Darlene: After you discover what your risk is, you need to define and live your legacy. So once you know what your approach is and you're happy with that approach, you need to actually live out those steps.
Doug: From Rea & Associates studio. This is Unsuitable, a management financial services podcast for entrepreneurs, tenured business leaders, and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I'm Doug Houser. As a CPA and business consulting firm, nothing gets us more excited than a good plan. So as we begin to look ahead at the brand new year ahead of us, it seems like a great time to become more acquainted with the topic of legacy family planning. To guide us on this journey we have Darlene Finzer, a principal and legacy planning specialist in the hot seat. Welcome back to Unsuitable, Darlene.
Darlene: Thanks, Doug. It's great to be here.
Doug: So this is the number four episode for you?
Darlene: This is.
Doug: You're approaching the record here. It's like the SNL host with the most guest hosts things, you get some kind of award for that, I believe.
Darlene: Yeah, I think so.
Doug: Good.
Darlene: We'll have to work on that.
Doug: Yes, we were discussing that before weren't we?
Darlene: We were.
Doug: Maybe a Carhartt or something. Some clothing lines we can start to build the brand.
Darlene: Yeah, exactly.
Doug: But anyway, welcome. So talk to me a little bit about legacy family planning and the pitfalls for business owners. Where do you see most of them falling short in that regard?
Darlene: So legacy family planning, I think it's important to maybe take a step back and determine what legacy family planning is and how we got to the topic of legacy family planning. A lot of times whenever people talk about planning, it's estate planning or planning for your future, your future generations. So legacy family planning is important from the standpoint of expanding on your estate planning plan.
Doug: So like taking it to the next level in essence?
Darlene: Right.
Doug: Okay.
Darlene: Making sure that that plan that you have in place for your estate is actually successful. So to give you some statistics or some background on that, we have a record number of people who are retiring every day. We also have a record number, we have 10,000 baby boomers that we're losing every day. And what's happening is they don't have a plan in place for their legacy. And when we talk about inheritance and asset transfers, 70% of asset transfers or asset or money transfers are not successful.
Doug: Really?
Darlene: Yeah.
Doug: Why is that? Is it more the mechanics of the transferor is it has more to do with the kind of the lack of purpose or not looking at those types of issues?
Darlene: A little bit of everything that you mentioned. When we talk about 70% of asset transfers not being successful, the actual rate of wealth transfer, and when we talk about wealth, we're talking about money, assets, and then also what's important to someone, their legacy, what's important to them, that that information or that thought process is also not being transferred.
Doug: Okay.
Darlene: So when we look at a family unit, when we talk about 70% not being successful transfers when we look at that family unit, it's actually closer to 85 or 90% that fail within a three-generation span. And the reason for that is your first generation of a family will actually build the wealth and the second generation might see some of that. They understand what mom and dad may have done to build that wealth and went through that struggle with them potentially. So whenever they inherit that wealth, they know what's important. They know what some of those ideals are. Whenever you get to the third generation, a lot of times that wealth is already there.
Doug: Mm-hmm (affirmative). Sure.
Darlene: And again, when we talk about wealth, it's not just money. We're talking about ideals and forward-thinking and individual's approach to their businesses, to their family life.
Doug: Their community, everything, right?
Darlene: Community, everything. When you get to that third generation, it's already in place. They didn't see the struggle. They weren't part of that struggle. It's just there. And a lot of times because of that, because they didn't have to go through that, they are losing part of that wealth.
Doug: Okay, sure.
Darlene: It also deals with the family unit, which we can talk about in a little bit, but just getting to that third generation, I'll give you a perfect example. A farm family, they had the first generation who built the farm. The second-generation obviously helped to build that farm. Whenever they received it they knew what the investment was. When it got to the generation, it was handed to that third generation. And sometimes it's because of circumstances beyond their control. And in this particular instance, there was a little bit of that going on where you have medical expenses or something that that happens. It went from the 150-acre family farm in the third generation to 77 acres because of having to sell off part of that farm. So, that's just an example of how that loss can happen within a three-generation time span.
