Originally published in Forbes on August 25, 2022
BY: DAVID REDDING, CTFA, AEP, CWS
Austin, TX Market President, Argent Trust Company | (512) 478-3188
In a prior article, I wrote about the need to be purposeful in estate planning and proposed that the family culture will eat financial and estate planning for breakfast! It has been my experience over the past 30 years that this is a true statement, and it is always so frustrating when so much time, energy and money is put into the estate planning process—then it simply falls into a tailspin over the next one to two generations. Why is this the case? Regarding this topic, I subscribe to and follow the thoughts of Jay Hughes, and in his book, Complete Family Wealth, Hughes answers the question.
To further illustrate, suppose that I ask, “What is family wealth?” The vast majority will respond that wealth consists of the financial capital that has been acquired by the family—consisting of liquid assets, like stocks and bonds, or illiquid assets, such as real estate, metals or limited partnerships. However, I would suggest, as Hughes does, that family wealth is comprised of five separate “capitals,” not just financial capital. Each of these capitals must be cared for and nurtured to create a family wealth structure that is capable and competent to be “good inheritors.”
The financial capital is the quantitative part of the family wealth. It can easily be measured, gifted or transferred and is, therefore, the most readily identifiable with wealth. It is also the easiest to deal with through the estate planning process. The other four capitals are qualitative capital and are therefore much more subjective and more difficult to identify, grow and transfer downstream to family members—but I would argue that these four qualitative capitals are much more important and closely related to the success of wealth transfer and to actual happiness than the financial capital will ever be. The four qualitative capitals are human capital, intellectual capital, social capital and spiritual capital.
Human capital is the individuals who make up the family. All of them, not just some. This encompasses the physical, emotional and psychological well-being of all members and their ability to engage in meaningful work and pursue their own happiness. Obviously, financial capital can be of great use to ensure all members have access to the resources they need to live life to their fullest potential and to receive treatment if mental disorders or addictive behaviors are present.
Intellectual capital is a compilation of all the education or knowledge that each family member has gained through education or life experiences. It is not only limited to academic successes but may encompass any experience that has produced learning that can benefit the family. Intellectual capital must be leveraged by the family, and each member must contribute to making the family the best it can be. Each individual has something to add to the intellectual capital of the whole.
Social capital doesn’t just mean how the family relates socially with the community in which they live. It also is measured by the relationships and communication between each of the members of the family. This can be one of the most difficult capitals to grow. Many families of wealth have fractured or even broken relationships, but I’ve seen what some might consider miracles in family relationships when those relationships are made a priority and all parties are willing to invest time and effort to mend any faults. Obviously, social capital also relates to the giving of time, talents and treasure to the local and larger society in which they live.
Spiritual capital may be the most important capital to a successful family wealth transfer strategy, and it must be cultivated and grown with care. This is not specifically related to the family religious beliefs, but the religious beliefs may be a large part of spiritual capital. Spiritual capital encompasses the purpose and dreams of the family. What are we, who are we, and what do we stand for? These are shared values and beliefs that must be discussed and agreed upon by all members of the family. Everyone must acknowledge that the shepherding of the family wealth is bigger than one person and all must participate to achieve success. There must be gratitude for the generations that came before, those now carrying the bulk of the work and for those to come. This takes time and energy, and everyone’s thoughts and viewpoints must be valued and brought into the process.
Of course, financial capital is very important and is the resource that allows for investment into the four other qualitative capitals. Without financial capital, it can be very difficult to create the time, place and energy to cultivate the other important pieces of the puzzle. Things like healthcare, private and higher education, philanthropy, travel and shared experiences are all made possible by the family financial capital; however, if the other four capitals are not valued and nurtured, the likelihood of a successful wealth transfer strategy decreases exponentially and the “shirtsleeves to shirtsleeves in three generations” adage is lived out yet again by another well-meaning family with a very expensive and complex estate plan.
When you consider wealth going forward, think of all five of these capitals and the importance they have in a successful and vibrant family. When you consider the concept of “wealth transfer,” think of how each of these five capitals can be transferred and grown in future generations to achieve the family goals and objectives—and consequently, that each member will see themselves as a “wealth” creator, like the first generation, perhaps not as a creator of financial capital, but by utilizing other capitals that will benefit the family.
Look at wealth transfer differently to avoid the many mistakes that can be made during this crucial financial process. For a more in-depth look at how to incorporate the five capitals into your family, I’d recommend fully reading Hughes’ book, Complete Family Wealth.
David E. Redding, Market President and Senior Wealth Advisor at Argent Trust Company, helps clients navigate the complex world of estate planning, trust administration, wealth transfer and closely held business strategies. David has over 28 years of experience in in the wealth management industry.