Family Office as a Vehicle for Legacy and Multigenerational Wealth

Feb 7, 2020

What Is “Legacy”?

Ask most families who choose to create or join a family office, and you will discover that their decision was motivated by a single word: legacy. Now that we have looked at some of the basic dimensions of the family office, let’s dive deeper into the fuller meaning of the motivating word legacy.

The dictionary definition is familiar enough. In terms of wealth, legacy is simply an inheritance, a bequest of money or property. The broader meaning, however, is not confined to gifts of money and property but applies to just about anything that comes to us from the past and, most especially, from an ancestor.

Virtually all families that create or join a family office are motivated first and foremost by an imperative to preserve and to grow family wealth in the present and for the future. The chief objective is to invest assets productively to fund coming generations of the family. Yet ask these same families to define legacy, and they will also speak in terms of values, principles, and ethics.

Beyond both finance and values, families are concerned about preserving and passing down certain physical objects and homes or estates not just for their monetary value but for the sentimental, spiritual, iconic, or symbolic value they hold for the family. Such emotionally charged assets range from small keepsakes to important works or art to great properties and estates.

Finally, many very wealthy and ultra-wealthy families see philanthropy—making a philanthropic mark and leaving the world a better place—as the very foundation of legacy.

In all these varied definitions of legacy, the family office can play a significant role in stewarding legacy in every one of its dimensions. The business of the family office is to manage the assets, whether tangible or intangible, that constitute the family’s legacy. The family office stewards these assets to protect the legacy, preserve it, and grow it, always with an eye toward handing it over to the rising generation.

Four Categories of Legacy

Perhaps the most direct way of thinking about the different dimensions of legacy is to divide the subject into four broad categories:

  1. There is the financial legacy—passing on financial wealth to next-generation beneficiaries.
  2. There is the social values legacy—modelling and articulating the values, ethics, and attitudes the family wants to perpetuate from one generation to the next.
  3. There is the philanthropic legacy—family-financed charitable giving aimed at making the world (or some part of it at least) a better place.
  4. Finally, there is what we may call the narrative legacy—which consists of the autobiographical narratives, the life stories, told by senior members of the family for the benefit of succeeding generations. This legacy is the family’s narrative history.

Financial Legacy

According to one study, about 80 percent of individuals of wealth are keenly interested in passing down a significant fraction (usually about half) of their material wealth equitably to their children.[1] This represents a sharp departure from the earlier tradition of primogeniture, which favored passing on the bulk of material wealth to the firstborn son. About two-thirds of wealthy individuals also list philanthropic causes (or charity) as major beneficiaries of their wealth. Occupying third place among beneficiaries are family members other than children, such as grandchildren, siblings, spouses, and so on, followed, in fourth place, by one’s church, synagogue, mosque or equivalent.[2]

Most wealthy people believe it important to specify beneficiaries very clearly, with the amount or portion of each bequest quantified. For most, the objective of this specificity was to avoid stirring family conflict. Many also believe that testators—especially parents—should at least broadly earmark each bequest for some stated purpose, such as education or starting a business.

Social Values Legacy

Most wealthy individuals report that they want to pass down social values along with a financial legacy. Generally, the idea is to promote personal growth—growth of character—along with financial growth. While stewardship of both material and social wealth is important to most wealthy individuals, many want more. They envision the family’s material and social wealth as continually being managed for growth. This social value is directly related to the responsible stewardship of family financial wealth. The objective is to spend with discipline so that the family wealth will not only grow for its own sake but will enable family members to continually give back to their community or, more generally, to causes beneficial to humanity. In short, many privileged families believe that the value of great wealth increases if a significant portion of it is used for the benefit of others, outside of the family.

Properly constituted, staffed, and managed, the family office is a powerful tool of stewardship and discipline. As mentioned elsewhere, it can function to educate members of the rising generation on ethical stewardship, which promotes both the preservation as well as the growth of all aspects of the family legacy. Respect for material wealth includes a commitment to the family’s reputation for—and tradition of—strong social values, which are acted upon through charitable or philanthropic giving.

