The dilemmas of family wealth insights on succession, cohesion, and legacy (bloomberg)

Praise for The Dilemmas of Family Wealth Insights on Succession, Cohesion, and Legacy by Judy Martel “When the mountains of unread books on investing and estate planning are weighed against The Dilemmas of Family Wealth, many will elect to keep this book on the bedside table Instead of teaching how to calculate P/E ratios or ROI, these twenty-three wise practitioners share their insights in ways that encourage action—not calculations! Wealthy baby boomers, who have been frustrated by so many other how-to books, should rush to purchase this terrific compendium.” — Charlotte B Beyer CEO, Institute for Private Investors “Most families aspire to use wealth purposefully and to raise children as thoughtful stewards of their inheritance But such aspirations are often thwarted for lack of the kind of sound guidance that Judy Martel offers in The Dilemmas of Family Wealth The value of this very effective book lies in the stories that illuminate the complexity of wealth—and how to deal with it in the context of the family system Martel’s book is both specific and provocative Families would be wise to buy multiple copies and read the book together, chapter by chapter!” — Joline Godfrey CEO, Independent Means Inc Author, Raising Financially Fit Kids “Wealthy baby boomers have many individual advisers, but they desperately need some guidance on how to work together as a family to create the best possible future for themselves and their investments This is a great guide to all facets of the personal side of wealth planning.” — Dennis Jaffe Professor, Saybrook Graduate School Executive Director, Family Enterprise Center San Francisco State University This page is intentionally blank The Dilemmas of Family Wealth Also available from BLOOMBERG PRESS Family Wealth—Keeping It in the Family: How Family Members and Their Advisers Preserve Human, Intellectual, and Financial Assets for Generations by James E Hughes Jr Managing Concentrated Stock Wealth: An Adviser’s Guide to Building Customized Solutions by Tim Kochis The PPLI Solution: Delivering Wealth Accumulation, Tax Efficiency, and Asset Protection Through Private Placement Life Insurance edited by Kirk Loury Tax-Aware Investment Management: The Essential Guide by Douglas S Rogers, CFA A complete list of our titles is available at www.bloomberg.com/books Attention Corporations This book is available for bulk purchase at special discount Special editions or chapter reprints can also be customized to specifications For information, please e-mail Bloomberg Press, press@bloomberg.com, Attention: Director of Special Markets or phone 212-617-7966 The Dilemmas of Family Wealth INSIGHTS ON SUCCESSION, COHESION, AND LEGACY by judy martel with a foreword by james e hughes jr B L O O M B E R G N E W P R E S S Y O R K © 2006 by Judy Martel, CFP ® All rights reserved Protected under the Berne Convention Printed in the United States of America No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY 10022, U.S.A., or send an e-mail to press@bloomberg.com BLOOMBERG, BLOOMBERG LEGAL, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG PRESS, BLOOMBERG PROFESSIONAL, BLOOMBERG RADIO, BLOOMBERG TELEVISION, BLOOMBERG TERMINAL, and BLOOMBERG TRADEBOOK are trademarks and service marks of Bloomberg L.P All rights reserved Certified Financial Planner Board of Standards Inc owns the certification marks CFP ® and CERTIFIED FINANCIAL PLANNER™ This publication contains the author’s opinions and is designed to provide accurate and authoritative information It is sold with the understanding that the author, publisher, and Bloomberg L.P are not engaged in rendering legal, accounting, investment-planning, estate-planning, or other professional advice The reader should seek the services of a qualified professional for such advice; the author, publisher, and Bloomberg L.P cannot be held responsible for any loss incurred as a result of specific investments or planning decisions made by the reader Editor’s note: Some of the families in this book who did not wish to be identified by name also requested that a few details about their families be changed to protect their identity The experiences that such families are relating for the purposes of illustrating dilemmas they faced, however, have not been changed Portions of chapters one and two were developed from material that appeared in articles by the author in Worth