U.S. Trust® Family Office Profile: Legacy Planning— The Family's 100-Year plan

A hundred years is a long time. It is especially long in an age of instant messaging and smartphones. Society is also very much focused on instant results. Nevertheless, planning for the next 100 years is one of the most critical tasks a wealthy family faces today. With this 100-year plan, a family sets in motion a culture and philosophy that can guide future generations to perpetuate the family's financial and intellectual capital.

To a great extent, the 100-year plan can help present and future family members better understand how and why their parents and grandparents arrived at some of their decisions on the following issues:

• The distribution of wealth between family and charity, and the distribution among family members
• When both family members and charitable organizations will receive their designated funds
• The form in which each will receive the funds
• How any partnership, trust and charitable entities will be governed

When Designing a 100-Year Plan, Families may Want to Consider Some of the Following Guiding Concepts:

1. The Real Levels of Investments — The ways families invest should be examined on three levels:

• Investments in assets, through the traditional allocation of wealth into a range of financial asset classes, real property, private businesses, real assets and collectibles.
• Investments in community, through charitable giving, impact investing, charitable trusts and a private family foundation and/or donor-advised fund.
• Investments in family, by using wealth to support family members in their business and personal endeavors. The objective here is not only to look at wealth in financial terms. Instead, it is also important to use your wealth to build a family "intellect" and to enable its members to contribute to each other and to the greater community. A wealthy family is not just one that has a substantial amount of money or real property. A wealthy family is also one that has produced leading doctors, social workers, professors, school teachers, musicians and scientists. Sometimes it is the availability of family wealth that may encourage or enable a family member to pursue a profession that is very worthwhile but may not pay much.

2. The Founder's Attitude Toward Wealth — Perhaps one of the key attributes of the document is how the founding patriarch and matriarch view their family's wealth and how they would like to see it employed over the generations. They will usually speak about how they would like future generations to be entrepreneurial, and how they would not want money to divide the family. They will also discuss the importance of education and the importance of work over consumption. Most family leaders will also express their desire to see future heirs become leaders in their communities and perpetuate the family's good name.

3. Managing Risks — Most plans will deal with the issue of risks, as the overriding concern of most families is the loss of their wealth. Risk is present in different ways, depending on the specific family. This is where they address the issue of equity concentrations. In particular, they would convey their attitude toward retaining significant positions and diversifying away from those concentrations. Additionally, they may discuss the range of asset classes in which they believe the family should invest, as well as the way to handle risk in those asset classes.

4. The Family Business — Where a family business still exists, it becomes an important part of this plan, with the following issues generally covered:

• Desire to see the company always retained in the family, or a willingness to see it positioned to sell at an opportune time
• Guidelines for selling the stock, particularly to nonfamily members
• The allocation of stock among family members, particularly where some family members are not involved with the company
• The makeup of the board of directors, solely among family members as well as among family and nonfamily
• Succession plans
• Effective estate transfers

5. The Role of Philanthropy — Nearly all wealthy families give something back to the communities where they made their fortunes. Accordingly, a 100-year plan will address how the founder would like to see the family spend its charitable dollars. Some of these broad issues will likely be covered:

• The extent of the estate going to charity.
• The preferred charitable structure, such as charitable remainder or lead trusts, donor-advised funds at a community foundation or a private family foundation.
• If a private foundation is a chosen option, the plan may comment on the preferred governance structure, including the makeup of the board of directors (see point 8). It will also specify the role each of the family's children should play in the foundation. Some families allow each child to designate a portion of the charitable beneficiaries while others want each child to have a seat on the board and to act collectively. Finally, it would certainly comment on the foundation's mission.

6. Wealth Transfer — At the heart of the 100-year plan is how the family's wealth will be transferred to succeeding generations. This answers the questions of who, how much and when. There are a range of issues, but here are some of the most prevalent:

• Who the specific heirs are.
• How much is transferred at death and how much during lifetime.
• The lifetime gifting strategy.
• Dealing with disabled or elderly family members.
• Attitude toward minimizing estate taxes versus retaining ownership and control of assets.
• The use of trusts, including a family dynasty trust.
• If trusts are established, should they be "pot" trusts or individual trusts?
• The principal distribution guidelines for each trust
• Trust termination provisions.
• Who the trustees should be. Also, should there be a corporate trustee?
• The process for replacing trustees.
• The need for a trust "protector."
• How advisors should be evaluated.