A family’s conscious, deliberate embrace of its social values legacy requires members to understand and accept the precept that with significant wealth comes the ethical responsibility, the moral privilege, and the power to do good. As the Gospel of Luke puts it, “For unto whomsoever much is given, of him shall much be required.” At the same time, sound stewardship of social values requires humility. Many legacy families are wary of the rising generation coming of age with a sense of entitlement, a belief that their wealth puts them in a higher social or moral category than others. This is especially offensive in countries with strong democratic traditions, such as Canada and the United States. The family office can play a role in helping senior family members moderate the growth of anti-democratic attitudes of entitlement. The following well-known (but probably misremembered) exchange between F. Scott Fitzgerald and Ernest Hemingway is a good corrective to the confusion of wealth with aristocracy:

Fitzgerald: “The rich are different from you and me.”

Hemingway: “Yes, they have more money.”[3]

Social values legacy requires handing over, intact, from one generation to the next, the conviction that wealth can be used to promote social justice and should never be used to circumvent social justice. This ethical discipline is not simple self-denial. Rather, it inculcates in the rising generation the belief that money indeed neither buys happiness nor confers social superiority. To the extent that the rising generation builds its happiness on possession of money, it is built on a foundation of sand.

This is not to deny that money does contribute to happiness. It can, and it does. The reverse, however, is also true. Squandering one’s financial legacy by living beyond one’s means can create profound, even catastrophic, misery.

The Philanthropic Legacy

With considerable justification, there is much concern these days over the “wealth gap,” the vast disparity between the wealthiest 1 percent and the remaining 99 percent. The Conference Board of Canada recently ranked Canada 12th in income inequality out of its 17 peer countries. That is, only Japan, Australia, Italy, UK, and US have a greater wealth gap than Canada’s.[4] Nevertheless, according to a 2018 study Bank of America conducted in partnership with the Indiana University Lilly Family School of Philanthropy:

Generosity is the norm among high net worth Americans. . . . [T]he overwhelming majority of American high net worth households reported making charitable donations. Last year, 90% of this group gave to charity, compared to 56% of the general U.S. population. … Wealthy donors gave to an average of seven different nonprofit organizations in 2017. These donations supported a wide range of charitable causes with basic needs organizations receiving support from the largest percentage (54%) of high net worth households. Additional causes supported by wealthy donors included religion (49%), health care or medical research (36%), combined charities6 (31%) and youth or family services (29%). Thirty-six percent of high net worth households gave to educational causes, including 22% giving to higher education while 24% gave to K-12 education.[5]

There is no reason to believe that attitudes north of the border are dramatically different. In addition, a study focused exclusively on ultra-high-net-worth individuals (UHNWI) reported that 84 percent believed that wealthy people had a moral duty to contribute to society.[6]

As mentioned, very-high-net-worth and ultra-high net worth individuals and families typically apportion a substantial fraction of their material wealth to charitable and philanthropic causes. Moreover, the vast majority who give while living or who bequeath significant sums in their wills report having come from families “that were philanthropic.”[7] This supports the notion that most families with sufficient resources to prompt them to create or join a family office consider philanthropy an important element of the family legacy. In many cases, the family and its members do not just donate to philanthropic institutions and entities, they create them and play significant roles in their management.

In philanthropy, tangible and intangible legacies combine. Planning and providing for the financial aspects of philanthropy requires dealing strategically with material assets whereas determining the purpose of a particular philanthropic cause partakes of intangibles, including social values legacy and the family’s moral and ethical vision. Here, the family office’s role in articulating family values and vision comes very much into play. The family office can also coordinate consultation with individual family members in drawing up a will that specifies philanthropic bequests and may also include features of the so-called ethical will.

In contrast to traditional wills, which simply specify how and to whom financial and other material bequests are to be made and apportioned, ethical wills lay out and explain the values, ethics, and philanthropic intentions of the testator. Traditional wills simply pass on money and other physical items of value. Ethical wills pass on knowledge and share dreams, values, and vision. They are testaments of the individual’s core beliefs and values, which often are intended to reflect the collective legacy of the family.

