance. Morris and Pearl offer education, starting with the root issues of how to help the people we love the most achieve happy and productive lives. They do this by helping us learn:

• How to bring to life the dreams of young spirits

• Which practices are most likely to achieve such lives

• How to integrate an earlier generation’s dream, represented by its financial wealth, into the life of such a spirit so it enhances that spirit’s journey

Thank you, Richard and Jayne, for the gift of your wisdom and compassion. Your questions will help many different families’ dreams come true.

JAMES (JAY) E. HUGHES JR. ASPEN, COLORADO July 2009

Acknowledgments

This book is the result of a powerful collaborative effort of colleagues, friends, and contacts who cheerfully provided information, referrals, support, encouragement, and constructive feedback.

At the top of the list of people we want to thank is our editor at Bloomberg Press, Stephen Isaacs, who was always accessible and who provided much sage advice. Other Bloomberg Press folks who labor tirelessly behind the scenes include Yvette Romero, Judith Sjo-Gaber, John Crutcher, and JoAnne Kanaval.

We would not have found each other to undertake this collaborative effort were it not for the wisdom and kindness of Howard Muson, former editor of Family Business magazine, who introduced us. Any book is only as good as the resources behind it, including the scores of parents, professionals (including lawyers, accountants, psychologists, and academics, investment advisors, investment managers, and family office executives) and individual high-net worth investors, who were generous with their time. These include Mary Jo Barrett, Charlotte Beyer, Thomas Bloch, Bruce Boyd, Jeffrey Brodsky, Ira Bryck, Mitch Cohen, Mike Cohn, Leslie Dashew, Francois de Visscher, Nancy Donovan, Susan Goldenberg, Fritzi Hallock, Sara Hamilton, Jeffrey Horvitz, James Hughes, Henry Hutcheson, Holly Isdale, Charles Jahn, Dr. Kenneth Kaye, Richard Levi, Charles Lowenhaupt, Teri Lowinger, Doug Macauley, Susan Remmer Ryzewic, Tom Rogerson, Claudia Sangster, Istar Schwager, Jill Shipley, Dr. Kenneth Sole, Michael Sonnenfeldt, and Dr. Kerry Sulkowicz. Our thanks to you all for your insights and candor.

We are very grateful for creative and constructive feedback and some technical advice and help that several colleagues offered, including: Donald Claus, Tura Cottingham, Christopher J. DeMonte, Amy Downey, Phil Gartner, Henry Gorecki, Doug Gourly, Sherri Kole, and Bob and Debbie Render. Special thanks, also to Wolverine Torres, whose inquisitive spirit and laughter are contagious.

We are fortunate for the invaluable contract guidance we received from National Writers Union member Paul J. MacArthur and Authors Guild staff attorney Michael Gross. We would also like to acknowledge our web developer, Roy Plum, whose ability to listen deeply and translate our concepts and style is unparalleled.

The life-long influence of especially outstanding teachers can never be forgotten and should never go unrecognized. Our truly inspiring teachers include Ernest J. Barry, Professor Emeritus at Lake Forest Academy; Diane Gayeski, Professor at the School of Strategic Communication, Ithaca College; Sandra L. Herndon, PhD, Professor Emerita at the School of Communication, Ithaca College; and the late and very great Professor Arlene Wolf Goodman, former Professor of Journalism at Hofstra University.

While immersed, engrossed, and perhaps at times obsessed with pulling together the material for and writing this book, we should not ignore the moral support and patience we received from family and friends, including Mortimer B. Pearl, Robin Pearl, Ellen Pollen, Ryan Hommel, Linda Morris, Aaron Morris, Allison Morris, and Charlie Morris. Thank you for not divorcing or disowning us!

Introduction

CHILDREN WHO GROW UP in a wealthy household are bound to encounter mixed feelings, mixed messages, and mixed blessings. That’s because parents who provide a charmed lifestyle and leave behind substantial money to their children do not guarantee their children’s happiness. In many cases, riches have the opposite effect.

For wealthy families, the stakes are high—not just because there’s more money to squander, but also because wealth can fuel dysfunction. Money can provide education, comfort, travel, and exposure to high culture, couture, and cuisine. But money can also paralyze people and strip them of ambition and meaning. Some children suffer feelings of guilt over not having earned their wealth; others find themselves mired in a toxic brew of entitlement and numbing ennui.

These problems affect a growing portion of our country. The estimated number of households with at least $10 million in net worth doubled between 1995 and 2004, from more than 200,000 to more than 500,000, according to Federal Reserve surveys of consumer finance. Households with at least $25 million jumped from 50,000 in 1995 to more than 100,000 in 2004.

