Inheriting Wealth, AND Structures

The First Part of Is More Appealing than the Second

This week we’ll be looking at an aspect of the world of wealth transitions that I typically don’t put a lot of focus upon.

In some ways though, this is a subject that’s long overdue, and I finally have a good excuse to introduce it here now.

We’ll get into more details below, but I want to start with the words I put in my title this week, about how people in a wealthy family will eventually inherit wealth, but that wealth typically comes in some form of a “structure”, or more likely, “structures”, plural.

I recently heard someone put it that way, but the first person I heard it from years ago is a good friend who was recently my guest on a podcast I hosted, and because that episode just dropped, it’s fresh in my mind.

Stop Frankensteining It

The podcast was Family Enterprise Canada’s Let’s Talk Family Enterprise, episode 68, titled Stop Frankensteining It.

My guest was Cindy Radu, and she was the first one I ever heard say “people in families inherit wealth, AND structures”.

The Frankenstein part is all about how lots of different professionals are typically involved in the creation of said structures, and the result is often some abomination.

The take-away message for this part is that incoherent, overly complex and incompatible structures make it even worse.

I feel like I may be digressing too much so I want to just get back to what inheritors are actually going to inherit.

Suffice it to say that most are happy about the wealth part, and less enamored with the structures that invariably come along with the wealth.

Very Valid Reasons for Structure

There are of course a number of very good reasons why people create such structures, and so it’s important to acknowledge what they are.

The goal is typically one of wealth preservation over generations.

The cynical way to state this may be “I want my grandkids and great-grandkids to benefit from my hard work and good fortune, so I need to make sure my own kids don’t spend it all or allow it to fritter away”.

The most common reason espoused is to save taxes, wherein the government / tax man is the common enemy of the whole family.

It’s very easy for any wealth creator to be seduced by a plan that clearly shows, down to the last dollar and cent, that if you do nothing you’ll pay $XXX to the tax man, but, if you implement this great plan I’ve drawn up for you, that number shrinks or even disappears.

All too often, though, that “tax tail” ends up wagging the whole family dog.

Limiting Access and Maintaining Control

The structures that get put in place also usually limit access to the wealth to specific people at specific times and for specific reasons, all with the goal of maintaining the family wealth for posterity.

This is sometimes couched in reasoning like protection from creditors and former spouses too.

There’s usually some terms in place that allow for certain people to remain in control of the wealth, lest the heirs be allowed to use it at will.

You can imagine that those for whom all this is purportedly being done may look at these structures in a negative light, that somehow leaves them feeling less than perfectly trusted by their forebears.

And that’s why it’s important to take the time to discuss and explain everything to the stakeholders.

Preparing the Heirs for the Wealth

There’s an expression I like that says people spend lots of time preparing the wealth for the heirs (i.e. creating all these structures) and not nearly enough time preparing the heirs for the wealth.

Preparing those who will inherit is better than not preparing them of course, but what is sufficient preparation?

So many people immediately jump to “financial literacy”, and while important, it is rarely enough.

Regular readers know that I encourage regular meetings that include dialogue between generations, so that information can flow upwards as well as downwards.

This allows the family to learn how the wealth can and should be used and stewarded for future generations, and allows the structures to be understood and modified over the years to evolve as the family evolves.

The structures are necessary, as we noted, but they don’t need to become the bogeyman.