magazine in December 2004 Portions of chapter five appeared in articles by the author in Worth in March and April 2004 and in March 2005 First Edition published 2006 10 Library of Congress Cataloging-in-Publication Data Martel, Judy The dilemmas of family wealth : insights on succession, cohesion, and legacy / by Judy Martel ; with a foreword by James E Hughes Jr p cm Summary: “Drawing on the experiences of real families and of leading professionals, the author offers guidance for members of extended families and their advisers on dealing with the financial and nonfinancial challenges of significant wealth Topics include effective family governance, preservation of human and intellectual capital, instilling appropriate values in children, wise inheritance planning, and managing intergenerational conflicts” Provided by publisher Includes index ISBN 1-57660-190-0 (alk paper) Finance, Personal United States Family Economic aspects United States Estate planning United States Inheritance and succession United States Communication in the family United States I Title HG179.M3423 2006 332.024 dc22 2005035446 To the many families who readily shared their personal stories with me, and without whom this book would not have been possible To Jay Hughes, for his enthusiasm and gentle advice To Jared Kieling and Bob Casey, for their guidance and patience And to my husband, Bob, always, for his loving support Contents Foreword ix Introduction 21 About the Contributors Part One: Transitions and Letting Go Introduction 34 Succession and Letting Go of a Business 37 Dilemma: It’s time to plan for succession, but I don’t know how to let go of the business Keeping Future Generations Connected 67 Dilemma: I sold my business at the right time and have more than enough to take care of my family, but I feel alone and uncomfortable in my new position of wealth What I with my time, and how I preserve a connection with the family wealth in subsequent generations? Future Wealth Generators 79 Dilemma: As the family grows, the original fortune is not enough to support everyone How can I support and encourage future wealth generators to add to the family coffers? Part Two: Retaining Family Cohesiveness Introduction 90 Keeping the Family Together 95 Dilemma: I want the wealth to enhance our dreams, but don’t want it to be the only reason we stay together Integrating New Family Members 127 Dilemma: As new members come into the clan through marriage, how I level the playing field if one partner is less wealthy, and what value certain structures like prenuptial agreements offer me? Part Three: Preparing Heirs Introduction 150 Preparing Children and Grandchildren 153 Dilemma: I need to prepare my children and grandchildren for the responsibility of wealth, but I’m afraid that if they know too much, it will destroy any initiative to earn a living How I communicate this concern? Fairness in Estate Planning 177 Dilemma: I plan to be fair to my children, but if I leave them unequal amounts of money, am I setting up a future battleground? Strategic Philanthropy 193 Dilemma: I want to give some of my wealth back to society, but how can I it without my children thinking I’ve given away their inheritance, and in a manner that will reflect our values and enhance the family legacy? Index 215 S t r a t e g i c P h i l a nthropy 211 that organizing themselves around a mutual passion makes working together an enjoyable and personally rewarding experience When created by the second generation, as in the Remmer family, the foundation becomes “theirs” as opposed to a fully formed organization handed down from the founder When families like the Remmers are dealing with the complexities embedded in an inherited family business, a foundation devoted to their interests can be an antidote Remmer says her family foundation’s small group of trustees “was just this wonderful cocoon.” She adds that the foundation provided them with “a healing process” after difficulties they encountered with the sale of their family business, when they had to learn to work together as a family without a strong patriarch as their anchor The caveat to the closeness the foundation enjoys is that they know that it will be short-lived and will require more structure as the next generation matures “We are a typical first-generation foundation, with almost no policies and procedures,” Remmer wryly notes “Most first generations know and trust each other innately, and there is a greater