By: Steven E. Zeller, CFP, CExP, AIF, NQPC

Wealth within a family can be a double edged sword. It can serve as an incredible resource to benefit its family members, but it can also be destructive and divisive. Destructive in the sense that if not properly tended to and respected, wealth can destroy the purpose and outcomes of individual family members, and divisive in the sense that it can damage the bond between family members and cause a splintering of the family.

Wealth and the handling of wealth have been discussed and written about throughout the ages, as they are mentioned in both the Old Testament and the Gospels, particularly in the parables of Jesus. Yet often, families don’t properly plan, develop, and practice the preservation and use of their wealth in ways that produce favorable outcomes and endure across generations. The reality that families face is that just because they have addressed the accumulated tangible assets with a planned strategy and structure for transferring those assets, it does not ensure that those assets will last and, more importantly, promote the growth and well-being of individual family members and foster family unity.

So how does a family address this topic? A good place to start is to change the way wealth is viewed and is approached. First, family wealth is capital, which equals potential (Family Wealth = Capital = Potential). That potential can have a positive effect or a negative effect. Secondly, family wealth comes in multiple forms – Financial capital, human capital, intellectual capital, and spiritual capital. Wealth in a family means more than just money, assets, and material resources; it also includes other things, such as family heritage, reputation, knowledge, education, passions, purpose, relationships, achievements, personal growth, and values. In fact, the other forms of wealth I just mentioned are arguably more important to preserve and grow than the tangible form, because without nurturing and expanding the intangible forms of wealth, the tangible wealth is unlikely to survive and may break family harmony. The emotional bonds, unity and harmony of the family members are some of the more powerful components that are critical for preserving family wealth long-term.

Within family unity and harmony lies the development of trust, respect, and communication. These components should be developed and strengthened before financial capital is transferred and deployed. We will discuss that later.

Discussing the Four Forms of Wealth

The forms of family wealth that I mentioned are somewhat subjective, but are important to realize and work to develop, grow and protect. Strengthening all 4 forms of family wealth promotes purpose, personal growth, happiness, and well-being. Furthermore, the legacy of this wealth involves every family member and spans over several generations.

Financial Capital – Financial capital consists of the tangibles – Investments, savings, bank accounts, real estate, businesses, precious metals, collectibles etc. – The movable and immovable assets that the family owns. Financial capital can be a powerful tool for promoting the growth of the family’s human, intellectual, and spiritual capital.

Human Capital – Human Capital is the most important capital. It is the members of the family and their physical and emotional well-being and self-sufficiency.  It’s their ability to pursue happiness, their higher purpose beyond themselves, their ability to make a positive impact on their community, and the centeredness of maintaining a strong family. Not only is it vitally important to focus on the strength and growth of this capital long-term, but the family also needs to work, communicate, and cooperate with each other as a team to help assure that everyone is flourishing to the best of their ability, and work towards common goals.

Intellectual Capital – The strength of a family rests on what it knows. The intellectual capital is the knowledge life experiences and wisdom of each of the family members. gaining knowledge, applying knowledge, and other skill sets to preserve the wealth, and apply it in ways that is conducive for the family and well-being of family members. It is also the competency of each family member. Building a strong foundation of intellectual capital will help drive individual purpose, skills, and relevant knowledge, thereby preserving and respecting financial capital.

Spiritual Capital – As sad as it is, this subject has become controversial within our society as it becomes more secularized. But the spiritual capital ties in with the happiness, well-being and purpose of each family member, in that if they have a strong spiritual foundation, they have a higher power to live for, go to, and from a meaningful perspective, make a positive difference in the world for the sake and love for mankind through God.

The Importance of Family Harmony

Family unity and harmony is vital for the survival of family wealth. The proactive building of trust and communication needs to begin early on as a family. Why? Because it doesn’t happen overnight and requires working as a team and developing the family bonds that are trusting, compassionate, and cohesive. According to some studies, 70% of estate transitions fail, and the wealth vanishes. Within the 70% failure rate, 60% was due to a breakdown in trust and communication; 25% was due to failure to prepare heirs; 10% was due to lack of a family mission statement; 5% was attributed to other reasons.

Because of the high failure rate stemming from the breakdown of trust and communication, it stresses the importance of the family focusing on it and making a consistent effort to strengthen it. Hence, proactively preparing family members involves resolving the breakdowns in communication and trust. It also requires them to work together to establish a family vision and mission statement, align those statements with financial capital, identify family values, develop roles for each family member, establish performance and quality standards, and work towards family governance that involves the whole family.

There is a process that a family can go through, starting with the wealth accumulators, or the first generation of wealth. This journey consists of several tools, including a family retreat that involves the first generation or the parents who accumulated the wealth. Later, the other generations are brought into the fold as family meetings begin. From there, the building of communication, trust, common causes, the establishment of values, the fine-tuning of the vision and mission statement, etc., are pursued. Once this is thoroughly completed, the family can work towards establishing roles for each individual, developing leadership skills, and establishing family governance.

Ultimately, this is the creation of a family legacy, and as I mentioned in the title of this article, it is a multi-generational process and effort. It is also likely that the family will need professionals to help them through the process, and our firm can provide them.

I will write more on this in further articles.

I hope you found this article helpful. If you have any questions, please don’t hesitate to contact me at szeller@zellerkernba.com.

Steven E. Zeller is a practicing Business Advisor for Zeller Kern Business Advisors located in Sacramento, California. They provide Business Exit Planning services in the Sacramento area and throughout the Central Valley of California, Nevada, and Idaho. They also provide advice for building the value, scalability, and transferability of a business. They are also experienced in Family Legacy Development. www.zellerkernba.com