Successful generational wealth transfer can be difficult for many reasons.
Often, significant wealth is created in a single generation. The vast majority of examples of such wealth creation is through enterprise building. Corporations are recognised cornerstones of economies and communities. They can put families on the map.
Great wealth creation in and of itself is very difficult to accomplish, and most entrepreneurs take risks to accomplish outsized success and returns. Many will fail — some for taking too much risk; others for taking too little risk. Others will become leaders in their business endeavours and find tremendous success. They create wealth for their shareholders, their families, and their communities.
While wealth creation remains difficult, maintaining and growing family wealth from generation to generation presents many challenges as well. It is rare to have dynastic wealth. There are different reasons for why this is but, in our opinion, three jump out as most heavily influencing the success or destruction of family wealth.
- Family dynamics
We have written articles in the past on the challenges that family disharmony can cause (most recently: Avoid a family feud when it comes to generational wealth transfers. As we wrote in that article, “Too often generational planning is done with a singular focus on family wealth. While it’s true that this is a really important element, it also brings other aspects to the forefront: tax-planning, legal considerations, corporate and trust structures, insurance and investments. Ensuring maximum wealth transfer requires the right team of professionals and a strong plan. But we’d be foolish to ignore the anchor of the family wealth triangle: family cohesion and family compass, which are both commonly overlooked or ignored in planning. This triangle was developed at Tall Oak Private Wealth to deepen conversations with families and ensure that wealth is grown and preserved for generations to come.”
- Division, by definition, means less
When families successfully transfer assets through multiple generations, they most often divide assets between a greater number of descendants. A grandparent may build $300 million of family wealth and choose to pass it on to the next generations, but inevitably each successive descendant will end up with a smaller share of the pie. Even if none of the wealth was spent or lost along the way, if there were three children, and each of those children had two children, the grandchildren’s share of the family wealth would be calculated at $50 million. - Failure to protect and grow assets
In order for generational wealth to become dynastic wealth, wealth has to grow. We define dynastic wealth as wealth that is not only transferred from generation to generation but also grows as it transfers.
The first tenet of ensuring that wealth is categorized as dynastic is to transition the often-ingrained belief that wealthy families have of focusing solely on capital preservation. This focus on preservation only works in situations where there is no division of assets (point 2 above) and where inflation is non-existent. We have lived in a low inflationary environment for decades and so have gotten used to forgetting how detrimental inflation can be to long-term wealth.
In March 2022, rising post-pandemic consumer demand, coupled with supply chain bottlenecks and labour shortages, led to a significant rise in the price of almost everything. Inflation reared its ugly head, rising to 4.8% in 2021 (its fastest pace since 1991), and so far in 2022, annualized inflation has risen to 6.7% in March. Attempting to rein it in, the Bank of Canada raised interest rates by 0.25% in March, and 0.50% in April 2022. Some analysts anticipate another half-percent increase in June, and possibly more in the latter half of the year.
Inflation erosion is a real and present danger to generational wealth. At 3.4% over 20 years, the real value of wealth is cut in half. Said differently, if the family above kept $300 million in cash in a trust for 20 years with the intention of dispersing the funds at that time to the beneficiaries, and inflation averaged 3.4% during those 20 years, the real – inflation-adjusted – value of that $300 million in 20 years would be $150 million. Simply by doing nothing and holding cash, this family would lose half their true wealth in 20 years.
We often discuss the relationship between risk and investment opportunities with our clients. When asked if “risk” means “opportunity”, many would agree. Turning that around, the following statement rings true: “no risk” means “no opportunity”. In investments, without taking risk, you can expect no investment opportunity or returns. This is especially true when taking into consideration the negative effect of inflation on the true value of investments. However, “risk” certainly does not guarantee “opportunity” or returns.
The dilemma that many families face is how much risk to take. If not enough is taken, assets are subject to inflation erosion. If too much risk is taken, losses can destroy wealth. The responsibility of balancing risk and reward to, at a minimum, maintain the real value of generational wealth for the future is daunting for many families. We have worked with many to understand the landscape of opportunities and to build diversified wealth portfolios that include many asset classes. Our lens in assisting families in building these portfolios remains tied to our stated investment objective of achieving long-term capital appreciation with a focus on diversification and downside protection by investing across multiple asset classes.
At Tall Oak Private Wealth, we have had the privilege of working with many wealthy families to transfer, preserve and grow their wealth successfully for generations to come.
If you, or anyone you know, could benefit from our expertise, we would be more than happy to assist. Please click here to schedule a complimentary discovery call.
The views expressed in this commentary are those of Tall Oak Capital Advisors as at the date of publication and are subject to change without notice. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide tax or legal advice. Statistics, factual data and other information are from sources Tall Oak believes to be reliable but their accuracy cannot be guaranteed. This commentary is intended for distribution only in those jurisdictions where Tall Oak Capital Advisors are registered. Securities-related products and services are offered through Raymond James Correspondent Services Ltd., member Canadian Investor Protection Fund. Insurance products and services are offered through Gryphin Advantage Inc., which is not a member-Canadian Investor Protection Fund. This commentary may provide links to other Internet sites for the convenience of users. Tall Oak Capital Advisors is not responsible for the availability or content of these external sites, nor does Tall Oak Capital Advisors endorse, warrant or guarantee the products, services or information described or offered at these other Internet sites. Users cannot assume that the external sites will abide by the same Privacy Policy which Tall Oak Capital Advisors adheres to.
