The Stages of Wealth
Start educating your child early, and keep at it well into adulthood.
AGE 8: Each week put a small allowance — $1 to $5 in dollar bills — into an envelope and hand it to your child. Explain that it’s up to him to decide whether to buy candy or save up for, say, a skateboard. (Don’t undercut the lesson by buying the skateboard yourself.)
AGE 10-12: Invite your child to start attending regular family meetings. Discussion items: How lucky we are to be financially comfortable and what we as a family think is the purpose of our money. Should we take fancy vacations or give to charities? Make it clear your kid’s opinion matters.
AGE 12-14: Make sure your kid knows how to manage a checkbook. And at the family meetings, start making it clear where the family money came from–somebody’s hard work! Start setting future expectations: Tell your child, “You’re going to have to make your own fortune,” or “Someday this will all be yours to preserve.”
AGE 14-16: Don’t be afraid to invite your banker or financial advisor to attend family meetings. It can be easier to have a neutral third party broach delicate topics such as a prenup and how much money you plan to leave your kids.
AGE 15-20: If the message isn’t getting through, initiate steps for a “beneficiary rescue.” Shift assets from normal investment accounts and minors’ trusts into entities that you firmly control, such as family limited partnerships.
AGE 20-25: Make it clear you’d welcome your kid into the family business — as soon as he’s ready. College is a first step, and training at someone else’s company can offer perspective. Remind your child that you love him and have total confidence in his ability to make his own way into the world. He’ll thank you for it when he’s 40.
Goodbye, Family Fortune
By MICHELLE SLATALLA
Will your kids be prepared for great wealth? What you can do now.
After his mother died, John Mecom Jr. was supposed to make sure her money was preserved for his four children.
Instead, the son of a Texas oil tycoon looted a multi-million dollar trust he was supposed to oversee, a lawsuit alleges. It claims he failed to account for $536,691 he owed the fund, racked up “general office and administrative expenses” of more than $80,000 in one year and sold off nearly a million dollars’ worth of his mother’s art, antiques and jewelry.
Mecom Jr., who declined through his attorneys to comment for this story, said he was entitled under terms of his mother’s will to do anything he wanted with her personal possessions, according to court documents.
But a lawyer who is suing him on behalf of his daughter sees the situation differently. “We think it was theft and that he was just a spoiled brat that was raised by a rich family that probably spent more time making money than they spent taking care of the kids,” said James R. Lovell of Lovell & Lyle in Dumas, Texas.
Thomas ReisMore parents are wresting trust funds away from wastrel heirs.
These are the times that try rich men’s souls. Even under normal circumstances, the average patriarch lives in fear that “a spoiled brat” who gets his hands on a family fortune will squander the inheritance. But these aren’t normal circumstances. First there was the financial crisis of 2008 and the subsequent recession. Now there’s the European debt debacle, which threatens to cascade through global banks and the world economy. The U.S. already is facing the real possibility of a new recession; economists put the odds at about 1 in 3. In other words, preserving a fortune is getting harder than ever.
The hysteria among the super-rich is palpable. They’re worried their kids and grandchildren will fritter away the money it took forebears lifetimes to earn. They’re asking: How do you prevent a child from growing up to be ne’er-do-well? Should you leave a spendthrift heir nothing? Or money with lots of strings attached? And what if a family squabble escalates into an expensive lawsuit?
“Families are saying, ‘Oh my God, that last collapse was awful, and now we know there will be another big one, and when it comes it will be as scary as hell,’ ” says Maria Elena Lagomasino, chief executive of GenSpring Family Offices, which manages the money of some of America’s wealthiest families. “And, ‘What if I’m not around to manage the next one? How do I make sure the next generation really has the preparation to get through the crisis?’ ”
With at least $41 trillion in private wealth expected to be transferred from one generation to the next in the first half of this century, the stakes are high. As a result, rich families are sending kids to financial boot camps or giving them crash courses in money management at home. They’re also crafting sophisticated “beneficiary rescues” to wrest trust funds away from wastrel heirs and hiring psychologists to help them broach the topic of money with kids. (“It’s harder than talking to them about sex,” one father confides.)
“Kids need education,” said Sara Hamilton, chief executive of the Family Office Exchange, which advises ultra-wealthy families. Hamilton also teaches financial skills to 35 or 40 heirs at a time who enroll in a four-day private wealth management course that the University of Chicago offers twice a year (tuition: $8,950). The course covers the basics — of investing, tax law, estate planning and philanthropy — at the behest of parents who, Hamilton says, are “concerned about whether the wealth will disincentivize their kids from leading productive lives. That’s the No. 1 concern that drives the education piece.”
The good news is that despite all the hand-wringing, there’s little evidence yet that family fortunes are taking big hits. Last year, the richest people in the world — the segment of the population with $30 million or more — saw their wealth increase by 11.5%, according to the latest annual World Wealth Report from Capgemini and Merrill Lynch.