sense of shared values.” In Remmer’s own experience, she and her siblings had to overcome only a few personality quirks She, for instance, had to realize that as a consultant, she was trying to conduct foundation business in a formal manner with a lot of forms, while the others thought she was going overboard Today, the foundation’s operations “are fairly fluid and very organic.” Remmer says that in foundations like theirs, which are not connected to the family business and where the trustees all serve as volunteers, there is little tension because individual family members don’t stand to gain monetarily When family members are paid to run a foundation, however, it is particularly important to set policies and procedures, just as a family would for its business As families bring the next generation into a foundation, it is also an important time to impose more structure on the operation “You just have to turn it into a bit of an institution If you don’t that, there could be a lot of misunderstanding,” she cautions Policies and procedures for foundations should include a philanthropic mission, a code of ethics, conflict-of-interest policies, 212 Preparing Heirs an investment policy, job descriptions for trustees, a discretionary grants policy (if they want family members to have certain amounts allocated for grants), and requirements and training for new trustees Remmer also advises term limits for trustees She acknowledges, however, that the first generation is not likely to impose them on themselves because as creators of the foundation, they are inclined to stay on to provide guidance As new trustees are added, the first generation realizes the need to enforce policies and procedures Foundations, like businesses, are fluid and families should be open to new ideas from the next generation “I believe you need to revisit your mission every five years to see if it is still relevant,” Remmer says “Most of the donors we work with are happy to have the next generation amend the mission.” It could even change completely, Remmer says “I’m guessing that when we open up our foundation to the next generation, it could change.” She counsels founders who insist that their passion be carried out forever to take a realistic view by bringing in outside experts to achieve this instead of relying on family members Remmer believes that the ideal family foundation is one that “serves both the family and society It’s a wonderful and exciting thing to be strategic, pick an area, and try to make a difference.” According to Remmer, “Our family has not modified its mission statement for probably ten years, although we review it and modify our guidelines regularly The criteria have changed at least once and the process is updated each year It just turns out that this statement seems to work for us We stay true to our mission and use it as a reminder that this is what we are about In addition to printing it in our guidelines, I find myself using it when describing the foundation to potential grantees or partners.” The Remmer family mission statement and guidelines are shown below: Typically, family foundations are specific in their goals, objective, guidelines, and funding procedures because the IRS monitors them But whether families formalize their charitable intentions into a lasting legacy or choose to give informally, involving the entire family in the strategic plan will pay the most rewarding dividends in a family’s spiritual connection S t r a t e g i c P h i l a nthropy 213 REMMER FAMILY MISSION STATEMENT AND GUIDELINES MISSION The mission of the Remmer Family Foundation is to reduce youth and female poverty by helping disadvantaged preadolescent and adolescent girls take charge of their own lives PROGRAM The Remmer Family Foundation is a charitable foundation that makes grants to qualifying 501(c)(3) tax-exempt organizations Currently, the Foundation is concentrating on applications from organizations located in the metropolitan Jacksonville, Florida, area and occasionally accepting those that are national in scope (e.g research or advocacy) The Foundation funds new and existing programs that strengthen girls and help them make good choices in their lives We look for programs with the following qualities: • Build on girls’ strengths, thereby preventing problems that limit their opportunities • Focus on girls to 15 years old • Address girls’ needs in the context of family and community • Challenge girls, promote