Of course, a fair number of the country’s and the world’s wealthy are worth significantly less as of this writing as a result of the stock market meltdown that began in 2008. In fact, as of March 2009, the richest of the rich who made it to Forbes magazine’s list of World’s Billionaires found their average net worth had fallen 23 percent, to $3 billion, from the preceding 12 months. Forbes reported that the world now has 793 billionaires, compared with 1,125 the previous year. American billionaires fared a bit better than their global counterparts, snatching 44 percent of the slots, up 7 percentage points from the year before.

The financial crisis has created a new set of financial and emotional issues for wealthy families. Some who saw almost half their net worth disappear were arguably less experienced than middle- and lower-class folks in cutting spending. Families who have inherited their wealth and who have no current wealth creator among them may have an even tougher time weathering the current economic storm, both financially and emotionally.

Many wealthy parents worried even before the economic meltdown about how to raise children with a sense of groundedness and balance: how to impart a strong work ethic, how to counter their sense of entitlement, how to prevent them from remaining dependent, how to help them separate their identity from their wealth, how to help them develop confidence in themselves, how to instill a desire to give back to society, and how to be good stewards of wealth for future generations. Suddenly, there’s a greater urgency about guiding and teaching children these financial values and lessons.

Moreover, those who count themselves among the elite slice of society found their sense of security shattered. Money had protected them from many of life’s harsh realities. They were caught utterly off guard and unprepared to adjust their expectations and lifestyle.

When we began researching and writing our book in the fall of 2008, just as the stock market plunged, we, along with our editor and publisher, felt we might out-date this book if we gave more than a cursory mention of the market meltdown. But as the country and much of the rest of the world began to spiral into a deep and potentially prolonged recession, we all agreed that even if a miracle were to effect a major turnaround, the shock waves wealthy families were experiencing were having a profound effect. These world events had the high—net worth community questioning their values, spending habits, and children’s future in a profound way. The economic downturn has brought these issues to the surface and made exploring them impossible to ignore. We have folded in facts, examples, and quotes that describe how these economic woes impact the many issues our book addresses.

Readers should also be aware that the authors of this book bring very different experiences, skills, and perspectives to this project. Richard Morris has a background in marketing and education. He worked his way up in his family’s auto parts manufacturing company, Fel-Pro, where he worked in marketing and later in acquisitions, until the family sold the eighty-year-old business in 1998. Morris’s “liquidity event” prompted him to rethink his life. He wanted a work life that provided a sense of belonging and a chance to give back to society, and he soon created ROI (Resources for Ownership Intelligence) University, which provides certificate courses for private owners in management, marketing, retail, sales, and human resources management. Even though he and his wife decided not to change their standard of living substantially, they found that the liquidity of their assets provided new challenges in bringing up their children as well as managing the families’ finances. Many questions needed answers, and they found no one resource to address those questions. Morris devoted substantial time to studying not only how to manage his financial assets but also the psychological and social challenges new and sudden wealth can bring.

Jayne Pearl has been a financial journalist since 1980, when she started as a reporter-researcher at Forbes magazine, where she helped research and fact-check the premiere Forbes 400 “Rich List” of the wealthiest Americans. She later worked as editor of a syndicated daily financial public radio program, then launched a successful newsletter for management guru Tom (“In Search of Excellence”) Peters. In 1989 she helped launch Family Business magazine, to which she has contributed for twenty years. She wrote a highly acclaimed book, Kids and Money: Giving Them the Savvy to Succeed Financially (also published by Bloomberg Press), in 1999, and has been writing and speaking about financial parenting ever since.

The authors’ different professional and socio-economic backgrounds resulted in enlightening brainstorming, challenges, and some creative tension as they periodically wrestled over how to address many of the issues they have covered. Without either one receiving or delivering a single black eye (which would have been difficult not to avoid, as they live a couple thousand miles apart), each difference or hurdle led them to deeper insights and solutions that far exceeded either of their initial positions and preferences.

The authors hope that the resulting book will help readers increase the odds that their family wealth will enhance their children’s ability to succeed under any economic circumstances. We will describe the skills children need to obtain successful, happy lives. We will look at how we define success and explore the extent to which money might bring or hinder that success. We will evaluate how spending, financial management, and estate-planning choices today affect what we will leave behind. We will also consider an array of ways that parents can discuss money with and in front of children, to teach them how to spend, invest, and manage it responsibly.