Nevertheless, recent history is rife with, well, heir-raising horror stories. In Canada, there’s the seemingly endless saga of the drug-abusing daughter of deceased media mogul Pierre Peladeau. Anne-Marie Peladeau sued her brothers — after they cut off her $10,800 monthly allowance — before heading off to a stint in a rehab center named for her family. In California, Korbel Champagne baron Gary Heck and his daughter, Richie Ann Samii — whom he sued for defaming him on the Internet — fought in court for three years over more than $9 million in trust-fund income following her arrest for sexually assaulting two employees. (The father and daughter eventually settled, for an undisclosed sum estimated to be in the millions of dollars.)
AND BACK IN TEXAS, John Mecom Jr.’s daughter Katsy Cluck filed suit against him in 2008, in a messy and expensive case that names her three siblings as involuntary plaintiffs and involves five separate teams of lawyers, each trying to determine how much money matriarch Mary Elizabeth Mecom had at the time of her death in 1996.
In 1983, when Mrs. Mecom set up the trust, the multi-million dollar fund’s assets included cash and bonds, more than 140,000 shares of stock in 16 different companies and the household possessions of her French château-style home.
As trustee, her son John Jr. was instructed under terms of the trust to distribute what was left of the assets to his four grown children upon her death.
But John Mecom Jr., a former owner of the New Orleans Saints football team, never gave the children a penny from the trust, according to the lawsuit. It pits against each other two generations of a family whose wealth was once estimated at more than $200 million.
“Dear Daddy,” reads a plaintive letter Mecom Jr.’s four children sent him, asking what happened to the money. “We are all adults now with our own financial responsibilities and it is very difficult to plan for the future when we have these unresolved issues hanging over our heads.”
The Mecom case, which has wended a slow, Dickensian route through the court system, is headed to trial after a state Court of Appeals ruling earlier this year determined that John Mecom Jr. demonstrated an “inability thus far to fully explain his activities as trustee, including his personal transactions.”
As a longtime family friend observed, “It really is tragic, when all of them have money, that they end up not speaking to each other and spend a lot of money and cause themselves grief over an amount that’s not that significant to them.”
No titan of industry wants to work hard all his life only to raise a child who turns out like Huntington Hartford, the boy who inherited the vast A&P grocery fortune and whose teachers called him the “million-dollar milk-fed baby.” By the time he died at age 97 in 2008, Hartford had lost well over $100 million to gold-digging wives, ill-advised financial investments and the occasional megalomaniacal urge, including one that prompted him in the 1960s to build an ugly, eponymously named art museum at the southern edge of Manhattan’s Columbus Circle. At the top of the building was a restaurant called the Gauguin Room. Its menu was Polynesian. It didn’t last long.
Most real-life horror stories, however, have nothing to do with family intrigue, drug-addicted heiresses or Internet feuds but instead are the result of children who simply don’t understand the basics of money. JPMorgan Private Bank, in a poll of heirs at a recent education session, found that 75% of them felt either completely unprepared or only somewhat prepared to take on the management of their wealth.
Very often, the culprits are the parents.
“I know this one father who is frustrated because he has two daughters who don’t work, yet he has never worked in front of them or told them to get jobs, and every year he buys them Fendi purses for Christmas,” says a wealth manager at one firm. “You look at him and think, ‘Well, you spend $1.2 million a year and you’re not sure on what, except for about $150,000 of it going to a mortgage in Italy, so you aren’t exactly the best role model.’ ”
Family dynamics can create problems. “Some families are really wacky,” said a wealth consultant. “I know a client who gave his daughter a budget for her wedding, and after she went over by $387.25, he sent her a bill for that amount. But she has brothers who are $100,000 in credit-card debt, and the father doesn’t do a thing. It makes you scratch your head.”
INCREASINGLY, BANKERS and other advisors are offering to talk to the kids on behalf of their parents.
“Starting when our kids were teenagers, at least 10 years ago, we asked our family wealth advisors to talk to them, because there are things that you are better off hearing from a neutral third party, like why you are going to have to agree to a prenup when you marry,” said one GenSpring client whose daughter is now married (with a prenup in place).
Psychologist Amy Zehnder, who was hired by U.S. Bank this year as part of a new Ascent Private Capital Management team aimed at clients with more than $25 million to invest, said families need to sit down together and talk — about their values, where the money came from originally and how they believe it should be used in the future.
“If the money is just to feed them, to allow them to spend, that’s completely different from if there’s a greater purpose,” Dr. Zehnder said. “Once the generations decide that together, they can make a family plan.”
Without a plan, the money can vanish. “Shirtsleeves to shirtsleeves in three generations,” is the old saying that describes the typical trajectory of a family fortune. Every culture has a variant: “Clogs to clogs in three generations,” the Dutch say. “Rice paddies to rice paddies” is the Chinese version.
The meaning is the same, though: An entrepreneurial first generation makes a fortune before selling a business and leaving a big pot of money to a second generation to try to preserve or invest before passing what’s left to a third generation of far-flung cousins. By then, there’s less for each because the family tree has a lot of new leaves hanging off its branches.
“This is the human condition. The money is spent, and it’s back to the rice paddies,” said James E. Hughes Jr., author of the book Family Wealth — Keeping It In the Family. “The forces of the universe suggest that when something goes into stasis, it will disappear.”
