Editorial Features

I participate in a number of conferences on family and business planning during the year. Inevitably, at some point, I merely sit back and wonder why all these other speakers have such wonderful families or business people to work with and I donÕt. Most of the people I talk to reinforce the point I have made numerous times over - that basically 95% of families are dysfunctional. Planning for the ideal is easy. Planning in the real world is not.

Clearly, the most difficult problem to solve in the intergenerational transfer of a family held business or other financial affairs deals with the human beings involved. The actual tax planning is relatively simple; if not for any other reason than the tax code contains so many anti-abuse provisions, that there are limited techniques which are still viable which will not otherwise lead to a run-in with the tax authorities. It seems clear to me that solving the human planning problem is the area which requires the greatest thought and is the greatest challenge.

My friend, John Goodson, who is a prominent estate planner and family wealth advisor from Phoenix, Arizona, takes the position that for long range planning a family should create a family constitution. After all, a constitution has served the US for over 200 years and has effectively kept some of its most dysfunctional people - Democrats and Republicans - from utterly doing each other in while the American economy has prospered. From a realistic point of view, this is the same result a family will need to achieve to enable a family to prosper over succeeding generations. John has made the point to me that a family constitution can help transform a group of human beings into a sustainable organisation with a high probability for success, security, and harmony.

I think John is right. Clearly the families which have succeeded in maintaining wealth in tact over three generations are those which have instilled a sense of shared values and have established some governance principles which manage inevitable differences.

In my view, a family is composed of two kinds of capital: financial capital and human capital. Some planners like to say that spiritual capital is also critical but it seems to me that they are talking about religious ideals and not true spirituality. I do have to admit that religious families seem to have a better success rate over time than non-religious ones. I tend to think that it must be the adherence to shared values that overcomes the otherwise inevitable conflict of ideas that arises within any group of human beings. And a reduced rate of divorces.

Without capital, there is no capitalism and without money coming in on a regular basis, there is no means of maintaining a sustainable family. So the key to long term family prosperity is to build a capital base, expand the base, and keep it protected from the ravages of financial loss, excessive taxation, litigation and, likely the greatest hazard of them all, divorce. How can this be done?

Clearly, this takes some planning and involves the creation of a written plan like a family constitution. Before a family constitution can be drafted, some preparatory work needs to be done. The bookstores are full of books dealing with developing business plans or creating business mission statements. The same thing needs to be done for the family.

What I find most difficult in this analysis is creating the method to be used in deciding on how to allocate "family" financial resources in some rational manner. Any number of my colleagues use the simplistic approach of dividing up the total value by the number of kids and allocating each their proportionate share - the old per stirpes approach. Others just take the total value and divide by the number of beneficiaries - the old representative approach. The fact is that in the real world there are those that work in the family business, those that do not, those with special needs, those who create their own wealth and don't need family resources, and lots of other typically special human situations. Remember, dysfunctional is the norm, and any system which creates a sense of financial entitlement creates a family disaster. What this means is that allocation of family resources will be dependent on the unique factual circumstances of the individuals whom make up the family and their adherence to a set of reasonably practical rules.

I have always felt that any family business plan needs to have two minimums. One is the minimum level of support that each member of the family can expect regardless of circumstances. Basically, it is food, clothing, shelter and the opportunity for education. Everything above that must be earned. Second, participation in the family business or having the family finance a separate business is available only to those who are qualified. A meritocracy is usually the best approach to sustaining a successful family enterprise. Clearly, those who take the lead and advance the interests of the family need to receive incentives over and above the thanks given by family members less engaged.

There is nothing wrong with family members doing things which are beneficial to society. The world needs teachers, artists, poets, and people who will do compassionate social work - and such activities can be encouraged. But those who work hard at creating, expanding and protecting the wealth that makes financial comfort and the opportunity for social good for all possible, deserve to be properly compensated for those efforts. This is where the financial allocation model needs to be creative to take into account these variations and how this fits into the family philosophy.

I find that lofty "family mission statements" to be mostly baloney. The fact is that the primary mission of a sustainable operation is to create, expand and protect the business capital of the family which is needed to support an expanding family of succeeding generations. This is totally dependent on the business circumstances. It is nice to colour this effort with thoughts of spirituality but when you get right down to it, it is all about the money.

Some families which have an ongoing business may find that two financial plans are needed: one that deals with how the business will be conducted and one that deals with how the earnings of the business will be invested so that the earnings on the earnings can be used to support the family. Families which have transitioned out of active business operations and now solely rely on earnings from invested capital have less flexibility, fewer options and the need to create a structured system. Take it from me, simple allocation systems, the ones that are usually part of the lawyerÕsÊoff-the-shelf document production computer package,Êread nicely but rarely work in real life.

The family financial allocation model very much impacts the family human capital model. The money aspect must be used to encourage, to the extent possible considering all the variations of human abilities, flaws, and strengths, each family member to achieve his or her personal fulfilment. It is critical to happiness to have a sense of self-worth and dignity. It is also critical to train the next generation to succeed in financial affairs. Either that or the family constitution must provide for the financial capital to be handled by money professionals. Obviously there is a balance to be struck.

Some people enjoy doing business or investing while others just don't. Some have a talent for it, and other don't. When designing the family programme to develop the growth of intellectual capital, financial incentives can be used to encourage family members to take on roles as family leaders and perform representative roles in governing the family affairs.Ê Similarly, financial incentives can be used to encourage younger members to choose those activities and educational studies that will enable them to take on later roles in the family governance and in the family philanthropic activities. Importantly, each individual family member must be allowed the opportunity to fulfil their unique ability potential and achieve intellectual growth. There are many paths to self-fulfilment.

Any number of my clients have started the process by researching and creating their family history. It helps later generations to understand who they are and where they came from when they are able to identify with family stories. This enables diverse family members to feel part of the same family because they share a unique history. The creation of the family history is usually a catalyst which helps the current family leader to focus on what can be articulated as a family vision and desired family values.

What should the family goals be currently that will help the family identity survive for the next three or more generations? What are the values that the current generation feels are important in order that family members of the next generations are not left wandering in a moral or cultural wasteland? What a family is currently is the sum of the family members' experiences - in other words, its history.

Creating a family constitution is never an easy task. To be sure there are any number of levels of planning endeavours which will serve the purposes of the family patriarch or matriarch who decide that now is the time to organise the family's affairs if it is to survive through the next generation. Transforming any group of individuals into a viable and sustainable organisation is a daunting endeavour. However, for those who take the time and make the commitment, creating a family constitution can provide the likelihood that a family can maintain financial security over succeeding generations, with harmony, and enable each individual their opportunity to achieve happiness.