There are many choices that determine how wealth will affect your children. This book arranges these choices into three categories: Financial Choices, Intellectual Choices, and Spiritua1/ Emotional Choices, as depicted in Exhibit 0.1.

Exhibit 0.1Kids, Wealth, and Consequences Model

Each of these categories of choices comprises one section of the book, with a fourth section focusing on integrating the different types of choices into an action plan.

• Section I: Financial Choices. The three chapters in this section cover somewhat technical concepts, while Chapters 4 through 10 deal with the softer topics. If you are not a numbers person, you may prefer to skim the first chapters or even skip them, although optimally, you would benefit from at least familiarizing yourself with the technical concepts in this section (Exhibit 0.2).

Our decisions about spending, estate planning, and portfolio management dramatically affect our own future, as well as that of our children.

Exhibit 0.2Financial Choices

When wealthy parents neglect to think through these issues, making sure to structure trusts, spending, and investing to meet their goals and values, the unintended consequences for the children can include uncontrolled spending and dependence in the form of trust-fund babies. But when there is careful consideration and preparation, the family will develop the financial acumen, create estate plans that match their long-term values, and maintain their resources so that the children will live independently and responsibly.

In Chapter 1, “Calculating Your Family’s Future,” we describe the spending choices “Bob” faces, how various spending scenarios affect his net worth in future years, and the legacy he wants to leave behind to his children. How will these decisions affect his children? Will his financial decisions enable his children to enjoy future “intergenerational equity”—the ability to replicate his lifestyle? If intergenerational equity is not available or desired, then at what rate should he spend?

Chapter 1 also includes a spreadsheet calculation about the variables (expected return, inflation, income taxes, number of children) few people consider when they decide the percentage of their net worth that they can spend each year. Many wealthy individuals believe that, as in the case of endowments, they can spend 5 percent of their net worth per year and still preserve their capital. Our calculations demonstrate that such an approach may not allow their children to maintain the same standard of living as the family presently enjoys. What are the unintended consequences when adult children cannot match the standard of living they enjoyed growing up?

In Chapter 2, “To Trust and How to Trust,” we focus not only on how to select trustees and make sure they understand and honor the grantor’s wishes, but also how to structure the trust for the best financial and emotional benefit of the children—specifically, how to avoid creating a sense of entitlement and the “trust-fund baby” syndrome. In this chapter, we explore the best intentions of parents who work with their lawyers to create trust language that can actually lead kids to become dysfunctional and lack direction in their life. We also present alternative ideas about how to leave a legacy with legal language that will help kids to realize their potential before receiving the money. Chapter 2 illustrates that there is no one right approach, but each approach comes with its own set of unintended outcomes. We explore the pros, cons, and alternatives of incentive trusts, flexibility devices, handing over trust control, trustee selection, and oversight that can all help us to integrate the values and goals that we hope to pass down to our children along with our assets. It is not all about taxes and control.

Chapter 3, “Portfolio Management,” provides insights from many professionals and high-net worth investors as to how choices of asset allocation, asset location (which trust the asset should be put in), tax ramifications, and risk tolerance affect our ability to achieve intergenerational goals, or the ability to pass down the most value possible to our children. The interplay of these elements can affect our portfolio even more than our specific investment choices. The financial crisis that began in 2008 has brought to the surface some unexpected lessons about asset allocation, which we discuss along with the scams that have come to light during this economic downturn. They provide us with insights as to how important it is to stick to guidelines for choosing and firing managers and advisors.

• Section II: Intellectual Choices. The previous chapters dealt with how to prepare the wealth for family. In this section we delve into how to prepare the family for the wealth. Providing children with financial education is an important responsibility for any parent in today’s complex economic world. But for wealthy families, the stakes are much higher—not just because there’s more money to squander, but also because wealth can fuel dysfunction and at-risk behaviors such as substance abuse (Exhibit 0.3).

Chapter 4, “Financial Literacy,” explains that, regardless of how sophisticated (or not) they are about personal finance and investing, parents have a responsibility to prepare their children to live in our complex economic times. We guide parents through the process of instilling the five important financial values: tolerating delayed gratification, understanding the difference between wants and needs, practicing making tradeoffs, telling oneself “no,” and developing a healthy skepticism about ads, fads, and conspicuous consumption.

Exhibit 0.3 Intellectual Choices

Chapter 4 also addresses specific issues that come up in wealthy families. For instance, will allowance work for high-net worth kids? Should wealthy teens get a summer or after-school job (especially if their parents do not choose to work)? In addition, how can parents prepare children to invest and develop healthy spending and saving patterns early?

