By James F. Thomas, Jr. and Kelly Nilsson
Best laid plans don’t always work
When her spouse Gary died at age 54 from a terminal illness, though grieving, Barbara felt financially secure. Before he passed away, they established a trust to assure Barbara would have the resources to run the business they had built together and maintain her lifestyle.
As a precautionary measure the couple named a close friend and former attorney as trustee – someone they both liked and trusted. Initially things went well. Then the business took a turn for the worse and Barbara called upon the trustee for assistance. Though trust assets were sufficient to weather the storm, the trustee thought otherwise and limited her access.
After a long economic downturn and months of stress with nowhere to turn, Barbara sold her home. It still wasn’t enough. In the end, she lost the house, the business, the business income, and her relationship with the trustee.
This typical estate plan failure changed Barbara’s life forever.
Good outcomes are the exception
Disastrous financial consequences are common among families in transition. Family wealth is often dissipated or destroyed due to the loss of a key person and the survivor’s lack of familiarity with the many skills necessary to manage an ongoing family enterprise.
Professional advisors (CPA’s, attorneys, brokers, etc.) give the best advice possible within their areas of specialization. However, few are familiar enough with the family dynamics, or in a position to give the comprehensive guidance called for to make a smooth successful changeover after the death of a spouse. They do what they can but aren’t privy to the family’s big picture.
The surviving spouse is on their own to pull it all together and make major final decisions. Expecting a surviving spouse to simply pick up where the other left off does not work for a number of reasons:
1. Relationships – Both spouses rarely have the same trust and rapport with their advisors as the one who interacts with them the most.
2. Familiarity – When the less active spouse takes over, effectiveness and efficiency are naturally reduced.
3. Independence – Both spouses may have agreed on goals, but the survivor will invariably have their own ideas and manner of doing things.
4. No crystal ball – It’s impossible to predict future events (health issues, family differences, business demands, economic conditions, law changes, and countless other issues) that impact decision making.
A surviving spouse faces all this while experiencing what psychologists call the most stressful event of all: the death of a spouse. Complicating matters further, during the average grieving period (18 months), research indicates a much higher likelihood of impaired judgement and inability to focus.
What the wealthiest families do
To provide for the continuity of family wealth through such times of extreme change, the world’s wealthiest families create and maintain a dedicated third party “family office”. They employ an experienced staff with systems to provide the family the support they need to make the very best wealth decisions possible, under all circumstances.
Bringing up the idea of establishing a “family office” for families with less than a few hundred million dollars in assets usually generates comments such as: “Family offices are only for the super-rich”; “They’re very expensive to set up, and even more expensive to operate”; or, “A full-blown family office is far more than my family needs… it’s overkill”.
These statements and concerns are valid only if you are envisioning a traditional “single family office” model with an in-house staff that does everything from paying bills to walking dogs.
What you can do
Today’s “multi-family offices” are much more accessible, affordable, nimble, and customizable than any “single family office”. They serve numerous families simultaneously and operate efficiently and effectively.
Modern family offices exist to help you plan, enrich and grow your family wealth in good times, protect and clean up in the aftermath of bad, and keep your family prepared for the variety of life transitions that will inevitably occur. A good one will scale services tailored to your needs and budget.
A proficient family office can actually be expected to pay for itself (usually in the first year) by saving you time and money that is now unnecessarily spent, avoiding foreseeable dangers, and identifying viable opportunities.
A family office does not replace your current advisory team; it compliments, facilitates, and enhances it. Professional advisors (attorneys, CPAs, investment managers, bankers, etc.) work much better together with a family office coordinating their collaboration and eliciting their best ideas.
Each specialist gets to apply their unique ability, interacting with other members of the team and communicating in an organized way resulting in more precise documents and plans that are much more cohesive.
A team of advisors orchestrated by a central family office with a common vision of your family’s goals becomes a concerted effort to support you, your spouse, and your children through adversity, and positions you in a way to avoid danger and capitalize on opportunity when either presents itself.
A plan that works
Brenda and her husband Ed engaged a multi-family office to help them operate and grow their family enterprise, and to be there for the transition in the event of one spouse’s death. Though they had no children together, Ed had two adult sons from a previous marriage who were included in their estate plan.
A few years into the plan Ed, who played the lead role in operating the family enterprise, had a stroke and passed away. With their family office in place and Brenda’s experience working with them, she was able to step in and take control of the decision-making, even though she was grieving.
While settling Ed’s estate, tension developed between Brenda and her step- sons. For some reason, trusting relationships between them while Ed was alive became more guarded, suspicious, and contentious: early warning signs of a discourse which could tear the family apart and destroy the family’s wealth.
To get to the root of the trouble, Brenda called a family meeting facilitated by their family office. With everyone present (including the estate attorney), the venue and dialogue allowed each to air their concerns. They discovered a misunderstanding by the children based on a statement Ed had made years earlier when the estate was assumed to be much larger than when he died.
The children, who thought they were being shorted, realized the truth and the conversation quickly turned to back to more productive family matters.
Not all family offices are created equal
When considering family offices, be sure to select one that is and has a history as a competent fiduciary; one that demonstrates prioritizing their clients’ needs before their own.
When evaluating a family office, it is also important to ask:
- When will I see a return on my investment? A family office should not be an expense, but an investment that returns much more to you that you invest (ROI) by helping you make profitable financial decisions, avoiding costly mistakes, and eliminating unnecessary taxes and fees.
- How efficient is it? A quality family office is goals oriented, focusing on your most important issues and simplifying decision making with measurable results rather than offering numerous, non-essential, concierge-type services.
- What is its breadth? Many family offices are strong in one area and weak in others (accounting, legal, banking, investing, etc.). An effective one is comprehensive, supporting the planning and administration of cash flow, asset management, and a family-values-driven estate plan.
- Where is its focus? In order to assure objectivity look for a family office that is first and foremost a family office, not an investment company, bank, accounting, or law firm offering family office services. Conflicts of interests make it difficult to offer as an additional service.
Family wealth prudently handled has the potential to be a source of joy and confidence for your entire family. It can give each member the freedom to grow and flourish in their own way at their own natural pace. Working together also goes a long way to bring a family closer.
Family offices don’t just happen
The time and investment necessary to locate a suitable family office may seem like an insurmountable barrier. After all, where can you find:
- Capable staff who get know you and your family so well they can support you in making important decisions;
- An inclusive organization to coordinate your existing and future advisors;
- A flexible system that is responsive enough to adapt in good times and bad; and
- A dependable team that is there when you need them most?
As it is, your family depends on you to make the decisions that affect their financial health today and for generations to come. How would they fair without you?
Fortunately, the family office solution is more accessible now than ever.
James F. Thomas, Jr., (Buddy) is the Founder and Chief Planning Officer of Superior Planning, Inc., a multi-family office established in 1982 and based in La Jolla, CA. Superior Planning, Inc. currently serves 40 families in California and throughout the United States. Buddy can be reached at 858-546-1046 or firstname.lastname@example.org.
Kelly Nilsson, CFP, has been the Planning and Compliance Officer of Superior Planning, Inc. since 2010. With more than 20 years’ experience interacting directly with client families, advisory team professionals, and major financial institutions in the personal financial services industry, Kelly is uniquely qualified to meet the rigorous demands of providing the very best family wealth insights, guidance and services available anywhere. Kelly can be reached at email@example.com.
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