The Entrepreneur's Guide to Leaving a Financial Legacy That Won't Spoil Your Kids

Garrett Gunderson, Contributor, Forbes
August 16, 2016

Do you believe in leaving your children a wealthy inheritance? It can be a difficult question for successful entrepreneurs. On one side of the argument, you don’t want to create entitled, spoiled-rotten children who don’t know how to create value or be successful on their own terms. But on the other side, what’s so wrong with utilizing your success as a launchpad for your child? Is it bad that they may reach greater heights than if they started from square one?

Those are both valid viewpoints to hold. The good news is, you don’t have to make a choice. You can leave behind wealth to empower your children and you don’t have to fear that they’ll turn into lazy, spoiled trustafarians. How?

Choose to leave your kids a legacy instead

I’m choosing to leave my kids (and their kids) with a legacy. And to do it, I’m emulating one of the richest families in history: The Rockefellers. Why the Rockefellers? Because in the late 19th century, there were two very wealthy families: the Vanderbilts and the Rockefellers. Soon after the family patriarchs passed away, the Vanderbilt fortune was quickly depleted, leaving many heirs completely broke; whereas the Rockefeller fortune is still going strong today, six generations later.

The Rockefellers kept their fortune together by designing trusts to protect the family wealth. The money inside the trust is managed by the Family Office, a group of financial experts working together on the same goal. I’ve been studying this wealth strategy ever since I walked into a Family Office more than 15 years ago. And I co-wrote the book, What Would the Rockefellers Do?, with Michael G. Isom to share everything I’ve learned about creating a financial legacy for your family.

To give a quick overview, there are rules — and roles — for deciding how heirs are allowed to access money. Rules, and roles, are the key to giving your kids access to money without destroying their potential to achieve success on their own terms, in their own way. Let’s start with the rules:

Access to the family money

It’s common for successful entrepreneurs to fear leaving their children a large sum of money. But what if there were strings attached? What if you could continue to shepherd the family fortune even after you’re gone? And what if you could set up a framework for the next generation to apply their wisdom to the family fortune within responsible, reasonable guidelines?

You can’t do that with a generic trust formed with standard legal documents. But you can hire a qualified estate planning attorney to customize a trust to personify your wisdom and values. My estate planning attorney, who is a beneficiary of a prominent family trust himself, often helps Wealth Factory members create family trusts with rules for accessing money.

For example, your family trust can give rewards for certain behaviors, like going to college or starting a business, and take away rewards for other behaviors, like alcohol or drug addiction. The idea is to leave signposts. You’re not forcing them to do anything. But if they follow the signposts that guide them to a successful, productive life, they are rewarded with more access to the family money. Those are the rules, now let’s cover the roles.

Who do you trust to teach your children?

As the family patriarch, my role is that of the CEO, so to speak. It’s my job to establish the family vision, the culture and to look after the finances of the family trust while I’m alive. And I will decide who gets access to family money. Essentially, I’m in charge. At some point, however, I won’t be around to personally protect the family trust. What then? Well, businesses often have a succession plan if the CEO passes away, and your family should, too. A board of trustees is usually in charge of carrying out a business’s succession plan and making decisions after the CEO is gone. And your family trust can also have a board of trustees that takes control in case of your passing.

For my board of trustees, I looked at my closest friends and associates to find people that reflected my values. If I could figuratively slice up each member of my board, there’d be a piece of each of them that represents how I view the world and what I would do in a specific situation. So if I pass away, the board will be there to make decisions that are as close as possible to what I would have decided myself.

Those decisions may be about distributions to heirs, when to sell assets or businesses, and how to handle lawsuits against the family. The board can even decide to stop giving distributions to an heir who may have a drug, alcohol or some other problem if access to more money would be destructive. Also, my board of trustees is responsible for teaching my children what I wouldn’t be there to teach.

What advice would you give your great-great-grandchild?

A trust is also a great way to pass on your wisdom, knowledge and experience to the generations that follow. The document for my family trust is 87 pages long. But you won’t find any legalese in the first 51 pages — instead, you’ll find my Statement of Purpose.

A Statement of Purpose is your entire life philosophy distilled into one document so that it can be reread and utilized for generations to come. It’s the most important book that you could ever write. And it’s how you leave a financial legacy to your kids. My great-great-grandchildren will read financial wisdom that I’ve developed over the years like:

  • No one cares more about your money than you, so be a steward over your money.
  • No one individual is an expert in everything when it comes to finance.
  • Set up a wealth capture account where you separate your spending money from your investing money.
  • No amount of luck, discipline, rate of return, or savings, will ever matter if one cannot overcome the scarcity mentality, which will inevitably destroy wealth.

Can you imagine the advantages you’d have today if a wealthy ancestor had passed on their knowledge to you? With a Statement of Purpose, you become that ancestor for generations to follow.

This Is how wealthy dynasties pass on their success

Traditionally, trusts simply divide, distribute and ultimately destroy wealth. The beneficiaries feel frustrated, miserable and guilty because they miss out on lessons of life. They may never discover their life’s purpose and it can kill their chance to contribute to the world. But with a financial legacy trust on your side, you’ll actually enhance the next generation’s contribution to the world. And you’ll protect, preserve and perpetuate your wealth just like the Rockefeller trusts do.

This article was written by Garrett Gunderson from Forbes and was legally licensed through the NewsCred publisher network.

The strategies mentioned in this article will often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice.  This information is provided to you “AS IS”, does not constitute legal advice, is governed by our Terms and Conditions of Use, and we are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here.  Clients’ tax and legal affairs are their own responsibility – Clients should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this article.

The views of the author of this article do not necessarily represent the views of First Republic Bank.