Doug: Well, I think that's a great point. It makes me think we had an event at the Conway family business center yesterday where they were honoring family businesses and transitional across a number of generations, transitional success stories, things like that. Some that had even made it to the fifth generation, well over a hundred years. But as you say, the statistic that really grabbed my attention, I haven't heard this before, that by the time you get to that third generation, it's only 10% or so that maintained success. And I think there's so much that goes beyond just the financial structure of it, it's looking at that sense of purpose, those ideals, what has changed in terms of the outlook and the way of life and not taking all that into account. Do you see that pretty often in your conversations with family business units, that type of thing? Are they willing to address that?
Darlene: Not as much as they should be. Whenever we talk about the transfer of assets or transfer of wealth, you're talking somewhat about inheritance and the asset financial piece of that is always going to be a part of it because the financial piece is measurable and people want to be able to measure something. So, a lot of the times success is focused around financial or assets.
Doug: Because it's concrete, right?
Darlene: Exactly.
Doug: You can look at it and say, "Oh, that's a good number," or, "If we can get there, that's good."
Darlene: Right. What people fail to incorporate is that non-concrete piece where we have a thought process and the ideals of the family or the business, what has created that is not flowing to that next generation in the inheritance. We have a term, it's called the curse of inheritance, and a lot of families and a lot of businesses experience this and it's because those ideals are not being passed. If someone has a thought or they want to see a business ran in a certain way, if they're not communicating that to the next generation, or to the next set of leaders, that betting business will likely fail.
Doug: Sure. And it's difficult in my experience too, and I'm interested to hear your thoughts on this. It's difficult to get everybody in a room to talk about some of those issues because they're hard to talk about. You almost feel like a therapist at times. Have you experienced that too?
Darlene: Yes, absolutely. I mean, it's a very difficult conversation. And the reason for that is because, especially if you're talking about a family unit, in order for that inheritance to happen, someone has to die. And that person that has to die is someone that you love. So you really don't want to talk about them not being here, or what am I going to get in lieu of you not being here with us. So it is a very difficult conversation to have and it's very emotional. And that's why a lot of times those conversations don't happen because most people don't want to talk about their own surmise of reaching death.
Doug: Yeah. It's that mortality issue for sure.
Darlene: Absolutely.
Doug: What are some tools that you find success in trying to bridge that gap beyond the, you can layout the concrete comprehensive financial plan, that type of thing, but then how do you get them to sort of embrace the fact that we need to talk about the culture and the ideals and all of that as well?
Darlene: Right. So I met an individual by the name of Cindy Arledge. She's from McKinney, Texas and she has a concept known as legacy family planning. Essentially, the first part of the plan, before you even talk about transferring any type of assets is to know what you want your plan to look like. What type of approach do you use? So there are essentially three different approaches to leaving the legacy. And we can talk about each one because regardless of whether you planned or not planned, you're falling in one of those categories.
Doug: Sure. So yeah, give me a high-level look at what each of those are.
Darlene: Sure. So like the first one would be the avoider. I'm sure you know where this one's going.
Doug: I have a daughter who is a procrastinator does that count?
Darlene: Well, just because she procrastinates doesn't necessarily mean she's an avoider, but maybe she is, we'll say. So the avoider, the focus is on today.
Doug: Sure.
Darlene: The focus on themselves and on control. So it's living life in the moment. Their financial plan is basically, I want to get through today and we're not going to worry about tomorrow.
Doug: Got you.
Darlene: If I leave this earth and I have no money left, if I bounce my last check, that's my objective.
Doug: They don't care basically.
Darlene: Right, right.
Doug: Okay.
Darlene: So they have no backup plan. There are no essential savings. Or they might have a nest egg for their heirs, but they haven't told them about it. They want it to be a pleasant surprise.
Doug: Got you.
