In part one of this three-part series, we confronted a troubling statistic: studies show that nine out of ten traditional estate plans fail. When they do, much more than dollars are lost; often, the very families the planning was supposed to protect are torn apart. Rod Zeeb and Perry Cochell describe this crisis in their landmark 2005 book, Beating the Midas Curse. The authors, who have worked with thousands of families (including some of the wealthiest in the nation), say that the more financial success you achieve, the greater the probability that your family is headed for disaster. They describe how the traditional estate planning tools that we rely on to provide for those we love can actually increase the likelihood of family and financial turmoil for generations to come.
The collapse of wealth and the destruction of family unity that Zeeb and Cochell write about is not news to financial or legal advisors who have seen affluent families shatter under the weight of money. The eighteen-year old, for example, who inherits a million dollars with no strings attached, consumed by the hot car, the cocaine, the parties, and finally rehab, jail, or even suicide. Advisors see marriages break up, friendships devastated, and families torn apart. They watch businesses that parents worked decades to build go under, as heirs eager to squeeze more cash from the estate break them up, sell them at bargain prices, or lose them through mismanagement.
For generations, advisors have focused first and foremost on money and taxes when doing estate planning. And, from a purely legalistic, `state-of-the-art' perspective, most advisors follow prudent, conservative and generally accepted standards and practices. They diligently plan for the future of client valuables. They seek out every legal deduction, capitalize on the latest federal rulings relative to investments and trusts, and craft complex instruments to minimize estate taxes. More than anything, the perspective that guides most estate planning (minimize taxes and pass as much money as possible to the heirs!) is based on generations of tradition.
But, there is another tradition at play here. Two thousand years ago a Chinese scholar penned the adage: 'fu bu guo san dai,' or 'Wealth never survives three generations.' In thirteenth century Europe, the proverb, 'Clogs to clogs in three generations,' became 'Rags to riches to rags' in the early 1600's. In nineteenth century America, where fortunes were made and lost with astounding speed, people said 'From shirtsleeves to shirtsleeves in three generations.' Adam Smith summed it up two hundred years ago in his influential book, The Wealth of Nations. 'Riches, in spite of the most violent regulations of law to prevent their dissipation, very seldom remain long in the same family.' Many cultures. Thousands of years of history. One common tradition of failure.
So, why does traditional planning fail at such an astounding rate? A consensus is emerging among experts that suggests that when parents who build wealth pass only their material assets to their children, and not the values by which they have lived, there is little chance the family, or its wealth, will survive for long. Planning for the future of your money is important. But money is just a tool, as likely to separate families as it is to unify them. Families cannot be defined in terms of the things they own; estate plans describe a financial condition, not a family.
The conclusion drawn by experts is that when families place their valuables ahead of their values in their planning, they will probably lose them both.