For a family just embarking on multi-generational wealth planning, questions usually center on how best to pass wealth to children.  When a family has amassed significant wealth – enough to provide at least a financial cushion for two or more generations – families begin to think about how to benefit descendants farther down the line.  Following are two obvious points, with less obvious ramifications.

The first obvious point: there almost certainly will be MORE individuals in each successive generation, so that the family wealth will be divided into successively smaller portions.  It is the rare family that has only one descendant – more typically, each child has multiple children, creating new branches to the family tree at each generation.   Assuming a classic intergenerational distribution – parent’s assets are divided equally among parent’s children – each member of the next generation is going to inherit a fraction of the assets his or her parent inherited.  This, of course, is not new news.  The problem is that the next generation’s sense of appropriate lifestyle and spending level is learned, in many ways subconsciously, at the knee of someone who has significantly greater wealth than the next generation member will possess, and few younger generation family members are really prepared, psychologically and practically, to downsize their visions.  The key, then, is for the senior generation to be open and realistic with younger generations, to help them understand what their financial situations will look like, what they will and won’t be able to achieve if they rely on inherited wealth to fund their lifestyles, and then to encourage them to get the educations and build the skills necessary to create their own wealth.

The second obvious point: as numbers rise within each generation, so does heterogeneity. When the senior generation begins to plan, the children – their personalities, skills, talents, baggage, fears – generally are known.  The grandchildren are all about possibility, and the great-grandchildren are often just gleams in the family’s collective eye.  For a family undertaking multi-generational planning, it’s worth keeping in mind that successive generations won’t look much like their predecessor.

First, every succeeding generation will be more widely dispersed than the prior generation – in terms of age, capabilities, geographic location, marital status, number of children.  I once helped a client who had created a fortune in his lifetime envision who might be the beneficiaries of that wealth 50 years hence.  The client had four children between the ages of 20 and 30.  We made some assumptions, then extrapolated the family tree.  Fifty years in the future, four generations would be alive – G2 through G5, representing four branches.  G3 would range in age from 28 to 48; G4 would range in age from 1 year old to 26 (with more members still to come).  The smallest of the four branches – the unmarried child – consisted of one person.  The largest branch consisted of four generations and16 people, ages 76 to 1 year old.  This analysis led us to make some statements about the consequences of the denominator problem:

  • Sooner or later, the beneficiary group will grow faster than the family wealth.
  • Separate branches will grow at very different rates.
  • Individual family members will inherit wealth at very different ages.
  • Diversity of ages and viewpoints will increase with each successive generation.
  • With each generation, those who manage or oversee the family wealth will become a smaller minority, and will have to deal with a louder and more demanding group.

We also posited some actions which could minimize the effects of the denominator problem:

  • Wealth holding structures must be robust but flexible.
  • Transparency and flow of information will be essential to fostering effective collective decision-making.
  • Education and training for family members is a must.
  • The family must develop clear and accepted processes for decision-making and conflict resolution.

The information and any illustrations and models contained are the copyright of Withers Consultancy Group LLP and Withers Consulting Group LLC. If you would like to reproduce any of them please contact WCG at info@withersconsulting.com or by phone on +44 (0)20 7597 6850.

©2013: Withers Consultancy Group LLP and Withers Consulting Group LLC