Determining The Family Legacy


The estate planning process begins by developing the Family Mission Statement around your values.  Step two, asks you to define three objectives which are: How much of your financial wealth do you need to maintain your financial independence for the remainder of your life? Next, How much of your wealth is it appropriate to leave your children and grandchildren? Last, How much would you like to leave to charity? The other steps in the process will be covered either in the Advisors Corner or past and future issues of this newsletter.

This issue is almost entirely focused on the factors you might wish to consider when asking yourself, How much of your wealth to leave your heirs?  While it may seem un-American or nonsensical to even consider this when everyone knows that the answer is all of my wealth, it is still necessary to ask oneself “ What’s our mission?  Will this help or hurt our heirs?  What purpose are we attempting to fulfill?  Why are we doing this with our resources versus something else?  What’s the right amount to leave our children?

In Drs. Thomas J. Stanley and William D. Danko’s best selling book “The Millionaire Next Door” they describe their findings during the 20 years of study and the more than one thousand people that responded to their latest survey from May 1995 through January 1996. The authors state that, “ most people have it all wrong about how you become wealthy in America.  It is seldom inheritance or advanced degrees or even intelligence that builds fortunes in this country.  Wealth in America is more often the result of hard work, diligent savings, and living below your means.”

How wealthy should you be?  The Millionaire Next Door suggests a simple rule of thumb when computing one’s expected net worth.  Multiply your age times your realized pretax annual household income from all sources except inheritances.  Divide by ten.  This, less any inherited wealth, is what your net worth should be.  For example, if Mr. Anthony O. Duncan is forty-one years old, makes $143,000 a year, and has investments that return another $12,000, he would multiply $155,000 by forty-one.  That equals $6,355,000.  Dividing by ten, his net worth should be $635,500.

Given your age and income, how does your net worth match up? If you are in the top quartile for wealth accumulation, you are a PAW, or prodigious accumulator of wealth.  If you are in the bottom quartile, you are a UAW, or under accumulator of wealth.  Are you a PAW, a UAW, or just an AAW (average accumulator of wealth)

The author’s go on to give us some interesting facts.  PAWs are builders of wealth and typically have a minimum of four times the wealth accumulated by UAWs.  UAWs  tend to live above their means. The name of the game is being frugal PAWs live well below their means.  UAW’s  look for immediate gratification whenever there is extra money.

The chapter that is the most profound in my opinion is the Chapter entitled “ECONOMIC OUTPATIENT CARE”.  It states that many of today’s distributors of ECONOMIC OUTPATIENT CARE (EOC) demonstrated significant skill at accumulating wealth earlier in their lives.  They are generally frugal with regard to their own consumption and lifestyle.  But some are not nearly as frugal when it comes to providing their children and grandchildren with “acts of kindness”.   These parents feel compelled, even obligated, to provide economic support for their children and their families.  What’s the result of this largesse?  Those parents who provide certain forms of EOC have significantly less wealth than those parents within the same age, income, and occupational cohorts whose children are economically independent.  And, in general, the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more.

There are many forms of EOC  - some have a strong positive influence on the productivity of the recipients.  These include subsidizing your children’s education and, more important, earmarking gifts so they can start or enhance a business.  The giving of  noncash gifts, which cannot be readily traded in for a new  luxury automobile.

Conversely, what is the effect of cash gifts that are knowingly earmarked for consumption and the propping up of a certain lifestyle?  We find that the giving of such gifts is the single most significant factor that explains lack of productivity among the adult children of the affluent.  All too often such “temporary” gifts affect the recipient’s psyche.  Cash gifts earmarked for consumption dampen one’s initiative and productivity.  They become habit forming.  These gifts then must be extended throughout most of the recipient’s life.

The main findings of the survey is:

1   Giving precipitates more consumption than saving and investing.

2   Gift receivers in general never fully distinguish between their wealth and the wealth of their gift-giving parents.

3   Gift receivers are significantly more dependent on credit than are nonreceivers.

4   Receivers of gifts invest much less money than do nonreceivers.

What can you give your children to enhance the probability that they will become economically productive adults?  In addition to an education, create an environment that honors independent thoughts and deeds, cherishes individual achievements, and rewards responsibility and leadership.  Yes, the best things in life are free.  Teach your own to live on their own.  It’s much less costly financially, and, in the long run, it is in the best interests of both children and their parents. 

Webster’s defines courage as “mental or moral strength to resist opposition, danger, or hardship.”  It implies firmness of mind and will in the face of danger or extreme difficulty.  Courage can be developed, But it cannot be nurtured in an environment that eliminates all risks, all difficulty, all dangers.