Philanthropy is a gift bestowed on a community, on society, or on humanity itself. And yet it is also a gift a family gives to itself. It is an act of branding, of endowing the philanthropic family with an identity closely linked to the causes it funds, perpetuates, champions, and advances.

Families are ideal vehicles for philanthropy because the philanthropic endeavor, if wisely chosen and diligently stewarded, tends naturally to link one generation to the next. Philanthropy becomes not a sideline but the family’s heart and purpose. In this, philanthropy gives the lie to the old saw that money cannot buy happiness. In fact, giving makes us happier.

The family office can—and should—add a more directly financial element to this by ensuring that the family’s philanthropy is managed to take maximum advantage of the Income Tax Act. There are numerous financial vehicles for philanthropic giving that carry different tax benefits. Depending on the staff of the family office, its tax specialist—or one whom the office hires—should have the expertise required to determine the most advantageous structure for the philanthropic vehicle.

Capturing the Family’s Narrative Legacy

As the concept of legacy means different things to different individuals and families, so it takes on different emphases at different stages of life. Older family members are often anxious to capture what they consider their legacy. This effort may have financial dimensions, business dimensions (passing down a prospering family business), values dimensions (delivering intact the family’s ethics and values), and personal narrative dimensions. Older family members are often eager to tell their stories, to leave to the family an autobiographical legacy. Indeed, the family office may become the means through which this narrative legacy is captured. Writers, ghostwriters, genealogists, historians, and others may be hired and managed through the family office to create the autobiographies and preserve the valued stories for future generations.

We often speak of “recorded history.” The phrase, however, is redundant—because the only history that exists is recorded history. If the story is not set down, there is still a past, of course, but there is no history of it. It is the proverbial tree that falls, unheard, in the lonely forest. The family office can take on as one of its functions the role of family archivist and archives, preserving individual and collected narratives both through the recording of oral storytelling and the careful preservation of family documents.

Those of the younger generation may want to take the initiative in ensuring that the seniors share their stories. Psychologists Carolyn J. Friend and James M. Weiner founded the Gen-T Institute to help families pass on their non-financial and intangible legacies. In 2010, the pair published a book about the process of creating an inter-generational dialogue within the family, The Legacy Conversation: The Missing Gem in Wealth Planning.[8] The family office can be invaluable in initiating these conversations.

Philanthropy and the Family Office

I have alluded briefly to the role of the family office in legacy, and it can play an especially significant role in the family’s philanthropic legacy. In the absence of a private foundation, the family office may organize, operate (on a daily basis), and govern the family’s philanthropy. In some cases, the family office provides the direct leadership for the family’s private philanthropic foundation.

A few extraordinarily wealthy families establish large private foundations—sometimes in multiples. In these cases, the foundation usually incorporates its own operational, governing, and leadership structures. Even in these lofty instances, however, it is possible that a department within the family office itself provides leadership and management. The foundations even most ultra-high-net-worth families establish control assets under $30 million. Many of these are managed by staff within the family office. As the family office helps wealthy families articulate their vision and values, so it plays a key role in laying out the strategic focus of the philanthropy.

Among the greatest advantages of running a philanthropic foundation through the family office is that its staff is in an excellent position to ensure that the foundation’s values always align with the family’s values, its identity, and its public-facing brand. The family office can also more effectively coordinate the philanthropic endeavors of large and diverse families with multiple branches, especially when these are widely distributed globally. Such families often create a proliferation of philanthropic initiatives. Needless to say, the family must take care in choosing those personnel in the family office staff who are responsible for managing the foundation. There should be direct lines of communication between this highly professional staff and the family.

Other advantages to managing philanthropy through the family office include tight integration of administration, tax strategy, and governance with the corresponding functions that are not related to the family’s philanthropies. The family office also offers significant operating efficiencies, since some staff will doubtless support the foundation in addition to performing other family office functions. Moreover, if the family office serves to manage all the family’s investable wealth, managing the assets of the foundation may be very effectively aligned with investments outside of those dedicated to the foundation.

