The “third-generation curse” is a concept that spans cultures and centuries. In essence, it goes like this: first generations build wealth, second generations enjoy it, and third generations destroy what’s left.
But the decline isn’t inevitable. Canadian Family Offices spoke with Foster Family Office’s portfolio manager and chief executive officer, Christopher Foster, and portfolio manager Victor Todorovski, who recently co-authored Squandered: How Not to Succumb to the Third-Generation Curse. The book highlights fictionalized case studies of all-too-real challenges: businesses and family legacies brought low by poorly executed or non-existent succession plans, untimely deaths, sibling squabbles, and a lack of preparedness to manage either wealth or the family business.
How pervasive is the third-generation curse among wealthy families?
Victor Todorovski: A 20-year study of 3,200 families was conducted in the U.S. by the Williams Group. By the second generation, 70 per cent of wealthy families lose their wealth and by the third generation, it’s a 90 per cent failure rate.
Why did you decide to write a book to highlight this phenomenon?
Christopher Foster: Our Family Office Group is trying to do high-level risk management for wealthy families—making sure that these families have good communication, good documentation and good planning. But planning involves difficult conversations, dealing with legal documents and often paying a lawyer. There’s nothing pleasant about it, and our clients may not have been as eager to follow our guidance as we would like them to be. We’re hoping that these cautionary tales will get them to wake up a little bit, call their lawyer, and deal with the stuff that we know they have to deal with. We offer this book at no cost to clients for whom we think it might be relevant.
The book’s cautionary tales sound true to life—a family real estate empire, an energy business and a sugar operation, for example. In many of them, lack of a succession plan results in beneficiaries who are, at best, unprepared to steward family wealth. At worst, their disagreements about how a business should be run—or whether it should exist at all—considerably depreciate the value of the estate. How did you compile these accounts?
Todorovski: They’re fictionalized accounts, assembled from an agglomeration of things that actually go wrong in real life.
Why do things go wrong so often?
Foster: Succession is fraught for families because it involves death and money, simultaneously. Dealing with extended families, and then adding a property or a business that has emotional value to the principals, can result in the biggest toxic brew you can imagine.
Todorovski: Ultimately, people don’t want to deal with their mortality. It’s a combination of human nature, avoiding difficult subjects and failing to prepare the kids to manage wealth and a business. It’s not something you pass along in your DNA. It needs to be learned. If families don’t teach the next generation, get them involved and give them a sense of purpose, it tends to fall apart.
Many of the examples in your book involve beneficiaries who can’t agree on what happens to a beloved family property or how to run a business. Many see the family assets as ’lifestyle fuel,‘ and they’d rather cash out as soon as possible, even if a fire sale depreciates the value of their share of the estate.
Foster: A physical property or a business or a sense of legacy can be much more meaningful than an investment portfolio, which is largely seen as cash. We’re encouraging families to talk to their kids about family purpose as soon as they begin to understand financial concepts.
There’s also a dearth of financial literacy in this country. One of our initiatives at the firm is to run financial literacy nights for next-gens to help upskill them for when they have to take the reins.
One of the things Victor mentions in the book is the creation of a legacy letter, which speaks to your heirs after you die. You’re expressing your values and your wishes for them and the family and how you want the money to be used. A legacy letter can go a long way towards instilling a sense of purpose, but it’s something very few people do. If you can get them to see themselves as custodians of the family legacy, you’ve done some great work.
You mention getting your lawyer, your accountant and your financial advisor together to create an optimal succession plan.
Todorovski: Foster is a multi-family office that brings this team together on behalf of clients. Even if you don’t have a family office, that’s your mini-family office right there. It helps ensure that your succession plan is sound from all angles. For example, a lot of small business owners are unaware of the potential of an estate freeze to freeze the capital appreciation of the business or an asset up to a particular point in time. Taxes are payable up to that point by the original owner, but can be reduced by the lifetime capital gains exemption. You can then put the assets into a trust, so any appreciation going forward accrues to the beneficiaries and each of them gets to apply the lifetime capital gains exemption to their share. It can be a great strategy for preserving wealth.
Foster: When I ask people a simple question like, ’When did you last update your will?’ they’ll say it was 18 months ago. I’ll guarantee you it’s been 36 months at a minimum, and that’s too long. Speak to a lawyer, and get your will updated now.
Who should read this book?
Foster: Anyone who is concerned about their legacy and concerned about transitioning money to the next generation … and I think that includes a lot of Canadians.
What do you hope people do after they read it?
Todorovski: Talk to their kids, communicate with other family members who are involved, and get in touch with their lawyer.
Peter Kenter is a Toronto-based writer with a deep and abiding interest in how everything in the world works and how it got that way. He’s written about the economy, investing, financial services, cryptocurrency, pharmaceuticals, mining, energy, cannabis, agriculture, consumer electronics, education, sponsorship marketing, and entertainment. He’s the author of TV North: Everything You Wanted to Know About Canadian Television.
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