Center for Family Legacy 25 best practices of multigenerational families

Research suggests the odds of sustaining multigenerational wealth are as low as 30%. Yet less than 3% of the failures stem from poor estate planning and poor investment returns (Williams & Preisser, 2003). While this may be surprising to some, it implies that other circumstances may have a far greater impact on the ultimate success of generational wealth transfer.

Through years of collaboration with experts, internal research, and working with some of the world’s wealthiest families, we’ve identified 25 nonfinancial best practices that may enhance a family’s ability to sustain multigenerational wealth. These best practices include:

How families make decisions can be a critical component of maintaining wealth across generations. It’s important to have processes in place that codify the decision-making process to help avoid conflict and distrust.

Family governance: Also known as the practice of making informed decisions as a family, family governance becomes increasingly important for those families working to sustain multigenerational wealth. By virtue of the evolution and expansion of the family, the complexity of decisions to be made in families of affluence grows over time. Harry Martin, author of “Is Family Governance an Oxymoron?” says, “A lasting family governance plan can therefore prevent the [loss of generational wealth] while creating family harmony. Whatever the effort, it is worth it” (2001).

Family meetings: The development of a family governance system begins when current family leaders start involving next-generation family members in family meetings. For families just building their wealth, these meetings often start around the kitchen table when planning the next vacation. As a family’s enterprise grows in size and complexity, so do the meetings.

Lee Hausner, a well-respected family wealth expert, notes, “Family meetings play an important role in the succession process. Family meetings are the most likely forum for prolonged and in-depth communication between generations” (1990).

Family policies: When family members begin to meet regularly, they typically uncover a need to put family policies into place to help document their decisions. We advise families to start thinking about family policies before the need arises. It becomes more challenging to try to institute new policies when emotionally charged family decisions present themselves.

When families compile a series of policies that guide their decision-making, they can be collectively referred to as a family constitution. However, research and our experience don’t show that the mere presence of a family constitution provides benefits. It can often be more effective to implement a disciplined set of procedures for the documentation and communication of reasonable governance agreements.

Conflict resolution: There are times when conflict may still happen, even if policies are in place. Planning for conflict resolution, such as creating rules of conduct that are agreed upon and practiced by all family members, helps ensure there’s a thoughtful protocol in place to resolve disagreements efficiently, fairly, and with minimal disruption to the family.

Succession planning: Similarly, we’ve observed another best practice of sustaining wealth in families is having an understood and agreed-upon succession plan for preparing and involving the leaders of the next generation. Succession planning and conflict resolution procedures—along with regular family meetings and the creation of family policies—can help manage the stresses that come with the transition of decision-making responsibilities between generations.

Philanthropy is any activity or gesture done to bring about good or improve quality of life. People pursue philanthropy as a means to express or teach what they believe to be important. Three of the best practices we’ve observed in this area are very similar—yet represent very different goals within the families that exhibit them.

Support for philanthropy: First, many families provide support for philanthropy as a means to stress their belief in the importance of giving back to their communities and society. It’s a best practice intended to have a personal impact on those involved. Whether family members prefer to give their knowledge, time, or money, support for philanthropy is a way to position a rewarding and fulfilling practice that conveys family values to the next generation. At a minimum, wealth-preserving families tend to encourage and support philanthropy among their members.

Shared philanthropy: Second, family or shared philanthropy has the potential to provide a safe environment to help children and grandchildren acquire skills and competencies necessary to lead fulfilling lives. This best practice is intended to have a family impact and is an excellent means to discuss stewardship, values, and the responsibility that goes hand-in-hand with inherited wealth. Shared philanthropy is as much oriented toward building family cohesion as satisfying a societal need.

Families may also pursue shared philanthropy as a result of the family mission statement constructed by family members. Including children and grandchildren in charitable giving decisions, even with small amounts of money, seems to help them:

• Develop an understanding of financial concepts, such as investment management, due diligence, and analytical evaluation
• Learn to work together, make joint decisions, and solve problems
• Gain confidence through their interactions with others

Strategic philanthropy: Many families become very strategic with their philanthropy—intently focused on a societal or global impact. Strategic philanthropy involves conceiving of a giving plan, developing a philanthropic mission, identifying grantees, and measuring the effectiveness of giving. At the extreme, this form of philanthropy becomes “venture philanthropy,” effectively applying business theory to pursuing philanthropy. The key appears to be first deciding what you want to accomplish with your giving.

We’ve seen this happen countless times in families that support or pursue individual, family, or strategic philanthropy. Perhaps an unexpected consequence or overlap of best practices, we’ve also seen tremendous entrepreneurial skills developed and honed by family members in the pursuit of strategic philanthropy. 

One of the central components of any retention of wealth is strategic planning, which refers to setting a road map as opposed to having to make decisions in reaction to events. Strategic planning helps ensure your investment decisions are aligned with your wealth and family objectives.

Wealth objectives: Wealth objectives are the long-term goals that guide our work with families. In our experience, there’s a tremendous change that occurs in a family once they’ve clearly defined their wealth objectives and agreed on a strategic plan to accomplish them. In terms of multigenerational wealth, they increasingly move from being reactive and defensive to proactive and visionary.

Ideally, a family’s wealth objectives will correspond with and be conveyed in their mission statement. Williams and Preisser state that the expression of the family’s objectives through a written mission statement will “enable professional advisors to respond promptly in advising courses of action as new legislation and rules emerge. It goes beyond the preservation, governance, and taxation issues to define the purpose of the wealth, not just its retention” (2003).

Understanding economics: To prepare for the many strategic issues that can divert a family from sustaining multigenerational wealth, families benefit from a clear understanding of economics.

Having the education and knowledge about the impact of inflation, taxes, budgeting, and investment performance is a basic necessity to help families of wealth to succeed. In our experience, it’s particularly important that next-generation family members are educated about these concepts.

Experts maintain that by not communicating about money or mentoring the next generation, the resulting confusion may lead to either rampant spending without regard for the wealth or a reluctance that causes the heirs to fear even acknowledging the money—what we refer to as “financial paralysis.”

Planning for major life events: Change is inevitable, and unforeseen events are a reality of life. Being prepared for major life events provides families the opportunity to anticipate and plan for the future so they have the most flexibility and options possible. Major life events can include things such as birth, death, divorce, marriage, illness, or the sale of a business. To be prepared for such life events, which may also pair with generational wealth transfers, it’s recommended that families implement other best practices, such as succession planning and communicating intentions. 

How do families know if they’re prepared? Many of the ones we’ve observed practice scenarios. They proactively walk through or “fire drill” future life events or generational wealth transfers. This practice uncovers previously unforeseen issues that may have otherwise placed a family and its wealth in jeopardy while there is still time to take preventive actions.

We recognize that to help families manage the strategic issues, risks, and life events that occur, there must be clarity around the family’s values and wealth objectives. Findings from a Family Office Exchange study support this, saying: “Today’s wealth owners and office executives alike must ensure that decisions are made with the complete understanding of what the family values, what the family has at risk, and how those risks can be managed” (2006).

The 25 best practices outlined in this article are based on the experiences of families, consultants, and advisors who have seen the positive impact of these activities. When families employ these best practices—starting with clearly defined wealth objectives and a strategic plan—we find they have a higher likelihood of sustaining multigenerational wealth. They often experience more cohesiveness and make better decisions. They typically have healthier relationships.

These best practices, however, do not exist in isolation nor get implemented overnight: One affects another, and it takes time. However, we believe that families who devote their efforts to the successful adoption of these best practices will be better able to navigate many of the challenges that have historically befallen wealthy families and led to the loss of generational wealth.