Chapter 5, “Skills and Experience,” presents a framework to assess the current financial skills both parents and children posses. This chapter is filled with suggestions for preparing children to handle the money they may receive in the future. Experts share their findings about how having dinner with your children can dramatically reduce the chances of an array of at-risk behaviors, including abuse of drugs. For those parents whose kids are less than fascinated with finance, we suggest games specifically for high—net worth families that will make learning more fun.

We will describe creative ways parents can present children the opportunity to practice investing and handling money early so that they can make and learn from their mistakes early, before they inherit significant wealth.

Dealing with advisors is another important skill children will need once they take possession of significant money. This chapter suggests various ways to involve children at different ages with the family’s financial advisors and describes how to use a philanthropic family foundation to provide children real-world experience in investing. Often, the first exposure siblings have with financial planning is after the parents die, and they suddenly have to make big decisions with big consequences, without any experience working together. We explain how a foundation can help the family practice making financial decisions together. We also introduce family projects that will allow children to practice investing with real money and learn how to make financial decisions as a family.

Chapter 6, “Goals and Purpose,” focuses on how money can bring pleasure as well as problems. While money can provide education, comfort, and travel, it can also paralyze people and rob them of ambition and meaning. In this chapter, we explore how some kids suffer feelings of guilt over not having earned any of what they have or will inherit, while others feel entitled to get everything they desire and yet find themselves bored by it all.

In Chapter 6 we also look at how parents can help guide their children to find their purpose and set meaningful goals that will make them productive. This chapter also illustrates how parents of means can motivate their children, using simple techniques, to find their own path. We also consider ways to encourage children to take sensible risks and experience failure as an important part of their journey.

Many people build their identity around their work or professions. Many wealthy people who do not have to work find it difficult to find a purpose or sense of identity. Parents help their children develop a healthy sense of identity and purpose by exposing them to entrepreneurial and philanthropic activities, and by teaching them that wealth is a responsibility to pass down from generation to generation, not just to buy expensive things.

• Section III: Spiritual/Emotional Choices. Among the many concerns of wealthy parents are how to raise children with a sense of reality and balance, how to prevent them from being dependent, how to help them separate their identity from their wealth, how to help them develop self-confidence, how to instill in them a desire to give back to society, and how to teach them to be good stewards of their future wealth for later generations (Exhibit 0.4). Parents want their children to develop the capacity to engage in meaningful friendships, to love and to be open to others loving them—for who they are, not because of their family’s balance sheet. In this section we see how parents can enhance the values they hold close and discourage values that may impede living a happy and productive life.

Exhibit 0.4Spiritual/Emotional Choices

Chapter 7, “Success and Happiness,” delves into the issue of entitlement and the insidious effects it can have on children of any age. Entitled people do not appreciate, or even enjoy on any deep level, the possessions and other advantages they receive, which can lead to anxiety and depression when too much is never enough. We look at studies and talk to experts about the age-old question of whether money can buy happiness.

The flip side of entitlement is guilt. Some children feel they do not deserve the advantages they have and will inherit. They are plagued with guilt, which can also lead to anxiety and depression. While money will not necessarily make us happy, we can be happy with money. And while wealthy people can’t buy immortality, they can leave a legacy built around healthy values and exposure to the many facets and faces of the outside world. We describe the traits of happy people and consider what “drives” drive.

In Chapter 8, “Communication,” we ask: what attitudes and values have served you well in your own life? Which ones have hindered you in your work, relationships, and family? Are you comfortable talking honestly with your children about your own foibles and flaws? The messages we send our children come not just from our words but from our actions. While many wealthy people believe that their legacy to their children is their money, the larger legacy is actually the attitudes and values we pass along with that money. This requires a fairly high degree of open, honest communication, so we also explore in this chapter different communication styles, and how one type of communicator can best communicate with other types of communicators.

Our children derive their financial values and their expectations about what kind of lifestyle they will be able to maintain into adulthood—a topic not often discussed overtly with our children—from what they observe about how much and the way we spend. When is it appropriate to discuss with children what, when, and how they will inherit? Should parents tell their children how they expect them to spend, save, invest, and donate the money they’ll inherit? How can they help their children develop a positive identity that is not defined by money?

