HOW TO PROTECT AND GROW FAMILY WEALTH ACROSS GENERATIONS
By Jane Adler
Wealth accumulation is certainly a numbers game. But for many of us, it’s also a family affair.
John Bridge has been talking to his two sons about money ever since they were little. He started by emphasizing the importance of saving and how to handle an allowance. In time, he introduced more complex financial topics such as checking accounts, credit cards, credit scores and debt. He even showed them bills to teach them what things cost.
He led by example, too, as his sons, now ages 15 and 17, watched him build wealth by investing in real estate through his Chicago-based Equity One Investment Fund. The children also saw him launch a startup, Windy City Broadcasting, a developer of low-power radio stations.
“It’s important to exhibit values in how you live your daily life,” says Bridge. “It sinks in with kids.”
All prosperous families face the issue of how to educate their children about wealth. Parents worry about spoiling kids who may never have to work. Another fear is that family resources will be squandered. An often-quoted aphorism is “shirtsleeves to shirtsleeves in three generations”-an acknowledgement that hard-earned wealth is easily lost.
“Children who are not educated about how to handle wealth may spend too quickly,” notes Tim Hannahs, senior vice president and market executive at Fifth Third Private Bank in Chicago. “The family doesn’t get the long-term benefit from the wealth that the parents had originally envisioned.”
Schooling children about money should start early-a concept that applies to families of any income level. The lessons should be age-appropriate, experts say. Very young children can be taught about saving and putting some of their allowance aside for charity.
At ages 10 to 12, children generally have the maturity to understand more complex concepts. “What’s most effective is a hands-on approach,” Hannahs says. He recommends making the lessons concrete, such as opening an investment account for children and having them pick a stock based on their own interests. “Let them put a few dollars to work,” he says.
One father matched his son’s savings dollar-for-dollar. The son quickly learned the value of saving as his bank balance doubled.
At ages 10 to 12, children generally have the maturity to understand more complex concepts. “What’s most effective is a hands-on approach,” Hannahs says. He recommends making the lessons concrete, such as opening an investment account for children and having them pick a stock based on their own interests. “Let them put a few dollars to work,” he says.
One father matched his son’s savings dollar-for-dollar. The son quickly learned the value of saving as his bank balance doubled.
SECRETS STIFLE COMMUNICATION
The complexity of wealth management increases as families grow, especially when an operating business is at the center of the fortune.
Andrew Keyt is executive director of the Family Business Center of Loyola University Chicago. The center provides succession planning and education about wealth to about 100 member families across the Midwest. “The goal is to help families make successful transitions,” Keyt says.
The biggest mistake made by the older generation is keeping business and financial plans to themselves, Keyt says. “Secrecy robs the next generation of the opportunity to be responsible with wealth.” He recommends ongoing conversations to share details over time.
The Family Business Center helps company owners figure out what’s important to them. At a recent session, second-generation business owners discussed the messages about wealth they had inherited from their parents and what they hoped to convey to their adult children. “Once we’re clear about the messages we want to send to the next generation, we can be concrete about how to teach that,” Keyt says.
Regular family meetings are a good way to establish and communicate family values. The gatherings can also be used as a forum to clarify expectations and teach financial skills. One family uses its annual meetings to discuss estate plans and educate its members about how trusts work.
Sorting out family roles in an operating business can be messy. Some members may want to work at the company, while others don’t. Families need to discuss different career paths and determine fair treatment for those not in the business, Keyt says. “Create a plan.”
Meghan Juday designed a system that outlines specific competencies for different family roles. She runs the 50-member family council of Ideal Industries, Inc., an electrical tool manufacturing business based in Sycamore. Juday’s great grandfather started the company, which broke ground in May on a new 220,000-square-foot factory. The company is 100 percent owned by the family, and has been for five generations.
Family members who seek additional involvement in the business receive a development plan. It serves as the person’s roadmap to achieve the competencies needed to handle certain duties or roles, such as a seat on the company board. “We’re very transparent about what we need,” Juday says. “It’s very motivating.”
The system has been in place for three years and is working well, Juday says. Seven family members are working toward attaining certain roles. The family is fine-tuning its skills in other ways, too. They recently attended a two-day workshop on giving and receiving feedback. “We have to learn how to work together,” Juday notes.
But relationships can fray. As families expand through marriage, premarital agreements are advisable when a business is expected to be transferred to the next generation, advises Jason Adess, principal at family law firm Berger Schatz in Chicago. “A premarital agreement takes the mystery out of ownership that could be raised in a divorce,” he says.
As divorce case law has become more complex, premarital agreements have become more commonplace. And though contentious, high-profile divorces can make premarital contracts seem pointless, the agreements usually stand up in court when properly drafted, Adess says.
Educational resources are available for families. Merrill Lynch conducts three-day boot camps for young adults to prepare them to handle wealth. The sessions are held at business schools nationwide, including at the University of Chicago Booth School of Business. Investments, portfolio management and philanthropy are some of the topics covered.One hot-button concern is the notion of adequate compensation. A business owner may take most of his or her compensation in the form of stock options or restricted stock instead of a large salary. The stock distributions are difficult to value and don’t appear on tax returns, making it seem as if little money has been contributed to the marriage when, in fact, a great deal of wealth has been accumulated. “A premarital agreement allows you to navigate around the issue,” Adess says.
Business owner Bridge joined Tiger 21, a learning forum for high-net-worth individuals. With 330 members in 17 cities, Tiger 21 launched its Chicago chapter in 2014. Groups meet monthly to discuss a range of issues related to family wealth from investments and estate planning to philanthropy.
The forum gives Bridge an opportunity not only to learn about new investment ideas, but also to hear war stories from older members and how they managed the financial education of their own kids at different stages. “I’ve learned what to do and, more importantly, what not to do,” Bridge says.
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