Darlene: Well, news alert, it's not a pleasant surprise. If someone inherits money like that, again, we're going back to the emotional piece of it where someone had to die in order for them to get that money or to get those assets, it feels like dirty money. And because of that, they aren't prepared. They feel guilty that they've received that money because of what they've lost and they aren't going to be prepared.
Doug: That's interesting. I can see where that would come into play because, again, there's been no communication and all that. And while the initial generation thinks they're doing a good thing in this, the sense of loss and the lack of communication and lack of discussion about those things is just too great to overcome for the next generation in many ways. Interesting.
Darlene: Right. Exactly. And if someone is an avoider, they're not alone. 57% of US adults do not have a will or living trust.
Doug: Wow.
Darlene: So if you don't have a will, you are an avoider.
Doug: Yes, wow.
Darlene: As we talk about these approaches, there is no right or wrong answer. It's just letting you know where you are and also letting you know what the repercussions are based on your strategy or lack of strategy.
Doug: Lack of a plan is not a strategy.
Darlene: Well, it is a strategy. It's just probably not a good one.
Doug: Not a good one.
Darlene: Yeah. Again, you're in good company if you're an avoider because there have been a lot of famous people who have died without wills in place.
Doug: Sure. I always see it all the time.
Darlene: Examples would be Prince, a Sonny Bono, President Abraham Lincoln, Martin Luther King jr. Interesting story about MLK. His family fought for 48 years over who should possess his Nobel peace prize medal and his personal Bible. And they settled out of court just days before they were supposed to go to court.
Doug: That's amazing.
Darlene: The amount of money and time and lost relationships that occurred because there was no plan in place is what happens.
Doug: Well, think of the emotional damage over that.
Darlene: Exactly.
Doug: You can't repair that right away.
Darlene: No. It completely destroys a family unit.
Doug: So what's best practice than in your view? I mean, how do you initiate that dialogue? Can you do it from the next generation upward so to speak? Or does it have to be initiated by the lead generation?
Darlene: Right. So ideally because our elders are supposed to be our leaders and we learn from our parents, grandparents, aunts, uncles. You would hope that that conversation would be from the first generation to the succeeding generations. There are ways to approach the conversation in a tactful way and if people are interested, they can contact us and we can help them with some of that dialogue to get that started. It's basically, "Hey, I've been thinking about this," or, "I'm going to create my will." "Have you created your will?" These are things that I'm thinking about. Have you thought about these things?
Doug: So are those some of the talking points you'd suggest to get that started?
Darlene: Right.
Doug: And do you find that it's helpful to have a third party like us for example, in that conversation, just to help kind of guide the process a little bit?
Darlene: It is good to have a third party involved from the standpoint of having someone who is unbiased. Again, when you're dealing with family units, I am in another category of an avoider. I'm in the next category. But it's hard to talk about death. If you're talking to your parents about, "Hey, when you die..."-
Doug: There is a more tactical way to say that.
Darlene: Exactly, exactly. But, people could feel guilty even about wanting to have that conversation even though we know that each one of us is going to die at some point. Having that conversation and just thinking about that person dying, for them to know that you've thought about it makes you feel guilty. So it is a very conversation. But just because it's difficult doesn't mean that the conversation should not happen.
Doug: That's obviously a great point. I think you have this concept that four steps to a living legacy. What are those steps in your mind to make a successful legacy happen? How do we do that?
Darlene: Right. So, there are four steps. The first is to discover your risk and the risk is what approach are you using to get to that legacy? Obviously, we've talked about the avoider. The second type of approach would be an acceptor. And that is when someone is focused on themselves and also on their immediate heirs. So the individual wants to keep control of things until they die and then they want their immediate heirs to have whatever they have. There is some discussion or some thought about social responsibility, but there's no formal plan that has been put into place. And you will talk about death, but you really don't like to.
So a lot of people are in this situation. They put the plan in place, but then upon their death, they're hoping that their advisors are the ones who help their heirs go through that process.