The math is daunting: If a family spends 4% of its assets each year, which is about the norm, it has to earn a 12% percent return on investments to stay above water after taxes, inflation and money-management fees.
Some families manage to beat the odds, though. The fortune of the Laird Norton family, one of America’s wealthiest, is seven generations old, and dates from 1855 when two brothers (Matthew and James Norton) and a cousin (William Laird) invested their collective savings of $1,042.80 to start a Minnesota lumber company. Ever since, descendants of the two lines have considered themselves heirs to one fortune.
A privately published, 318-page hardcover family history titled Branching Out begins by quoting Verse 6 from the King James version of Psalm 16: “The lines have fallen for me in pleasant places; yea, I have a goodly heritage.” Enjoying the goodly heritage are about 420 living members. In 2006, the Laird Nortons sold the family’s Lanoga Corp. lumber-supplies company, with an annual revenue of $3 billion.
At first, though, the sale wasn’t universally supported. “Family harmony was fractured. There was some concern that we may be creating estate plan issues for some people,” said Laird Koldyke, chairman of the family’s board of directors. “We kind of blew the communication on that, and issues started to percolate, and there were questions of does the board know what they’re doing.”
As a result, the family made a conscious effort to step up internal communications and educational programs and give members more of a say and an emotional stake in the family as an entity.
The 420 Laird Nortons are invited to convene annually at a family meeting at a midsize resort somewhere in the U.S. (the location changes) to discuss two kinds of business: financial and family. At the gatherings, children younger than 13 attend the family’s privately run Camp Three Tree — named after the three 19th-century branches that founded the family.
“We start brainwashing them early,” Koldyke jibes. “We want them to have fun, have camaraderie with their cousins, play games together and, as they get older, to get some sense of exactly where the peanut butter and jelly sandwiches are coming from.”
When they turn 14, children graduate to a Next Generation financial academy that teaches basic business skills. They are formally introduced to the family and expected to start attending its business meetings. At age 21, they can join the Next Generation Leadership Council and attend three-day sessions to learn the ins and outs of the family’s business and philanthropic pursuits.
“What this means is that in the next 10 to 20 years, the family is going to have even more interested, qualified, capable leaders,” Koldyke said. “We’re pretty excited about the caliber of the next generation.”
“People take drugs. They do foolish things. You can dissipate a fortune by being a crappy investor pretty quickly,” said Robert Casey, a spokesman for the Family Wealth Alliance consulting firm.
There are special ways many wealthy families use to transfer assets from one generation to the next if they think heirs may turn out reckless or imprudent. Typically, when children are young, parents set up for them uniform gift to minor accounts (UGMAs), to minimize taxes and bank fees. Before children reach age 21 — when they legally get control of UGMA funds — the accounts get rolled into trusts with trigger dates designed to delay payouts. But most trusts are irrevocable, and have mandatory payout provisions. On trigger dates — such as when a beneficiary reaches a specified age of 25, say, or 30 or 35 — predetermined portions of the assets get distributed.
“If a child is entitled to the money at age 21 and he demands it at that point, it’s too late to keep it away,” said Thomas Handler, a partner at Chicago-based Handler Thayer, which specializes in financial planning for affluent families.
To prevent that, families who anticipate a problem can put a “beneficiary rescue” plan in place before a trigger date occurs by setting up family limited partnerships (FLPs) or family limited liability companies (FLLCs), which essentially are like big buckets into which assets can be poured. Trust assets can be transferred to those entities, which are then held in trust.
“From a control standpoint, you can have assets in these entities that are totally owned by children, grandchildren, even great grandchildren — and yet Generation One could still be the ones making the investment and distribution decisions,” Handler said.
The goal? “Minimizing the chance that something will go awry with the money and maximizing the chance the grandchildren won’t destroy themselves,” Handler said.
The safeguards can protect against meltdowns in dysfunctional families. “Once I had a client, a sister, suing the brother and the mother’s estate, who came into my office dressed in a St. John knit suit and an Hermès scarf, and came across as very polished,” Handler said. “It was a very affluent family, she grew up with lots of servants and all the trappings of wealth, but it turned out she had a lot of emotional baggage.”
The woman was suing over ownership of a condo in Florida and some art and antiques, “maybe one and a half or two million dollars in assets, which to this family would be like you and me fighting over quarters,” Handler said. “But the case dragged on. It was clear she didn’t want to settle, because it wasn’t about the money. It was about ‘Mom did this for you and not for me, and now I’m going to fight for my rights.’ ”
Handler went to the hotel to fetch her. In the lobby, he used a house phone to call her, but she wouldn’t tell him her room number. “She keeps hanging up on me. I call her aunt again, get the number, go up to the penthouse in the tower, and it takes me about half an hour to get her to leave,” he said.
At the courthouse, she ran ahead into the courtroom to tell the judge she was not “psychologically able to do this settlement,” Handler said. “So we have to get her therapist on the line to say there’s no reason she can’t, and finally she signs the settlement.”
That night, after dinner, Handler got a call from the client’s aunt. “She says, ‘You have to go get her, she’s in the courthouse refusing to leave.’ They were at the point in the evening where the janitor had had enough.”