In Chapter 9, “Navigating the High—Net Worth Environment,” we examine the messages children may glean from parents’ choices about how to live and spend, and the emotional impact that is likely to have on children. The media have a large impact on our children. It may be difficult for them to distinguish between the values of the media, your values, and the consumption they see all around them. Just because you or your family members have enough money to live in a palace, travel by limo, and jet around the world without traditional employment doesn’t mean that you have to do so. Nor should you or your children feel guilty about wealth and enjoying some of the benefits.

But with constant traveling and consumption of massive quantities of clothes, electronics, art, wine, jewelry, and—fill in the blank with whatever your passions or poisons include—children may come to believe their family is better than “those” people who don’t achieve the same lifestyle. They may believe it is not fun or safe to live differently. Yet many families have had more fun at a roadside hotel or have met interesting people and learned important skills having to deal with a canceled plane flight than they have living it up in a cocoon. More bonding memories result from the time spent together than from the time spent in a “great place.” Such situations teach us that what is important is family and community, not the money things can buy. This chapter will explore some of the unintended consequences children have suffered from being cocooned in the trappings of wealth and how to navigate around it. With the financial outcome of 2008, many parents are rethinking what is truly important about the money they have, the things they own, and the places where they live. Will the high—net worth environment protect wealthy families from new realities of a potentially changing world?

• Section IV: Integrating Your Choices. By examining the unintended consequences of your lifestyle, you can figure out how you can best match your lifestyle choices with your life values. By integrating the strategies and techniques we have presented in the first three sections—Financial Choices, Intellectual Choices and Spiritua1/ Emotional Choices—you can greatly increase the chances of raising happy, well-adjusted children who appreciate and know how to manage the wealth they will one day inherit.

“The Family Glue” is the subject of Chapter 10. Studies have found that many families that create even the most sophisticated estate plans but do not prepare their children to inherit their wealth will end up in a generation or two with little or no wealth. This chapter presents techniques for working together as a family toward common goals and values. Business owners and managers invest countless time and money teaching employees to work as a team, yet they do not teach their own families to do so. Business owners and managers also invest heavily in creating vision and mission statements that articulate their values and goals; yet they rarely if ever do so with their families. How can or should the family use its wealth to accomplish the family’s mission and vision in a way that complements its values? We will focus on how to begin to execute these goals at home to strengthen the family glue.

In Chapter 11, “Pulling It All Together,” we review how the issues, decisions, and challenges we have grappled with in previous chapters come together. We explore the likely outcomes—intended and unintended—of parenting and lifestyle choices, investing and trust decisions. One set of parents may decide to give their child a BMW at a young age but make other choices that offset the possible “spoiling” that may otherwise result. We help parents align their communication, trust documents, work expectations, and spending choices with their personal and shared family values.

This is not about judging or making all the “correct” choices but about understanding how the combination of our choices will affect each individual child. This chapter will also describe choices about what kind of legacy, beyond the dollars and cents of your wealth, you have an opportunity to leave future generations.

If 2008 has taught us anything, it is to prepare for the unexpected. All the chapters in this book raise—and we hope, help answer—some critical financial parenting questions, such as how we can plan and protect our children for the unknown and how can we prepare our kids to survive any potential lifestyle.

There’s no substitute for good basic, active parenting. Three of the many ingredients behind good parenting are clarity (setting clear rules and expectations), consistency (imposing consistent consequences for breaking those rules), and communication (about your family values, your expectations, and the lessons children learn from their successes and failures, whether at home or at school).

We are delighted you will join us on this journey and hope you visit our Web site, www.KWandC.com, where you will find many financial and parenting tools, updates, and links.

SECTION I

Financial Choices

1

Calculating Your Family’s Future

MANY WEALTHY PEOPLE have worked hard to amass their wealth, while others have been fortunate enough to inherit a large sum of money. In either case, most wealthy people do not take the time to answer the most important question this book will ask: What is money for? After answering this question, the next step is to calculate how much money is needed to reach your goals. Many wealthy people run out of money or leave far less to their kids or grandkids than they had imagined. The first section of this book, “Financial Choices,” helps you consider what you want your money to be for, and helps you set a strategic course to meet your money goals. The three chapters in this section pose hard questions and introduce financial techniques to help you understand the realities of what happens to money through the generations. Although this section of the book may seem very technical, it is the first step to increasing the likelihood that your money will help, not hinder, your children’s success, emotional health, and happiness.