Doug: Yeah. What would the next step be then? If I'm thinking of those four steps from there.
Darlene: Okay. And then just so we know what the final approach to a legacy planning is, is the anticipator. And the anticipator is more like utopia. The perfect world. Everything is in place. Everything works the way it's supposed to. Everyone's on the same page. Everyone agrees. Again, utopia.
Doug: Yeah. That doesn't happen.
Darlene: I would suggest that at least people get to the acceptor stage and move as close as you can to the anticipate or stage. But try not to be an avoider unless you really don't care about anyone but yourself and living for today.
Doug: There are those folks.
Darlene: There are. Yeah.
Doug: Again, nothing wrong with that, but you've got to have everybody buy-in. So then what's the next step in the process?
Darlene: So once you identify what your risk level is if you're happy with where your risk level is, then you're fine. Status quo, keep doing what you're doing. If not, if you want to use one of the other approaches, then you need to work towards that. We actually have an assessment tool to help you determine what level you're at. That goes into a little more level than what we're talking about today. To understand what level you're at.
Doug: Is it more like an emotional profile than anything else, or is it financial measures as well? A little bit of both.
Darlene: It is mostly emotional because a lot of this deals with emotional.
Doug: Yeah.
Darlene: Yes.
Doug: Good.
Darlene: Yeah. After you discover what your risk is, you need to define and live your legacy. So once you know what your approach is and you're happy with that approach, you need to actually live out those steps. I'll give you an example of something that happened in my life. My youngest niece, who is now a teenager, but when she was a little bit younger, she had seen an ad for Hocking Hills and she thought this would be a great family vacation. Grandma and grandpa, mom and dad, aunt Dar, uncle Eric could go and her and her brother, and she had it all planned out. We would be in this cabin in Hocking Hills and there would be a TV there. So if there was a football game, her dad could watch the football game.
Doug: And still be happy.
Darlene: Yeah. She wanted to take uncle Eric ziplining because she wanted him to be scared and for aunt Dar, she would make sure that there was wifi there because if she needed to bring her computer and she needed to work that there would be wifi so she could work, which really hit me because I thought, "Well, here's this pre-teen kid and what she sees of me is, aunt Dar works a lot." I don't want that to be my legacy. I want her to remember me doing something other than working all the time. We started every year we try to go on a trip somewhere where we go have fun, do something interesting, do something where we can learn and you. So that was a real eyeopener for me about living your legacy is how do you want to be remembered? Obviously, I don't want to be remembered that I'm just working all the time.
Doug: Well, and obviously the work is noble as well, but there's a balance.
Darlene: Exactly.
Doug: It's all about achieving the right balance and having somebody else sort of look from outside in and assess that is hugely important.
Darlene: Correct.
Doug: That's a phenomenal lesson, I think, for all of us.
Darlene: Exactly.
Doug: So yeah, that's great. So would you recommend then, I mean ultimately if you want to start this dialogue and sit down with somebody who can help guide you through this process, not just financially, but again, I think this emotional connection, this sense of purpose and transfer of that sense of purpose is really more important, isn't it?
Darlene: It really is.
Doug: Yeah.
Darlene: Yeah.
Doug: Yeah. That's fantastic. And just to hear the fact that you take such a well-rounded approach to the whole legacy family planning process, I think that's phenomenal and anybody should want to talk to you with that. So I appreciate having you on Darlene, and it's been fantastic and great life lessons for all of us. So thanks again. If you want more business tips and insight or to hear previous episodes of Unsuitable, visit our podcast page at www.raecpa.com/podcast. Thanks for listening to this week's show, you can subscribe to Unsuitable on iTunes or wherever you like to get your podcasts, including YouTube. And while you're there, please leave us a review. I'm Doug Houser. Join us next week for another unsuitable interview from an industry professional.
Disclaimer: The views expressed on Unsuitable on Rea Radio are our own and do not necessarily reflect the needs of Rea Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.
