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A guide to navigating family financial events and fostering growth and positive relations within the family system.
Merrill Center for Family WealthTM
We are in a new era of family interdependencies. In recent years, approximately 60 percent of Americans age 50 and older have provided financial assistance to members of their family, including adult children, parents, grandchildren, siblings or other relatives.1 This is a reminder of the generosity that runs through our culture and of the importance people place on helping family.
Many adult children and grandchildren are struggling with careers, tuition costs and a variety of other financial challenges. At the same time, many of us simply don’t know how to say “no” to our kids and grandkids, nor are we comfortable setting boundaries or fair terms surrounding financial requests. There is little proactive discussion about expectations and relative inattention to the development of both character and capacity among family members as they traverse these interdependencies. Typically parental “overfunction” fosters a kind of “under-functioning:” or dependence on the part of the children. As parents learn to manage their tendencies to over-function, children will often begin to gain ground in their own functionality. Of course this is a process that requires gradual and thoughtful implementation.
Navigating these choppy waters proactively requires a framework predicated on the premise that funds should enhance, not diminish, individual human potential and the health of human systems.2 Here we offer a methodology involving a three-step process designed to implement such a framework: 1) Cultivate Intention; 2) Match Methods to Desired Outcomes; and 3) Learn and Adapt.
This learning model is intended to help generous wealth holders develop an environment in which their financial resources nurture personal growth and development and foster healthy family dynamics.
Balance High Expectations With Understanding
Decades of parenting research in Western cultures reveals that the most effective form of parenting reflects high levels of love, support and understanding combined with high expectations, boundary setting and accountability. Researcher Diana Baumrind refers to this as Authoritative parenting (to be distinguished from Authoritarian, Permissive and Neglectful styles).3 The nemesis of Authoritative parenting lies in the anxiety patterns of family systems.4
Distribution decisions made under distress tend to feed mutual dependency in both the giver and the recipient. This blurring of healthy boundaries often limits the recipients by perpetuating patterns of immaturity. More often, reactive gifting is done to soothe and smooth the anxieties of the giver and the recipient. Outright gifts made from concern to alleviate mere discomfort are rarely healthy. When the giver is in charge of their emotional responses around the distributions, those distributions are cleaner and more likely to be effective.
Developing Family Policies
Clear and consistent approaches to distributions that create stability in the family system are often a helpful way to manage unintended consequences. We have found in families that authoritative parenting with older children (including adults) is often best served by entering into coherent and comprehensive family policies.5 Ideally, the process begins when children are younger by setting boundaries, having expectations and providing support. As children grow up, it is important for them to learn to self-regulate and for parents to engage in ways that promote, rather than smother, adult independence.
In creating these policies with older children it is important to negotiate—not dictate—the terms of the policy. Parents should have “guardrails” that set their personal boundaries within which negotiation is possible (some things will be non-negotiable). However, within these bounds there should be room to meaningfully work out details that feel fair and reasonable to all concerned.
Family policies or agreements can address a number of different types of transfers. In designing policies, families often find it useful to reflect on their own past behavior and design new ways to play the game. For example, after Impulsively agreeing to a loan request from a household employee, one family stipulated a 48-hour waiting period before responding to future gift and loan requests. Another family established that requests during holidays were off-limits. In developing and implementing policies, it is important to set intent before the next requested distribution and to apply established policies consistently.
Our foundational premise is that financial transactions within the family should enhance the lives of individuals and support healthy family dynamics. We have identified seven broad categories of financial events that typically occur in families.6 While we touch on each category, we will explore only one in detail. We do so because we have seen its effectiveness and because it highlights the various complexities of financial events. The categories are:
Financial transactions within the family should enhance the lives of individuals and support healthy family dynamics.
Earnings reflect a fair exchange at fair market value; here the child works to earn money. Through earning, a family member can build confidence, competence, and capability and understanding of the value of a dollar. This may include payment for extra yard work (separate from existing chores) or working in the family business.7
Families that make loans requiring no repayment send mixed messages. While from a legal point of view, it may be necessary to structure a note to effect a gift, creating an environment in which loans do not have to be repaid is a dangerous game. Loans must have teeth to work. Failure to repay must engender consequences. One family policy stated a limit of one outstanding loan at a time. Loans should be reserved for important situations and be promptly repaid to ensure the availability of future loans.*
Transfers made primarily for estate and gift-tax planning purposes can be highly problematic. If the goal is to generate personal learning, growth and development in the recipient, transfers may not be the best option as most are not designed with those outcomes in mind. The consequence is that all too often, transfers lead to spending, dependence and entitlement. When transfers do work, it is because the preexisting character and competence of the recipient match the scale of the transfer. Children who demonstrate solid stewardship attitudes and skills can usually assimilate transfers without massive disruption of their psyches or their lives.
When we give gifts, we put thought into what the person wants and needs. If we are wise, we don’t go over-the-top but we want the gift to surprise and delight the recipient. The gifts of money, experiences and goods operate in the same way.
Investments are a bit different and we have found them to be a powerful tool.8 Here, the person distributing the funds is expecting an intangible “return” on the investment. Usually, this return is reflected in the personal growth and development of the recipient, and the terms are based on a mutually negotiated agreement.
Grants are different from gifts. Here, the recipient has either done something of substantial significance or is pursuing a cause or work in service to others. In the first case, the grant may come as a surprise. It rewards hard work, sacrifice and exceptional accomplishment. In the second, it helps to subsidize good work in the world by providing a supplement to what may otherwise generate real financial pressure.