The amount of money you decide to spend each year can have far-reaching consequences, both intended and unintended, on your children’s future. It can affect the legacy you leave behind, not only in terms of how much financial capital they will eventually inherit, but also in terms of the lifestyle to which they have grown accustomed, the messages your spending patterns send to them, their expectations (which may not be realistic if you outlive much of your wealth), and their career decisions. In addition to spending patterns, inflation, return on your investments (net of fees), the number of children you have, and the amount of wealth your children will create in the future will all affect the extent to which you will be able to meet your expectations for your children and future generations.

Self-Survey for Intergenerational Equity

Every chapter of this book presents a self-survey so that you can assess your assumptions and beliefs before you read about the subject matter. Please write your answers in the column to the left of each question. Then, after you read through the chapter, turn back to this page, and consider each question once again—this time, writing your answers in the column to the right of each question. By noting any questions you answer differently the second time, you can pinpoint areas of your lifestyle, parenting, and planning that you may want to reconsider and discuss with your spouse, advisors, and children. Perhaps this will lead to changes, subtle or profound, in the way you handle your wealth and improve the chances that it will enhance your family’s healthy attitudes, expectations, and decisions concerning money.

Self-Survey about Intergenerational Equity

What Is Money For?

There’s no single correct answer to this question. Some feel their money is there to spend during their lifetime, and that their children should work to support themselves. Others believe their children should be entitled to the same standard of living as the parents enjoy. Most of us fall somewhere in between. For instance, some feel, especially if their money was inherited rather than earned, that they are stewards, not owners, of that money.

You may want your children to find fulfillment in a meaningful, successful career and the pride that comes from earning their own keep, but you may not want them to have to bear the financial burden of paying for their home, vacations, retirement, or their children’s education.

Some feel compelled to use their money to help society. For instance, some wealthy people decide to bequeath all or a significant portion of their net worth to a foundation, as Microsoft founder Bill Gates and entrepreneur/investor Warren Buffett have done. Buffett’s estate, for example, will leave his children enough that so they would never starve; some of the excess has been designated for foundations partly for them, which they manage; the rest he has donated to Bill Gates’s foundation.

We recommend that you sit down, preferably with your spouse (if you have one), to sort out what you want your estate to provide the next generation:

• The ability not to have to work, or to take a meaningful but low-paying job

• The ability to give back to society

• The ability to pay for their college education and that of their children

• Some amount of extravagance, such as travel or a vacation house

Whether or not you believe your children are entitled to inherit your wealth, they will need to know your intentions, which will affect their life decisions. If you live lavishly, they may assume they will be able to do so as well once they are on their own. If you live frugally and your children have no idea that they will eventually inherit vast sums, they will need to be prepared emotionally and intellectually to handle that wealth.

One unprepared young woman, Kathy, became enraged when she learned she would be inheriting enough money that she would not need to work to maintain her lifestyle. She had chosen to get an MBA and had pursued a career on Wall Street rather than her passion for art. Had Kathy had any inkling she would not need to support herself, she would have taken a completely different path.

TEACHABLE MOMENT

If your kids are old enough, which could mean when they know who they are and what they want to be—probably sometime in their twenties—you might want to include them in this discussion about what money is for.

UNINTENDED CONSEQUENCES

The lifestyle you choose to live will create certain expectations in your children as to what lifestyle they will maintain. Communication with your children about this, even when they are mature enough, may be uncomfortable or unpalatable, but it is one of the best gifts you can give them, regardless of how much or how little they may ultimately inherit.

If you have $2 million in assets, your ability to create intergenerational equity so that your children will be able to replicate your lifestyle without having to work is not realistic. But perhaps you could create a more modest level of intergenerational equity in terms of providing a roof over your children’s head—maybe not a palace, but a modest home in a nice community, or a down payment for a more upscale abode. Or you could supplement what your grown children earn so that they can enjoy a higher standard of living than they otherwise might.

Current Spending versus Future Intergenerational Equity

If you want your children to enjoy intergenerational equity, calculate whether your annual spend rate (as a percent of your net worth) will preserve enough capital for them to enjoy the same standard of living as your family currently enjoys. If you do not work, will they need to? Would you have answered this question the same way in 1929, 1960, 1985, 2005, 2008? What world events might make you think differently?

We talked with many high-net worth investors who analyzed the ability to create intergenerational equity and pointed out what they think most investors fail to see. Richard Levi, age sixty-one and a father of two children, recalls a presentation he attended several years ago at which the presenter mentioned how rare it is for a family fortune to last past the fourth generation. Levi says the presenter explained that “estate and income taxes along with inflation (and occasional spendthrifts or imbeciles) play a role, but the real killer is that assets expand arithmetically and families expand geometrically.”