 It takes considerable courage to work in an environment in which one is compensated according to one’s performance.  One of the greatest entrepreneurs and extraordinary sales professionals of all time, Ray Kroc, looked for courage in selecting potential McDonald’s franchise owners and executives.  Kroc actually welcomed cold-calling sales professional.  He told his secretary to “send all of them in.” Why? Because it’s not easy finding people who have the courage to be evaluated strictly on their own performance. 

The Forbes article from issue May 19, 1997 entitled “The Disinheritors” begins with the following –“Over dinner at his Pasadena, California home one evening in 1971, construction engineering magnate Joseph Jacobs and his wife Violet, talked seriously to their three daughters, then in their early 20’s.  Because we love you very much, we have decided that we are not going to leave you a lot of money, the self-made centimillionaire told the three young women.  He would leave the bulk of his estate to charities.  He then gave the three of them $1 million worth of stock each in his company, Jacobs Engineering Group.  Though that stock has since greatly appreciated, it represents only a small portion of his wealth. 

Jacobs, now 80, the son of poor Lebanese immigrants, has not changed his mind.  “One of the worst things I could do, “ he says is indulge them to the point where they don’t have the opportunity to make their own failures and successes that they can say are theirs and not their parents’.”

Home Depot Chairman Bernard Marcus, 68, agrees that inheritances can be a “terrible burden for some.”  He’s decided: “If my kids want to be rich, they’ll have to work for it.”  He plans to leave almost all of his $850 million in Home Depot stock to the Marcus Foundation, which supports education and the handicapped.

‘The parent who leaves his son enormous wealth generally deadens the talents and energies of the son,” steel magnate Andrew Carnegie wrote in 1891.  There’s a subtlety to all this.  In older societies old wealth was prized above new wealth.  There is a tendency in our society to show contempt for inherited wealth and to admire self-made wealth.  “How could they be worth anything in our culture if they were all made by somebody else, their Daddy?” asks Aldrich.

 “Many wealthy people crush their children inadvertently,” says billionaire Herbert A. Allen, 56, of investment banking firm Allen & Co.  “ If you’re the child of a wealthy person and your first paycheck is totally meaningless, you’ve had something taken away from you.”  John Train, investment adviser to wealthy families, agress.  Giving too much to children, he says, is “irrational.  It’s like giving them a no-appetite pill.”

Langone: “Someone once said: ‘Money is like manure – put it in a pot and it stinks.  Spread it around and it grows things.”  Warren Buffett, states “that parents should leave children enough money so they do anything, but not so much that they could nothing.” Warren believes that” giving heirs a lifetime supply of food stanps just because they came out the right womb can be harmful for them and is an antisocial act.”

The Whitman Institute coined a term they call Affluenza which refers to the liabilities attached to inherited wealth.  The money that buys power, privileges and luxuries can just as easily damage a child’s self-concept and motivation to achieve . . . (with) a range of symptoms: immaturity, boredom, selfishness, lack of motivation and work ethic, lack of self-discipline, alienation, aimlessness, rebelliousness and suspiciousness.”

In John Sedgwick’s book “Rich Kids” (published1985 and out of print)  states that “to come into money is the universal fantasy- hitting the jackpot, winning the lottery.  What about the lucky souls who strike it rich at birth?  John Sedgwick spent nearly a year traveling the country to interview the young heirs and heiressess to America’s greatest fortunes: Rockefeller, Mellon, Pulitzer, Pillsbury, among many others (fifty seven in total).  He found that their unearned millions affected nearly every aspect of their lives.  He describes the strange, isolated childhoods of these rich kids, their ignorance of money matters, their spending sprees, their guilt, their search for happiness in work, their mad passions, their lavish houses. 

John Sedgwick, in the prologue section of his book states, “among the papers left by his  father when he died in 1976, my mother found a document that was a revelation to me.  It was titled – A Guide To Life, and it explained about my inheritance and what my father expected me to do with it.”  My father wrote “Fundamentally, I believe there are but two basic goals to life (1) personal happiness and (2) a determination to help make the world a better place to live in.  It is my observation that long term happiness cannot be obtained by seeking it directly, but only as a byproduct of success in the second objective.  Of course, immediate happiness can be secured and rightly by a good dinner, a good tennis match, an interesting trip, but if one spends one’s entire life doing that I suspect, though I never tried it, that no matter what the variety of amusements eventually a life devoted to them would be boring.”

“Then he outlined the financial details of the inheritance which he termed no great fortune, explaining that I could expect $100,000 on turning twenty-one. 

