Your Family Wealth Is Borrowed From Your Grandchildren

When people talk about family wealth planning, the conversation usually starts with money. Families want to know how their assets should be invested, how taxes can be managed, whether a trust should be created, how the business should be transferred, and how much wealth the next generation will eventually inherit. These are all important questions, but from a family office perspective, I believe there is another question that should come before all of them: what exactly are we trying to pass to the next generation?

I recently revisited Dennis Jaffe’s work on multigenerational families, and one idea stayed with me. Family wealth should not simply be viewed as something that belongs to the current generation. In many ways, it is something we are temporarily responsible for before it reaches future generations. Thinking about wealth this way changes the meaning of estate planning. The objective is no longer simply to transfer assets successfully. The real challenge is to prepare the family that will eventually receive those assets.

Many successful business families already have sophisticated structures. They may have operating companies, holding companies, investment corporations, trusts, shareholder agreements, wills, insurance policies, foundations and several different investment portfolios. They may also have accountants, lawyers, investment advisors and tax professionals working around them. On paper, the structure can look very complete.

However, the next generation may understand very little about why those structures exist. They may know that there is a trust but have no idea why it was created. They may own shares in a family business but not understand the difference between being a shareholder, a director and a manager. They may receive distributions without understanding how those decisions are made, and they may eventually inherit significant assets without ever having participated in the decisions that created or preserved the wealth.

This is where family governance becomes important.

Dennis Jaffe describes the family constitution as an intergenerational framework that connects a family’s values, expectations, decision-making processes, legal agreements and responsibilities. It does not replace legal documents such as trusts, wills or shareholder agreements. Instead, it helps family members understand how those documents fit into the larger purpose of the family and how the family intends to operate over time.

This distinction is important because legal documents can define rights, but they cannot always create understanding. A trust document can say when money may be distributed, but it may not explain why one generation wanted the assets managed in a particular way. A shareholder agreement can define ownership, but it may not explain what the family expects from someone who becomes an owner. A will can transfer wealth, but it cannot teach the next generation how to become responsible stewards of that wealth.

A family constitution tries to bridge this gap. It allows the family to discuss its values, its history, its expectations and its long-term purpose. It can also clarify practical questions that often become difficult later, such as who is qualified to work in the family business, how family members participate in governance, how dividends are determined, how conflicts should be handled, how the next generation should be educated and what responsibilities should come with ownership.

One of the most important lessons from Jaffe’s research is that a family constitution should not simply be written by an outside advisor and handed to the family. Advisors can facilitate the process, lawyers can align the legal documents, and tax professionals can help with the structure, but the family itself needs to participate in creating the governance framework. Families that simply received a document written by a consultant often did not accept it because the members had not been part of the conversation.

This is why I believe the process is often more important than the document itself. When parents and children sit together to discuss what the family stands for, what they expect from one another, how decisions should be made and what should happen when they disagree, they are already practicing governance. The final document may be useful, but the real value comes from the conversations that happen while it is being created.

This is particularly important for first-generation business families. In many entrepreneurial families, the founder has historically made almost every major decision. The founder may be the majority shareholder, chief executive, chairman and final decision-maker at the same time. While the founder is active, this structure may work very efficiently. The difficulty comes when ownership begins to transfer to the next generation.

The second or third generation may include several siblings, spouses, cousins and children. Some may work in the family business, while others may have completely different careers. Some may want the business to continue growing, while others may prefer larger distributions. Some may understand the business deeply, while others may see themselves mainly as investors. At that stage, the family can no longer depend on one person making every decision. It needs a system.

One of the examples in Jaffe’s research makes a very important distinction between ownership and management. Ownership is responsible for selecting and overseeing the board, while management is responsible for running the company. A family member should not automatically receive a management position simply because he or she owns shares. Management positions should depend on experience and qualification, and the business should still seek the best people available, whether they are family members or outsiders.

I believe this is one of the most difficult transitions for family businesses. The first generation may have built the company through hard work and instinct, but the third generation may eventually include dozens of shareholders. The family therefore has to move from a system in which one person decides everything to a system in which everyone understands how decisions are supposed to be made.

