In my previous piece on effective wealth, I made the case for linking wealth to spending.
- Individual wealth => 5 to 10 years cost of living
- Generational wealth => 10 to 25 years cost of living
- Multi-generational wealth => 25 to 40 years cost of living
- Surplus (excess?) wealth => beyond 40 years cost of living
Spanning 25 years and a range of industries, my careers have had one thing in common… clients can sustain significant losses.
Early in my working life, permanent financial loss didn’t concern me.
- I had limited assets
- I was an employee
- I was insured by my company
- I was indemnified by my clients
Over time my exposure changed and, eventually, I realized that I had a significant risk of ruin.
My definition of “ruin” has changed over time. It’s worth writing out your own and discussing within your family.
For example, “losing everything I own:”
- didn’t concern me at 25 – I had a small balance sheet relative to my future earning potential
- would have been a huge problem at 35 – I had limited earnings, moderate personal leverage and a balance sheet containing more than 15 years cost of living
- isn’t a problem today – low leverage, small personal balance sheet, greatly reduced cash flow deficit relative to my young family’s assets
Today, ruin consists of adverse events with my family’s human capital.
While I run our family structure, it’s a very small piece of what I do.
Because… the purpose of getting family structure correct is to enable a focus on what matters – human capital and shared experience.
Get the structure right so that you can focus on things other than the structure!
- Straightforward to manage
- Cost-effective (time, expense, future flexibility)
- Are you worth suing?
- In what capacity could you be sued?
- What’s the nature of the losses that could be sustained by any party?
- What can go wrong outside of lawsuits? Personal disability, for example.
- Can financial, or legal, structuring reduce these risks?
- What’s the cost to insure these risks?
Brainstorm the answers and schedule consultations with:
- an experienced litigation attorney – quantify and understand how you will be ruined 🙂
- an experienced trust and estate lawyer
- a fiduciary with experience advising families similar to your own
- a family that has managed two successful generational wealth transfers – what does success look like when you’re gone?
Write out your notes from these meetings, discuss with your family counsel and reach a rough consensus on your family values.
Here are reading resources to help you understand family wealth.
- Consult widely
- Seek out smart people that disagree with you – you’ll both benefit
- When family members disagree, pause
- Change slowly
More on the specifics of my own journey in a future installment.