Most families that engage extensively in philanthropy do so through private foundations. There are alternatives, however. Some of the most common include:

  • Giving circles
  • Corporate giving—through the family business
  • Operating foundations, which are supported by the family but operate independently from it
  • Community-based foundations, which are staffed by professionals in the community rather than directly employed by the family that serves as the foundation’s chief donor

Still other alternatives to a foundation include donor-advised funds and direct gifts.

  • The donor-advised fund accepts and invests the family’s donations in the form of an irrevocable trust. When the family decides to contribute to a given charity, it recommends that investment to the fund’s manager. The money in the fund grows, tax-free, until the decision is made to invest all or some of it.
  • Direct gifts are just that. The family donates to a cause directly.

The tight integration within the family office of foundation and non-foundation management is mostly positive. But it can present some potential for friction and conflict. After all, the “main” objective of the family office is to preserve or even grow the family’s wealth, whereas the objective of philanthropy is to give away wealth. The potential for power struggles within a family office that also manages a foundation is also quite real. Strong and clear communication between the family and its family office is essential to averting this consequence.

Many of the potential tensions may be avoided if the educational role of the family office is used effectively. Remember, most family offices provide mentoring of family members in the responsible stewardship of wealth. The office can also be used to mentor the rising generation in philanthropic investment and the responsible management of funds earmarked for philanthropic purposes. The idea is to instil a philanthropic mindset in younger family members for the purpose of ensuring the continuity of the family’s philanthropic endeavours.

Philanthropic Role of the Family Council

The family office is not the only family entity that may become involved in the leadership of the family foundation. If the family has created a formal family council, this body can choose to constitute itself as a committee tasked with providing oversight of the family foundation. Already deeply involved in the business of the family, the family council, perhaps even more than the family office, is in position to ensure on an ongoing basis that the family’s philanthropic endeavours are always aligned with the family’s interests and values.

The Family That Gives Together …

It is tempting to think of philanthropy as a kind of supplement to the core business of the family. In fact, as mentioned, philanthropy itself often becomes the very core of the family’s cohesion, identity, and “brand.” Despite the challenges and real potential for disputes, most very wealthy and ultra-wealthy families find that philanthropy is a force for unity in the present and continuity into the future. Philanthropy is a confirmation of the family’s essential goodness and desire to give back to the community, the nation, the world. The family that gives together stays together.

[1] Kirby Rosplock, The Complete Family Office Handbook: A Guide for Affluent Families and the Advisors Who Serve Them (Hoboken, NJ: Wiley/Bloomberg Press, 2014), 334.

[2] Rosplock, 334.

[3] Wikiquote, Talk: F. Scott Fitzgerald, https://en.wikiquote.org/wiki/Talk:F._Scott_Fitzgerald. This is how Hemingway remembered the exchange. In fact, it was more likely a garbled recollection of a conversation between Hemingway and Mary Colum, an Irish literary critic.

[4]The Conference Board of Canada, “International Ranking, Income Inequality,”  https://www.conferenceboard.ca/hcp/Details/society/income-inequality.aspx?AspxAutoDetectCookieSupport=1; Denmark has the smallest wealth gap among Canada and its seventeen peers. Norway, Belgium, Finland, Sweden, Austria, France, Ireland, Netherlands, Germany, and Switzerland also have smaller wealth gaps than Canada.

[5] Bank of America and the Indiana University Lilly Family School of Philanthropy, “The 2018 U.S. Trust Study of High Net-Worth Philanthropy,” https://www.privatebank.bankofamerica.com/articles/2018-us-trust-study-of-high-net-worth-philanthropy.html.

[6] Kirby Rosplock, “The Wealth Alignment Study Report of Findings,” GenSpring Family Offices, 2008.

[7] Rosplock, The Complete family Office Handbook, 344.

[8] Carolyn J, Friend and James M. Weiner, The Legacy Conversation: The Missing Gen in Wealth Planning (Milwaukee: MavenMark Books, 2010).