leadership abilities, and enable them to experience the satisfaction of achievement • Sensitive to and directly address issues of difference (e.g., class, race, culture) as strengths The Foundation also funds cutting-edge research on the development of girls Most grants range from $5,000 to $15,000 and may be for one to three years Awards given for more than one year will be subject to a careful annual review of grantee’s performance APPLICATION PROCEDURE In 2005, we will focus our grantmaking in Jacksonville, Florida, and will accept grant applications by invitation only Due to our ongoing funding commitments, there will not be sufficient funds available to warrant an open application process Please submit a proposal of no more than five pages, covering the following areas: (Continued next page) 214 Preparing Heirs REMMER FAMILY MISSION STATEMENT AND GUIDELINES (cont’d.) • • • • • • • Mission, goals, and history of the organization Rationale or need addressed by proposal Objectives of proposal and approach for reaching objectives Implementation plan and timeline Indicators of success and approach for assessing success Organization and project budgets Other sources of funding We are a small family foundation, managed by our three volunteer trustees We try to be as accessible and responsive as possible, but are not always successful Please bear with us and be assured that we are interested in the extraordinary work that you INDEX A&P store, 17 Adams, John, 2, 82 Agamemnon, age inheritance and, 157 of majority, 160, 190 age differences, financial issues and, 132–133 American Academy of Matrimonial Lawyers, 139 American Institute of Philanthropy, 208 Asset Management Advisors (AMA), 3, 29, 81, 106, 124 Beckett, Samuel, 104 bequests, structuring, 188–191 Better Business Bureau, Wise Giving Alliance, 208 Blouin, Barbara, 21, 157–158, 163, 170–171 BMC Associates, 23, 54 board of directors, succession and use of, 41 Born Rich, 16, 162–163 Boyce-Abel, Olivia, 21–22, 116– 118, 123 Boyce-Abel Associates, 21 Burns, George, 97 Carnegie, Andrew, 195 Carnegie Corporation, 195 Carnegie Hall, 195 Carnegie-Mellon University, 195 C corporation, 122–123 CenterPoint, 28, 131 charity See philanthropic activities 215 216 Index children See also heirs, preparing sibling rivalry, 55–56, 177– 178 communication See also family meetings about money issues with heirs, 162–164 about philanthropic activities, 196–198 estate planning and clarifying intentions, 181–187 methods and scheduling of, 43 with shareholders, 43 succession and the role of miscommunication and, 45–47 community service, 43 compensation guidelines, 43, 44 conservation restriction, 123 consultants, family meetings and use of, 101–104 DiFuria, Joan, 22, 70–71, 181– 183, 187, 189, 197–198 dilemmas, description of, 4–6 donor-advised funds, 208 Dubin, Arlene G., 22, 139, 141, 144, 146 Edelman, Ken, 23, 140, 145–146 emotions, financial issues and, 129–133 estate planning, fairness in clarifying intentions, 181–187 problem with, 177–179 seeking equality, 179–181 structuring bequests, 188– 191 Euripides, families, future roles for, 71–74 Family Business Assessment Inventory, 49–54 family capital, forms of, family council forming, 104–107 succession and role of, 42, 44, 72 family crisis, surviving, 1110–113 Family Firm Institute, 38 family history, maintaining, 74–77 Family Lands Consulting, 116 family meetings consultants, use of, 101–104 face to face, 96–107 family council, forming, 104–107 governance procedures, 109–123 guidelines, 100–101 at home, 97–101 mission statements, 107–109 Index multiple owners, dealing with, 115–123 removing unproductive members, 113–115 with the next generation, 123–125 family venture committees, 83–84 financial issues age differences, 132–133 communicating about, 162– 164 emotions and, 129–133 gender differences, 128, 129, 131–132 gifted money, 134–135 inherited versus marrying wealth, 129–131 management of money, importance of teaching, 160–161 prenuptial agreements, 139– 148 Ford, Edsel, 39 Ford, Henry, 16, 39 Ford, Henry II, 39 Ford, William Clay, 16, 64–65 Ford Motor Co., 16, 64–65 foundations, role of, 208–209 founders, future role of example of, 68–69 mentoring the next generation, 84–87 217 redefining, 70–71 Gage, David, 23, 54–57 gender differences, financial issues and, 128, 129, 131–132 Georgia-Pacific Co., 200 gifted money, 134–135 Gilman, George, 17 giving circles, 208 Godfrey, Joline, 24, 164, 168– 170 Golden Ghetto, The (O’Neill), 156 governance procedures, 109–123 Great Atlantic & Pacific Tea Co., 17 Gunster, Yoakley & Stewart, 140 Hartford, Cathy, 18 Hartford, Edward, 17 Hartford, George Huntington, 17 Hartford, George Huntington II, 17–18 Hartford, Juliet, 18 Harvests of Joy (R Mondavi), 58 Hausner, Lee, 24, 41, 42–44, 46, 47, 50, 54, 72, 73, 93, 101– 102, 104, 111–112, 197 heirlooms, 190–191 heirs, preparing 218 Index communicating about money issues, 162–164 management of money, importance of teaching, 160–161 parents as role models, 164– 175 philanthropic activities and, 198–202 problems with, 153–154 readiness checklist for parent/owner, 172–173 readiness self-checklist for heirs, 174–175 self-esteem, importance of, 156–162 hiring procedures, 43 How to Pass It On: The Ownership and Use of Summer Houses (Huggins), 118 Huggins, Ken, 25, 118–123 Huggins Balfe, Judith, 119 Hughes, Clarence, 60–61 Hughes, David, 60–63 Hughes, James (Jay) E., Jr., 2, 6, 25–26, 39, 71, 92, 102, 103, 104, 151–152 financial issues in a relationship, 130–133 Hughes, Russell, 60 Hughes Supply, 60–63 human capital defined, future generations and, 82, 148 going public and, 62 importance of sustaining, redefining roles and, 70 transitions and, 65 Hutton, Barbara, 150–151 Hutton, Franklin Laws, 150 E.F Hutton & Co., 150 IFF Advisors, 24, 41 income, generating future family venture committees for, 83–84 how fortunes are depleted, 81–83 mentoring the next generation, 84–87 problem with, 79–80 Independent Means Inc., 23–24, 164 inheritance age for receiving, 157 self-esteem issues, 156–162 Inheritance Project, 21, 157 inherited versus marrying wealth, 129–131 intellectual capital defined, family cohesiveness and, 93 financial capital and, 1–2, Index future generations and, 9, 82, 148 going public and, 62 importance of sustaining, redefining roles and, 70 transitions and, 65 Iphigenia at Aulis (Euripides), Irving, Amy, 144 Jaffe, Dennis, 26, 40, 41, 47, 64, 85–86 Family Business Assessment Inventory, 49–54 John Adams (McCullough), Johnson, Jamie, 16, 162–163 Johnson & Johnson, 16, 162 Jung, Carl, 132 Kroc, Joan, 202–203 Kroc, Ray, 203 Krug, Chalres, 57 Lansberg, Ivan, 26–27, 39, 42, 58–59, 61–62, 64, 106–107, 114–115 Lansberg, Gersick & Associates, 26, 39 Le Van, Gerald, 27, 70, 72, 113 Le Van Co., 27, 70 Liautaud, Gina, 203 219 Liautaud, Jim, 45–46, 71, 75, 80, 196–197, 203–204 Liautaud, Jimmy John, 45, 46, 80, 196–197, 204 Lithuanian Children’s Hope, 203 management of money, importance of teaching, 160–161 marriages discomfort, easing, 134–138 financial issues and emotions, 129–133 prenuptial agreements, 139– 148 problems confronting, 127– 129 Mayer, Leslie, 14–16, 27 Mayer Leadership Group, 14, 27 McCullough, David, meetings See family meetings mentoring the next generation, 84–87, 123–125 Merrill, Jackie, 28, 130–135, 137–138 mission, company, 43 mission statements, 107–109, 206–207, 213–214 Mondavi, Peter, 57–58 Mondavi, Robert, 57–58 Mondavi, Timothy, 57 money See financial issues 220 Index Money, Meaning & Choices, 22, 70 National Conference of Commissioners on Uniform State Laws, 144 National Public Radio, 203 O’Neill, Jessie, 29, 156–157, 163–164 owners, dealing with multiple, 115–123 ownership of property, state laws, 145 parents as role models, 164–175 partnership charter, 54–57 Passing It On (Huggins Balfe), 118–119 performance reviews, 43 Perry, Henry, 3, 29, 81–83, 92, 106, 107, 124 philanthropic activities, 43 communicating about, 196– 198 donor-advised funds, 208 educating heirs about, 198– 202 foundations, 208–209 giving circles, 208 methods for giving, 207–212 mission statements, 206–207, 213–214 monetary with personal involvement, 202–207 problems with donating, 193–194 tax issues, 208 policies, need for written, 43–44 Preisser, Vic, 29, 73, 74–75, 172–175 prenuptial agreements, 139–148 Prenups For Lovers (Dubin), 139 Preparing Heirs (Williams and Preisser), 73 Pritzker, Jay, 90–91, 92 Pritzker, Liesel, 92 Pritzker, Matthew, 92 Pritzker, Nicholas, 91 Pritzker, Robert, 92 Pritzker, Tom, 91 Private Wealth Services Group of Gunster, Yoakley & Stewart, 30 property ownership, state laws, 145 public, decision to go, 60–65 Raising Financially Fit Kids (Godfrey), 164 Remmer, Ellen, 30, 209–214 Rockefeller, John D., 34–35, 39, 171 Rockefeller, John, Jr., 34 Index Rockefeller Foundation, 34 role models, 164–175 Ronald McDonald House Charities, 203 Salvation Army, 202–203 Schneider, Lisa, 30, 140, 178– 179, 180, 184–185, 189, 190–191 