Tiedeman Advisor’s Jill Shipley quoted in Barron’s | Even Wealthy Families Can Lose It All. Here’s How.

By Steve Garmhause | August 2, 2022

For many families, being wealthy involves continual worry about how that wealth might disappear. Even if they invest prudently, plenty of financial risks remain. So for this week’s Barron’s Advisor Big Q, we asked financial advisors to describe some of the top threats to family wealth that lie outside the capital markets.

Peter Mallouk, CEO, Creative Planning: The biggest risk to ultra-affluent families is not having proper asset protection plans in place—not protecting the assets from creditors, litigation, divorce. These things can also happen to your kids or grandkids: After the kids become adults, they receive all these funds. And those assets can be vulnerable if they get divorced, if they wind up in litigation, if they create an accident liability. Assets can be attached by the state for certain reasons.

If you have a plan where the money stays in a trust, and a trustee makes sure that houses, businesses, and so on stay inside the trust, then they are generally protected from divorce litigation and everything else. Unfortunately, most very affluent families don’t have that kind of proper planning. Trusts are a very basic tool for making sure the family doesn’t lose their wealth.

Another big issue for very wealthy families is a lack of generational education. Once control of the money passes to heirs, it really attracts deal making. Your heirs will constantly be approached [with investment opportunities], and they’re going to want to make their own mark. Without proper education, they can be too aggressive and make costly mistakes.

Cheryl Holland, president and founder, Abacus Planning Group: Increasingly my clients are at risk from climate change. A lot of them have not just two houses but three or four houses. And this is probably emotional loss as much as financial, but it’s about wildfires, flooding, rising sea levels, and hurricanes. I’m seeing some insurance premiums getting outrageous: I have a client in California whose new insurance premium for their house is $200,000 a year. And several clients had their policies canceled last year in southern L.A.

I will say that this is eyes-wide-open risk. People are actually saying things like, “I’m going to buy this house on Sullivan’s Island, in South Carolina, or on Fire Island in New York. And I understand that if I buy it in the family trust, that’s a really bad investment. Because the likelihood of it maintaining its value over the next generation’s lives is slim.”

Another risk is the children squandering inherited wealth. I don’t know that the data completely bear out the saying, “shirtsleeves to shirtsleeves in three generations,” but I’m sure there’s some truth to it. To make sure your children are supported by wealth and go on to live purposeful lives, it’s important to impart values around money for your family. It could be about work ethic or about public service ethic. It could be about how you share your time and talents, your resources with others. It could be about education or entrepreneurship. But the key is to start early. Ron Lieber’s The Opposite of Spoiled is a really good book that you can pick up to understand how you’re translating values to your children.

John Castronuovo, private wealth advisor, UBS: It does start with asset protection and planning. Most of the clients we work with have created the wealth that they have. And they certainly don’t want to lose it for some unforeseen situation. They want to be able to pass it along the way they want to pass it along. Structuring the estate plan correctly helps to ensure that it does get passed along in the way they want.

Communication within the family is also really important. We have clients who have led the next generation by disclosing what the family’s wealth is and in terms of being financially responsible. And then you have the other extreme where they don’t tell the next generation anything.

Lynn Halpern, senior fiduciary counsel, Bessemer Trust: Often, affluent families intend for their wealth to benefit their loved ones for generations to come—that’s why they built it. But one of the big things that we see interfering with our clients achieving that goal is designing their wealth plans in such a way that they’re either overengineered, or too rigid, or both.

That can lead to the loss of wealth, but it can also lead to wealth not being used in the way that our clients intend for it to be used. For example, setting the provisions of a trust too narrowly can hamper the trustee. Because people setting up trusts often want to control the way the funds are used. They might say, “Only make distributions for emergencies for the beneficiaries.” So, can we pay for their health insurance? Is that an emergency? If distributions are only to be made for support and maintenance, can we make a distribution to a beneficiary to allow them to start a business? That’s why we recommend that trustees be given broad discretion so that they can deal with those unforeseen circumstances that inevitably arise.

Finding ways to put flexibility into trusts is hugely helpful. That’s also true for selecting the trust’s decision makers. Provide the ability to remove and replace the trustees. Let trustees resign. If someone’s setting up a trust that is going to last for a long time, that flexibility is really important. Clients never want to have to go to court to force changes.

Jill Shipley, senior advisor and head of Family Governance and Education, Tiedemann Advisors: The number-one risk is focusing the majority of time and money on money, and not focusing enough on personal well-being: on our family, relationships, and community. An example of that would be preparing heirs for their financial future. That means not just giving them the technical skills that they need, but also the social and emotional tools. That leads to mental health challenges, sometimes addiction, sometimes overspending, which leads to loss of financial resources. If you didn’t communicate your estate plan to your kids before you die, that can lead to massive conflict, resentment, sibling rivalry and lawsuits that drain financial resources.

A second risk to wealth is families not working on proactive prevention. Part of our responsibility is to advise our clients to engage earlier than they might think they need to, related to all of the aspects of their capital. Their health is an easy example. We struggle as humans to focus on prevention, and unfortunately, that leads to us having to deal with the crisis and the treatment. That also relates to estate planning or insurance or having tough conversations around creating governance policies and guidelines that are agreed upon by the family.

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To read the full article on Barron's, click here.