Another important issue is fairness. Families often believe that they understand what is fair until they are faced with a real situation. One family described in Jaffe’s research agreed that the family would support the younger generation’s education, but that simple principle eventually created many practical questions. The family had to decide what level of tuition would be covered, whether students would fly business class or economy, what type of accommodation would be appropriate, what kind of car the family would provide, and whether academic performance should affect those benefits. As the family became larger, unclear expectations created different interpretations and eventually required more specific policies.

I think this example is especially relevant to many successful immigrant families. Parents often say that everything they have will eventually belong to their children anyway. This usually comes from generosity and love, but when expectations are not clearly discussed, generosity can sometimes create entitlement or resentment. One child may believe another has received more support. One sibling may work in the family business while another receives the same economic benefit without contributing to the business. These disagreements can easily become emotional because family relationships and financial interests are mixed together.

Good governance does not remove these disagreements, but it gives the family a way to deal with them before they become destructive.

The same principle applies to next-generation education. In my view, preparing children for ownership should begin long before the assets are transferred. Young family members should gradually understand how the family created its wealth, how the businesses operate, how the investment assets are managed, how trusts work, how distributions are determined and what responsibilities come with becoming an owner.

Some families in Jaffe’s research intentionally included younger generations in financial discussions, governance policies and business planning. Over time, those family members became more interested in the long-term success of the family enterprise because they were not simply waiting to inherit wealth. They were being trained to understand and eventually help protect it.

This is an important difference. Telling a child that one day he or she will inherit the family wealth creates one type of expectation. Telling that child that one day he or she may become responsible for protecting and managing part of the family legacy creates a very different mindset.

The financial assets are only one part of that legacy. Families also need to pass down the story behind the wealth. Jaffe discusses the use of legacy letters and videos in which older generations explain their experiences, values, mistakes and hopes for the future. These records can help younger generations understand not only what the family owns, but why certain decisions were made and what earlier generations sacrificed to create those opportunities.

I believe this can be extremely powerful. A trust agreement can explain where the money goes, but it cannot fully explain why the founder started the business, what challenges the family survived, why education mattered so much, why a particular charity was supported or what lessons were learned during difficult times. The financial structure transfers ownership, but the family story helps transfer meaning.

Family governance also needs to evolve. A family constitution should not be treated as a document that is written once and then placed in a drawer. Families change, businesses change and generations change. Children grow up, people marry, businesses are sold, new businesses are created and family members may move to different countries. The governance framework therefore has to develop as the family becomes more complex.

One family in Jaffe’s research began with a simple three-page document describing the responsibilities of siblings and shareholders. As later generations became involved and the family’s ownership structure expanded, the document eventually grew to more than forty pages and included practical issues such as what happens when a shareholder wants to leave the family business or sell shares.

From Anico Capital’s perspective, this is why wealth planning should not be separated into individual boxes. Investment management, tax planning, estate planning, family governance, succession planning and next-generation education all affect one another. A trust can be technically well designed and still create problems if the beneficiaries do not understand it. An investment strategy can perform very well and still create conflict if family members disagree about distributions. A business can successfully transfer its shares to the next generation without successfully transferring leadership capability.

For this reason, I believe family office planning eventually has to move beyond the question of who will receive what. Families also need to ask how they will continue making decisions together after the original wealth creator is no longer able to make every decision.

This is not always an easy conversation, and it does not need to begin with a formal fifty-page constitution. A family can start with a few important discussions about what the family wealth is meant to accomplish, what responsibilities should come with ownership, what the next generation should understand before receiving significant assets, how family members should participate in the business and how disagreements should be resolved.

Over time, those conversations can become a governance framework that grows together with the family.

Wealth can be transferred through legal documents, but stewardship cannot be transferred by signature. It has to be learned through education, participation, experience and communication. The families that successfully preserve wealth across generations therefore do more than manage assets. They also build the ability of future generations to make responsible decisions together.

Perhaps this is the most useful way to think about family wealth. The current generation may legally own the assets today, but in a multigenerational family, we are also temporary stewards of something that may eventually belong to children, grandchildren and even family members we will never meet.

When we begin to think this way, estate planning becomes something much larger than transferring money. It becomes the process of preparing a family to carry forward both the opportunities and the responsibilities that come with wealth.

Anico Capital

Family Wealth Planning | Family Governance | Succession Planning | Next-Generation Education

This article is inspired by Dennis T. Jaffe’s discussion of family constitutions and generative families in Borrowed from Your Grandchildren. It is intended for educational purposes only and does not constitute legal, tax, investment or financial advice.