How do you protect a unique family asset – say, a family vacation home, or an extensive art collection – if your goal is to ensure that it remains in the family over generations?

Before you do anything else, ask yourself: does it really make sense to own this asset collectively going forward? The denominator problem is inexorable: as families grow, so does the number of owners and the complexity of managing and governing.

Consider a family vacation cottage at the beach: dividing 13 weeks of summer among 3 children may work, but dividing that same amount of time up among 10 grandchildren – with attendant scheduling problems (“He got Labor Day last year so I should get 4th of July!” and management issues, such as divvying up the annual opening and closing chores, painting, plumbing repair and weeding – probably will make owning a share of the cottage seem more like a burden than a benefit to at least some of the group. If having 10 grandchildren co-owning a cottage doesn’t faze you, how about 35 grandchildren?

Instead of leaving the cottage to your descendants in your will, wouldn’t it be better first to talk with the next generation about the responsibilities and costs of ownership, and then encourage each of them to assess their long-term interest realistically? If you’re one of those senior generation members who figure “the next generation will work it out after I’m gone”, shame on you. Assuming that your family will come up with a decision-making system on the fly in the power vacuum that will follow your death is a fool’s gamble. If the asset is important to you and the family, then you owe it to your descendants to help them put in place a workable plan now, while you’re alive and able to contribute to the process.

How is the asset owned currently? You probably own the cottage in your own name. Rather than change the deed to transfer undivided interests to each of your descendants, with the result that they own it as tenants-in-common, you should contribute the cottage to a partnership or limited liability company (LLC) first, then transfer interests to your descendants. With a partnership or LLC, the long-term administration will be simpler because future transfers won’t need to be recorded on the land records. Ownership will be more private because the names of the individual owners won’t be on the town land records. The family will benefit from enhanced creditor protection in the event a guest or passer-by is seriously injured (or worse) on the property, because the claimant’s recovery will in almost all cases be limited to the assets of the LLC.

Putting the cottage into a partnership or LLC will also give you the opportunity to create a more formal decision-making process to guide the family’s use and maintenance of the property, in the form of a partnership agreement or operating agreement. Don’t just accept the default provisions in your lawyer’s model agreement – they were developed for commercial deals and aren’t designed to handle intra-family issues. Your family should jointly develop and agree upon the rules and procedures, particularly those that will govern decision-making in the event of a serious disagreement amongst the members of the group. You might appoint a family member with great interpersonal skills to lead the process, but better still might be to appoint a third-party facilitator with experience working with family groups, to ensure that the process is both smooth and comprehensive.
Warren Buffett’s widely-publicized decision to transfer most of his wealth to charitable foundations rather than to his children and grandchildren has sparked discussion about whether inheriting wealth might be a curse rather than a blessing. Inheriting wealth cripples motivation, saps the will to work, and leads inheritors to live a life of unhappy indolence, or so this story goes. Rather than becoming independent contributors, inheritors regress until, like infants, they become completely dependent upon their inheritance.

But is it true that wealth invariably cripples motivation? Clearly not – just as there are wealthy inheritors who have lost their way, there are inheritors around the globe for whom wealth has been a tool in building a rewarding life and creating value for themselves and others. So, are there steps that families can take to reduce the risk that their kids and grandkids will become trust fund babies?

Perhaps the best way to inoculate the next generation is to set a good example. If parents do meaningful work and manage money wisely, if the family expectation is that all children will study hard, obtain the best possible educations, get good jobs and live well within their means, then kids are more likely to gain confidence and a sense of self-worth from work rather than spending. Kids also need to understand the denominator problem – unless they too commit to sustaining and building the family’s wealth, the inexorable increase in beneficiaries at each generation will quickly dissipate even the biggest fortune.

How wealth is transferred also makes a difference. Trying to protect wealth at all costs – by keeping the next generation in the dark about family wealth, failing to educate them in the basics of stewardship and wealth management, creating trusts with elaborate control provisions – generally backfires. Beneficiaries who sense that they aren’t trusted are much more likely to display the very behavior the grantor feared most. Beneficiaries who understand the uses and purposes of family wealth, who see themselves as responsible stewards with an important role to play in preserving and growing wealth, are more likely to carry on the family’s legacy.

Buffett’s charitable transfers illustrate another important and growing trend in family wealth transfer – the value of philanthropy. Buffett funded substantial gifts to foundations run by each of children, thereby giving them a considerable degree of power, independence and responsibility – a lasting confirmation of his respect for them, their charitable goals and their decision-making ability. Buffett and his first wife undertook major philanthropic efforts individually, jointly, and in partnership with others (including the Gates Foundation) thereby setting a precedent and providing an important education for his children.

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