Dennis Jaffe is a founding member of the Aspen Family Business Group. www.aspenfamilybusiness.com.
To achieve true family wealth there are six forms of capital – together they facilitate family unity and help those involved prepare for the handover to the subsequent generation. But it doesn't happen overnight, warns Dennis Jaffe
Family business heirs, whose future is set by their family fortune, often face a unique set of problems. To make the fullest and best use of their inheritance, heirs must develop their capabilities, connections and resources. For a family to successfully pass on its wealth to the next generation, the family must offer their heirs more than money. It is a personal and long-term process of personal, emotional and even spiritual development in the family. Families ask themselves, "Why pass on wealth, if it can be squandered, or cause pain or conflict, or be misused by heirs?" To refer to these additional aspects of wealth transmission, family wealth consultants have begun to use the metaphor of different types of 'capital' that families can pass on to their heirs. A family that explicitly focuses on developing all of these types of 'capital' will be positioned to sustain and develop true wealth.
It may seem strange to use the terms spiritual and capital together in a single phrase. Yet spiritual capital – the values and principles that a family stands for – forms the foundation for all other forms of capital. Spiritual capital refers to how a family defines and lives its values, then weaves its activities together to create meaning for the family. Spiritual capital is generated when a family looks beyond money to define its values and how they wish to use it as a morally binding family mission and value statement for its next generation.
Fortunes cannot be inherited without attaching some message to them. Families must be clear not just about what is being given to their heirs, but why, and what is expected in return. This includes expectations of people and ideals about responsibility, roles in the community and relationships. The answers to these questions will be passed on in the family's mission and values.
A core concern of the older generation is the balance between consumption and revenue growth for subsequent generations. Some heirs regard their inheritance as a legacy that must be passed on to the next generation; others see it as a gift of fortune. These are value questions that the family should guide an heir in answering, not leave to chance. If a family's spiritual capital is clear to all, the next generation will feel guidance and clarity in using their inheritance.
Along with the financial resources that are passed down, comes a responsibility to manage them capably, sustain them for future generations and maintain a financial strategy for investments. An heir should not simply receive an endless expense account, but a mechanism for investing, values and expectations about what to do with wealth, as well as resources and support structures to help manage it. These must be communicated and taught, not simply buried in financial reports.
Financial capital is sustained by teaching heirs financial responsibility and accountability. Fortunes can be lost much more quickly then they can be amassed. Heirs today must be prepared to manage wealth by being given adequate investment and decision training.
A generation ago, there was a paternalistic approach to inheritance. Trustees and advisors were expected to take care of the next generation and their wealth. Today, inheritors want to administer their wealth actively, even if it lies in trusts and funds with clear limitations on what can be done. They need to be prepared for this responsibility by increasing education, involvement and participation.
Human capital is how the family develops capable and responsible adults whose values, skills and motivation enable them to use inheritance wisely and productively. This form of capital cannot arrive in a lump sum, but must develop over many years on a firm foundation. It begins in the early years around the house. Children learn about money and about the family's status through a lot of small messages not only from family, but especially from friends, school and guests.
To develop human capital, a family must deal with money and its meaning at every stage in raising children. As children grow up they will ask, "Are we wealthy?" This is not a yes or no question, but an invitation to talk about what it means to have money, what opportunities it presents and how a family chooses to use their resources. At this point, core family values are shared about money, spending, saving and sharing.
The most important lesson for a person of wealth to learn is to develop compassion for those who have less and an understanding that privilege is a gift rather than something that makes one better. This is a simple lesson that is endlessly complex to teach because it is not taught by declaration, but by thousands of small actions, which either reinforce or undermine the basic message.
Inheritance too often seems to interfere with maturity and can keep families in a pressure cooker, where bad feelings, pain and distrust endlessly recycle. Money can be a way of controlling family members and keeping adults from being able, or wanting, to become independent. Gentle pressure keeps kids from going out in directions the family does not want, and keeps the family together.
In a less affluent family, the young adult leaves and makes his or her own fortune. In the family with substantial shared wealth, leaving is harder and may not occur at all. A family must generate positive and voluntary reasons for each heir to remain connected to the family. After growing up, children must rejoin their family as adults, and be seen and treated as such.
Families must know how to express affection for individuals and develop mechanisms for resolving conflicts in order to prevent festering or poisoning the family's shared interests. A family may have to create a mechanism for those who cannot work together in order to disentangle their affairs. This is the essence of successful families, whether poor or affluent.
Forming a family council, in addition to more formal family boards and financial structures, can be a first step toward developing clear policies and practices.
Each generation adds more people to a family. From a nuclear family children grow up, marry and have their own children. They may also divorce and have different sets of children. Family members move away over generations and may feel less connected to their original founders of a family fortune than to their nuclear families. Yet a family's wealth can be administered through trusts, investments and mechanisms designed to keep the original family dynasty tightly connected.
The growing family must make clear how relationships are regulated between family members in relation to their shared assets. By agreements, and a clear set of governing bodies, the family is able to know clearly who decides what, how financial decisions are made, and what guides the decisions. They create clarity of purpose, boundaries, agreements, participation, policies and roles to help the whole family work together effectively across generations. They also function to transfer business and wealth, while maintaining family harmony, good returns on investments and desired social impact.
A large family can initiate informal family enterprise councils, where all family members come together to be informed about the state of their investments and to share personal lives. In a large family with many assets, family councils will be represented on family boards, and there will be a clear method to communicate to all family members what is happening. This is structural capital.
Wealthy families and individuals are part of a wider community. How they express that involvement is an important aspect to the meaning of their wealth. A wealthy family is more visible because they have more, can do more and have greater expectations upon them. How they earn their money is as important as who they are. Consequently, a community's esteem is dependent on what jobs the family creates, family investments, general business practices and how they treat those who work for them. Another aspect is the way they give back to the community.
While individual members of a family can make their own decisions about giving, wealthy families often organise a family foundation, to visibly focus its efforts to serve the community. The various forms of a family foundation are not just a vehicle to give money away, but for heirs to become involved in how the money is used, while helping the groups and services they care about. It is also a way to express the family's leadership in the community. The foundation's board can offer heirs the opportunity for new careers and involvement in social action.
When growing up, it is easier to teach a child about service by the example of helping, than by giving money. When a family begins to practice service together, they demonstrate that this activity is as valued as making or managing money, and that pleasure can be derived from service as well as consumption. It also offers an example that service can involve real work and can be a valued way to contribute to the community.
Several actions can be taken to develop each type of capital in a family. The first step is to take a broader view of wealth. Using the six forms of capital can bring a family together to explore these issues as they plan the process of inheritance. This preventive measure will help engage the family at a time when the older generation is able to make their views known. The younger generation will be invited to take a clearer and larger role in the family, and learn about their legacy.
Developing the six types of capital in a family is not an overnight process. It requires careful attention and years of hard work. It begins with broadening awareness, understanding the many elements and then holding conversations about how they apply them to a family. While the process is not easy, the long-term prosperity of the family and each of its members depends upon successfully transferring all of the family's capital to create true wealth.