An Ethical Will: The Importance of Passing Down Your Values, Not Just Your Assets
Ethan R. Okura
Have you heard the proverb “Shirtsleeves to Shirtsleeves in Three Generations?” Or perhaps you’ve heard the saying as “Rags to Riches to Rags in Three Generations.” The ancient Chinese version of this Proverb is 富不过三代 (Fu bu guo san dai), which roughly translates to “Wealth does not sustain beyond three generations.” Various cultures throughout history have seen this same pattern. The first generation creates success and builds wealth, the second generation preserves and transfers it, and the third generation (or sometimes subsequent generations) spends it until it is all gone. Why is this pattern so universal? Is there anything we can do to change this outcome? Today we will look at this issue and how to overcome it.
At Okura & Associates, we have seen many families’ estates; some through multiple generations. The fundamental problem here is one of education, knowledge, and personal or family values. Whether the size of the estate represents a modest amount of wealth (under one million dollars including the home), or a high degree of financial success (tens of hundreds of millions of dollars), we often encounter this phenomenon in our clients’ lives.
Usually, the first generation that creates family wealth has deeply ingrained values of thrift, frugality, hard work, and tenacity. They really appreciate the value of a dollar because they know first-hand how hard it was to save up the first bit of capital that they used to create the financial success they ultimately achieved. Often, the second generation grew up without much to start with and saw their parents working hard to achieve that degree of success, benefiting from it only later in their lives, if at all. Usually, the third generation starts off life accepting the fact that the family has access to money and other resources, and they tend not to ever know financial hardship in the same way that the first or second generation did. Sometimes they are raised in a very entitled or spoiled manner.
Traditionally, Estate planning has only been concerned with the mechanics of passing on wealth to heirs while minimizing estate and gift taxes, and avoiding probate. What we have come to realize in the modern era of estate planning is that it is also important to pass on family values and knowledge. Families that have dynastic wealth surviving many generations tend to do things such as: Bringing in the next generation to learn how to operate and ultimately take over the family business from early on; involving the children in discussions about family finances, where to spend money, and how to invest it; and discussing what charitable causes and institutions the family will support.
Although this process should start well before one’s death, it can often be helpful to prepare an Ethical Will or a Legacy Letter—a document intended to pass on one’s values, wisdom, and love to future generations. This is not a legal document intended to enforce any restrictions on the use of an inheritance or demand certain actions of family members, but rather stands as a statement of life purpose, family history, and cultural or spiritual values. Even though it doesn’t carry any legal weight, taking some time to write a thoughtful Ethical Will or Legacy Letter can help to clarify your goals, values, and vision, allowing you to better work with your lawyer about how you want to design your estate plan. Some clients use it as a guide to subsequently include restrictions in their will and trust that require children and grandchildren to be drug tested, graduate from college, and/or be working a full-time job before they are eligible to receive any inheritance from their share of the trust.
Historically, an ethical will stems from early Judeo-Christian traditions. There are examples of such in the bible and have continued as a practice to this day, especially amongst the Jewish community. A non-religious modern example comes from President Barack Obama who wrote a Legacy Letter to his daughters on January 18, 2009.
Even if each generation does its best to teach the succeeding generation the value of working hard, saving for the future, and investing wisely, the lessons don’t always stick. Sometimes the previous generation does not have the right knowledge to teach their children how to preserve wealth in a new era, even if they did have the know-how to acquire and accumulate it in decades past. Regardless, we find that those who take the time to pass down family values, and incorporate their descendants early on in the process of financial and business management tend to see their generational wealth continue a lot longer than the standard return to poverty by the third generation.
*For more information on Ethical Wills/Legacy Letters, see the following web pages: https://celebrationsoflife.net/ethicalwills/
© OKURA & ASSOCIATES, 2018