“In order to succeed in any role one must be willing to work long and hard.  Of this you have given fine evidence, it is a quality almost more important than brains.  You are ambitious, which is a good thing.  I hope all the foregoing will prove helpful to you now and in the future.  Never forget we are very proud of you and love you very deeply.”

The author goes on to say that when he turned twenty-one I received enough money to begin to ponder what I have come to see as a fundamental Rich-Kid dilemma: What is the money for?  Was it really mine, or was it somehow still my parents’ or for that matter their parents’? Was it really free, a pure windfall, like the lottery winnings, or was there a hidden contract by which one somehow had to “earn” it? Did it make me “rich”? In short, what did it mean?  Inherited wealth inevitably raises vast questions, for money pervades so much of one’s life.  The Question still lingers: how much of me is my money, and how much of me is me?

The author found that Rich Kids’ felt their greatest accomplishment was simply to be born, and the fascination is built in from the start.  Rich Kids’ hit it big at birth.  They have started out their lives at the apex of the pyramid that everybody else spends a lifetime climbing, pay raise by pay raise.  Rich Kids’ live in a fairy-tale world.  Middle-class kids strive to carve out an identity for themselves; rich kids have one ready-made.

John Sedgwick writes that psychologist Martin E. P. Seligman once conducted an experiment with caged rats.  He taught one group of rats to push down a metal bar by rewarding their successful efforts with a few pellets of food.  That group caught on quickly and took to pressing the bar for their food with zest.

 Then he tried out another group of rats in the cage, but, before putting them in to work on the bar, he released a shower of pellets in a great gush from the top of the cage.  The rats feasted delightedly on the lovely pellets at their feet.  When they were finished, Seligman watched to see how well they performed the task.  These rats did not learn to pull down the bar for their food nearly so quickly.  Some of them instead just sat around in their cages looking up at the ceiling, waiting for more food to drop down.  They didn’t make their way toward the bar at all.  And the more free food Seligman Showered on them, the worse the rats performed.  But they didn’t enjoy their indolence.  Given the choice between a cage where the food just rained down upon them and a cage where they had to pull the bar for it, they preferred the box where they had to work for their food.

Seligman discusses this experiment in his book, Helplessness: On Depression, Development, and Death.  He calls it the “spoiled brat” study and concludes that the randomness of the rewards for the second group of rats upset any emerging sense of an ordered universe.  The rats were frustrated that they couldn’t control events through their own actions. 

Applying the idea to humans, Seligman writes, “What produces self-esteem and a sense of competence, and protects against depression, is not only the absolute quality of experience, but the perception that one’s own actions controlled the experience.  To the degree that uncontrollable events occur, either traumatic or positive, depression will be redisposed and ego strength undermined.  To the degree that controllable events occur, a sense of mastery and resistance to depression will result.”

So good fortune can be as disruptive as tragedy.  Just as they are setting out into the world, these lucky heirs come unexpectedly into huge sums that make any further effort unnecessary.  No less than Seligman’s rats, the Rich Kids greet their windfall joyfully, but soon end up profoundly confused and dejected.  There is no connection between what they have done and what they have received.  So many Rich Kids become imprisoned by their wealth, yet that doesn’t need to happen.

Hard as it must be to make a fortune, it is easier than receiving one out of the blue.  Earned money is clearly one’s own, an affirmation of talent, energy, self.  An inheritance is none of these things.  Instead of being a source of pride, it is a subject of embarrassment; instead of rewarding accomplishment, it fosters sloth; instead of belonging to you, you belong to it.

Average Americans, struggling to get by, may not have all that much in their lives, but at least they have a reason to get up in the morning, and most likely, a feeling of accomplishment when they go to bed at night.

As John Sedgwick finished interviewing the fifty-seven Rich Kids he asked himself – Would I want this for myself?  The answer that came to him was no!  Only one Rich Kid of the fifty-seven had any real success that he could call his own.  He found that the Rich Kids are used to immediate gratification, they don’t put in for the kind of training that woud lead them to a big payoff down the line.  They received their fortune in an instant: they expect to make their fortune just as quickly.

These Rich Kids can never get out from under the shadow of their elders; they will always, in some sense, live in their fathers’ houses.

Back to the beginning question – How much should you leave your heirs?  The question is generally, never asked.  Far too often the advisors forget to play counselor and proceed to assume they know your answer will be one hundred percent of the assets. What is clear is that you must prepare the next generation for wealth, it’s a mistake to just leave it.  Thus begins the true process of estate planning.  It begins by developing a Family Mission Statement that reflects your values. It assumes you have the answers however it is the Family Wealth Counselor that has the questions.