Sustenance gifts are most often necessary for those suffering from addiction, mental illness, catastrophic financial setbacks or disability. When and how to provide sustenance is a complex topic. Effective sustenance plans will set expectations and create appropriate boundaries, but these are best designed with counselors working with the gift givers and the development of a deep support network for the recipient.
The Alchemy of Investments
In our experience, investments are a powerful tool for developing both character and competence in the recipient. Often it is wise to consider whether a present should be recast as an investment.
As mentioned, it is important that terms of the agreement (the quid pro quo) are not dictated by the gift giver, but fully and mutually negotiated. When the recipient is involved in creating commitments, she will have greater buy-in and will learn more from the experience. By way of example, one couple decided that there were two ways to give a car to their teenager. One was to simply hand over the keys with some sound advice (defined in this article as a Present). The other was to require their daughter to propose a series of commitments—such as good driving habits, maintaining the care and keeping insurance in force—and these became the basis of the negotiated agreement.9
|TYPE OF DISTRIBUTION||BASED ON MERIT||CONDITIONAL||NEGOTIATED WITH RECIPIENT||TARGETED TO DEVELOP RESPONSIBILITY||APPROPRIATELY SCALED|
For agreements to work, failures to live up to the commitments by the recipient must have real consequences. The goal is for the recipient to grow and learn—which requires some struggle—but not be overly burdened by restrictive agreements. It is important that both parties be held accountable to commitments made. Often the most effective agreements have graduated consequences to ensure that slips are not catastrophic to the entire agreement, while still impactful enough to motivate promise-keeping. This is best balanced by intentional design to support the likely success of the recipient.10 When done properly, investments become opportunities for ongoing learning conversations that deepen the understanding of both the giver and the recipient.
This approach can help financial resources enhance the human potential of other family members and the culture of the family.
One powerful way to use investments is to establish a financial and wealth skills trust. This type of trust requires that the beneficiary work with a financial advisor and professional trustee to learn the financial and wealth stewardship skills that will ultimately be required of them as heirs. For children who do not take up the challenge, the funds can be administered by trustees in the traditional manner and they will have less control over both investments and distributions.
The Difficult Issue of Adult Dependence
One of the most difficult problems families face occurs when persistent parental over-functioning gives rise to stubborn patterns of adult immaturity and dependence on behalf of the child. While this, too, is beyond the scope of our article, it is worth noting that the first step in addressing adult dependence is determining ways for the individual to get out of the crosshairs as the giver. This can be difficult to do and often will provoke strong resistance on the part of the giver, who may fear he will not be loved or will lose a certain amount of power. One family member was concerned that her family only visited her to receive handouts, and if the gifts stopped flowing, she would be alone on Christmas. The giver may also fear throwing his child into states of depression or worse. There are a number of solutions once the parent has decided to shift the cycle of dependence—typically involving other people helping to make distribution decisions based on agreements that emphasize accountability. Traditional trust structures can be useful tools in this regard.
Effective decision-making regarding family finances requires skill. Like any skill, it requires practice. Assuming the role of a curious and reflective reporter to ponder the family financial event can help you gain important insights. Ask yourself the following questions to begin:
By taking elements from the deliberate practice approach to analyzing family financial events, family members can improve their skills and understanding. In turn, they can increase the probability that their financial resources will enhance, not diminish, the human potential of other family members and the culture of the family system. In the words of Albert Einstein, “All that is valuable in human society depends on the opportunity for development accorded the individual.”
1 Merrill Lynch and AgeWave Study, “Family & Retirement: The Elephant in the Room” (2013)
2 Hughes, James, Family Wealth, Bloomberg Press; revised and enlarged edition (June 1, 2004)
3 Originated by researcher Diana Baumrind (developed 1967 and researched through 1991); expanded upon by Eleanor Maccoby and John Martin (Handbook of Child Psychology, 1983).
4 Bowen, Murray, Family Therapy in Clinical Practice, Jason Aronson, Inc.; first edition (December 1, 1993).
5 Policies also work well with sibling groups seeking to manage wealth inequality within the extended family.
6 These concepts build on the seminal ideas of James E. Hughes, Susan E. Massenzio and Keith Whitaker of transfers” and “gifts with spirit” as outlined in The Cycle of the Gift: Family Wealth and Wisdom, Bloomberg Press; first edition (November 6, 2012).
7 Note that if people are overcompensated the excess is not “earnings” but some other form of financial event.
8 Our use of the term investments excludes equity investment in a family member’s company. We’ve taken the position that one would follow the same decision process they would with any other arm’s-length investment decision. If the “investment” is being made for familial—not hard economic—reasons, it will probably be, in reality, either a grant, a present or an investment as discussed in the model.
9 Another approach would be to turn this into an “earned” transfer or a “grant”—for example matching the earnings of a child. The success of this approach depends on parents not “caving” to familial anxiety reactions if the child doesn’t do the work.
10 One way to view this is to consider investments as “safe-to-fail” experiments. The consequences have to be real, but failure can’t be catastrophic or even damaging. The point is to build character and develop skills, not to do damage.
11 Examples of skillful communication were worked in throughout the model. Most of us have room for improvement here as the (2015) study, “Is There Love In Money? How Families Put Wealth Into Perspective,” found that only 22% of participants have collaborative conversations as their most common method of communicating about money in their families.
12 To dive deeper into this, see Best Practice 3: Define the Rationale Behind Rules in “Wealth Continuity and Family Unity: 10 Best Practices for Navigating Family Wealth With Intention” at pbig.ml.com
13 “Is There Love In Money? How Families Put Wealth Into Perspective” at pbig.ml.com