7. The Family Bank — Critical to the process of expanding the family wealth is to create and implement a process for funding business and entrepreneurial opportunities. Even though an individual may be part of a wealthy family, that does not ensure that any commercial bank will finance a business venture that he or she will present to it. Accordingly, the concept of a "family bank" may resonate well with certain family leaders. Here is how it works. Structurally, there is no need to form an actual bank. Instead, the family bank could operate within the context of a revocable trust, limited liability company or, ultimately, a family dynasty trust. The dynasty trust could last in perpetuity and could engage in some of the following activities:

• Investment Capital — Here the family bank provides equity capital for a family member's business. This would be an investment that is converted back to cash upon sale or redemption. The family bank would generally invest alongside family members.
• Loans — Here the family bank actually lends funds to family members, requiring many of the same conditions as do commercial banks. It is expected that the funds would be paid back so the family bank could re-lend capital to someone else. The idea is to have a perpetual source of debt capital for family members, encouraging them to seek out productive investment opportunities. This concept is patterned after the model introduced by the Rothschilds a couple of centuries ago.
• Loan Guarantees — Instead of directly lending money, the family bank could offer loan guarantees to a commercial bank that would grant a loan to a family member. The idea is to encourage family members to deal directly with financial institutions and be on the line to service the debt.
• Real Estate Partnerships — This is a common investment for families, and having a family bank invest alongside family members would be an appropriate activity. Also, as real estate is typically a productive investment over the long term, this is a prudent deployment of capital to earn higher returns.
• Social Ventures — Earlier, we discussed the importance of using some of the family's wealth to support its members in the pursuit of their life's work or interests. In some cases, a family member may wish to devote his or her livelihood to social ventures. Examples could include the purchase of a summer camp, day care center or a theatre. While these may not be great money makers, they could enable the particular family member to develop an important niche in his or her life. At the same time, they help to build the family's legacy in the community and add to the family's "intellect."
• Education — While this would be an outright distribution, one can view it as a long-term investment in the "family." This is always a productive way to give money to the next generations. Education should also be looked at beyond the college degrees. Supporting and encouraging family members to attend seminars and specialized training is also productive. This expenditure could even be extended to include such activities as musical instruments and instruction and overseas study for grandchildren.

8. Philanthropy — Critical to the process of expanding the family wealth is to create and implement a process for funding business and entrepreneurial opportunities. Even though an individual may be part of a wealthy family, that does not ensure that any commercial bank will finance a business venture that he or she will present to it. Accordingly, the concept of a "family bank" may resonate well with certain family leaders. Here is how it works. Structurally, there is no need to form an actual bank. Instead, the family bank could operate within the context of a revocable trust, limited liability company or, ultimately, a family dynasty trust. The dynasty trust could last in perpetuity and could engage in some of the following activities:

• The family could adopt the traditional approach where the children would be board members who could, therefore, oversee the distribution of grants.
• The family could also broaden the children's direct involvement by enabling each child to nominate grantees up to a certain amount.
• Alternatively, the family could actually establish separate charitable pools for each child's family group, giving that group discretion over the grants. There could also be a common pool where all members participate as directors. When families adopt this format, they sometimes establish a family advisory board consisting of family members, professional advisors and community leaders. The purpose of the board is to ensure that all grants and operations are compliant with tax regulations and the foundation's bylaws.

9. Challenge Trusts — With some families, the concept of incentive trusts is popular. Here the family trust would match the earnings of children. It could work along the following lines:

• The trust matches the earnings of each designated family member on the basis of $1 per $1 earned up to a maximum of, let's say, $100,000.
• To further help family members who want to pursue very worthy but lower-paid professions such as teaching, the trust could offer $2 per $1 earned with the same maximum, dollar figure of $100,000.
• This way, each child could get the same maximum, but those who make less money could each get their match faster and at a lower threshold.

Results

To summarize, a family may craft a 100-year plan, or something like it, in an effort to articulate some of the following thoughts:

• Encourage business enterprise within the family.
• Perpetuate a family culture of "doing and accomplishing things."
• Encourage work over consumption.
• Promote philanthropy and active community involvement.
• Continually build the family intellect. This would happen as a result of encouraging both business and social investments. The end result is a family that offers society a number of talents and where the members are also in a unique position to support each other.