self-esteem, importance of, 156–162 shareholders, communicating with, 43 sibling relationships, 55–56, 177–178 Social Welfare Research Institute, 154 Sonnenschein Nath & Rosenthal LLP, 22, 139 Sophie’s Choice (Styron), special needs trusts, 189–190 Spielberg, Steven, 144 Styron, William, Subchapter S corporation, 122 succession board of directors, use of, 41 communication/miscommunication, role of, 45–47 failures, reasons for, 38–40 Family Business Assessment Inventory, 49–54 family council, 42, 44 221 going public, 60–65 policies, need for written, 43–44 problems facing, 37–38 timeline, problem with not having, 40–41 tips for, 48–59 training and, 47–48 successor, selecting a, 40–48 tax issues, philanthropic activities and, 208 The Philanthropic Initiative (TPI), Inc., 30, 209–210 training programs, 43 succession and role of, 47–48 transitions checklist, 74–75 families, future roles for, 71–74 family history, maintaining, 74–77 founders, redefining role of, 70–71 trusts, 188–189 Uniform Gift to Minor Accounts (UGMAs), 190 Uniform Gift to Minor’s Act, 170 Uniform Premarital Agreement 222 Index Act (UPAA) (1983), 144 Uniform Transfer to Minor Accounts (UTMA), 190 University of Illinois, Family Business Council, 203 Waiting for Godot (Beckett), 104 wealth See financial issues Williams, Roy, 1, 31, 73, 74–75, 172–175 Willis, Thayer, 32, 180, 184, 185–187, 199–202 This page is intentionally blank About Bloomberg Bloomberg L.P., founded in 1981, is a global information services, news, and media company Headquartered in New York, the company has sales and news operations worldwide Bloomberg, serving customers on six continents, holds a unique position within the financial services industry by providing an unparalleled range of features in a single package known as the BLOOMBERG PROFESSIONAL® service By addressing the demand for investment performance and efficiency through an exceptional combination of information, analytic, electronic trading, and Straight Through Processing tools, Bloomberg has built a worldwide customer base of corporations, issuers, financial intermediaries, and institutional investors BLOOMBERG NEWS®, founded in 1990, provides stories and columns on business, general news, politics, and sports to leading newspapers and magazines throughout the world BLOOMBERG TELEVISION®, a 24-hour business and financial news network, is produced and distributed globally in seven languages BLOOMBERG RADIOSM is an international radio network anchored by flagship station BLOOMBERG® 1130 (WBBRAM) in New York In addition to the BLOOMBERG PRESS® line of books, Bloomberg publishes BLOOMBERG MARKETS® magazine To learn more about Bloomberg, call a sales representative at: London: New York: Tokyo: +44-20-7330-7500 +1-212-318-2000 +81-3-3201-8900 for in-depth market information and news, visit the Bloomberg website at www.bloomberg.com, which draws from the news and power of the BLOOMBERG PROFESSIONAL® service and Bloomberg’s host of media products to provide high-quality news and information in multiple languages on stocks, bonds, currencies, and commodities About the Author Judy Martel, CFP®, is a vice president at Asset Management Advisors (AMA), a leading multifamily office and subsidiary of SunTrust Banks, Inc Ms Martel has twenty years of experience in journalism and public relations She was a newspaper journalist for eleven years, and she has written extensively on wealth issues and family dynamics for such publications as Robb Report Worth, Town & Country, and Vive magazine, where she writes a regular column She is a Certified Financial PlannerTM *** The book’s foreword is by James E Hughes Jr., author of Family Wealth: Keeping It in the Family (Bloomberg Press) He brings to his foreword the perspective of a respected long-time family counselor and a pre-eminent expert in the field of family governance and wealth transfer ... for The Dilemmas of Family Wealth Insights on Succession, Cohesion, and Legacy by Judy Martel “When the mountains of unread books on investing and estate planning are weighed against The Dilemmas. .. offers in The Dilemmas of Family Wealth The value of this very effective book lies in the stories that illuminate the complexity of wealth and how to deal with it in the context of the family system... dissipates, and then the friction or entropy of consumption in the third, with the energy of the financial capital fully dissipated by the fourth The laws of physics and the universality of human