I called up a successful friend recently to ask him how he speaks to his family about the $500 million, private jet, three homes and assorted other goodies they will inherit someday. He is getting on in age, has worked hard and is proud of the fortune he has scratched out through risk, smarts and persistence.
Rather than answer the question, the gentleman recounted a recent trip he took with his grandchildren to his parents’ Midwest homestead. His father was a laborer who had grown up with no money in a tiny house packed with half a dozen siblings. He showed the grandchildren the family’s modest roots, including a cabin they’d visit in the summer with no indoor plumbing.
My friend said the message he was trying to impart to the grandchildren, all of whom have grown up with greater wealth than most of us, the values of hard work and taking nothing for granted. Not everyone is as lucky at birth as his grandkids, he said.
At the end, I asked him whether he and the grandchildren used his private jet to make the trip.
There was a pause.
“Please don’t put that in.”
Such is the dichotomy for the ultra-wealthy as they work to strike a balance. They want to live well, but they don’t want to spoil their children. They want their kids to be well-adjusted and advantaged, but they don’t want them to lack ambition. Wealthy people on both sides of the equation — the wealth creators and the heirs — often consider it gauche to even discuss money. Some are embarrassed by it. More than once, I have been asked by a wealthy individual to leave any mention of money out of a story, as the gentleman above requested.
“Money is the last taboo,” said Marvin McIntyre, a managing director at Morgan Stanley who counsels families on investments. “People will tell you about their sex life before they will talk about money.”
Wilmington Trust, which is part of M&T Bank and manages money for wealthy people, found that 2 of 3 respondents to a poll of wealthy people said they were uncomfortable discussing inheritance.
According to Wilmington Trust, which was founded by the du Pont family 114 years ago, only 10 percent of the respondents said they provide complete information to their heirs.
One of the suppressors of discussion is fear that telling a son or daughter how much money is in the bank account will kill their motivation.
“Most wealth holders … are apprehensive to have these conversations,” said Bill LaFond, president of family wealth at Wilmington Trust. “There is a lot of fear, and you see it in our research, about demotivating. When do you tell them? And how do you prevent demotivation?”
One in five polled by Wilmington Trust had not discussed money because they hadn’t decided how much to leave. About 14 percent were waiting for their heirs to get older, and 1 in 10 had not had “the talk” because of concerns that the heirs might be betting on wealth that does not materialize. And 1 in 20, or 5 percent, simply said, “It’s not the heirs’ business.”
Some families try to feel their way through intuitively.
“Wealth doesn’t come with a handbook or a ‘Guide for Dummies,’ ” said Raul Fernandez, 51, who was a millionaire on paper at 29 and is now that many times over. Fernandez has three children, the oldest of whom is 15. He has not thought through how to broach inheritance with them.
“I have not decided how much I am going to leave the kids, how much should, could or would be there, or when I will discuss it with them or how. This is going to be a journey,” Fernandez said. “Right now, I am trying to think about instilling in my kids the same appreciation for opportunity and craving for winning that my parents instilled in me.”
LaFond sees one set of wealth holders who want to transfer an operating business across generations, “which is hard to do successfully,” he said. Another group is families that have liquid wealth across various investments, many passive, that are not tied to a single business. Most old wealth is liquid, with some exceptions, such as the Ford family, which still exerts its controlling interest in its eponymous automobile company. Even the Ford family, after 100 years, has presumably diversified into liquid wealth.
“Everyone needs to be ready,” LaFond said. “You, the wealth holder, need to be ready for that conversation, and you have to be comfortable that your kids are ready for that conversation.”
J.J. Smith, owner of Valley Proteins, a successful family business based in Winchester, Va., long ago got over the apprehension “thing.” Smith has three children: a son, 24, who has a master’s in business and works for Wells Fargo; a daughter, 21, interning at a major accounting firm and studying at the University of Virginia; and a daughter, 17, entering her senior year at a public school in Winchester.
Smith, 56, has not entirely settled on how to move his family’s nine-figure-wealth, a large portion of which is tied to his business, to his children. But he has started.
He describes this ritual:
“What I make a point to do when all my kids have just turned 18 is visit our estate attorney in Richmond who my dad and now me have done business with for 28 years,” Smith said.
Smith and his kid get in his car during Christmas break for the 2½-hour drive to Richmond, discussing a bit about the family estate plan on the way. When they arrive, the kid talks to the estate attorney while Smith cools his heels in the waiting room, reading the Wall Street Journal.
“It’s kind of an introduction to adulthood,” he said. “I have no input. I sit in the lobby. I make them understand that turning 21 and becoming an adult is more than just voting and being able to buy alcohol.
“There are things adults need to be responsible for. One of the things is a will and the estate plan. I want them to understand as they get married, have kids, get divorces, they need to deal with those things as they go through life.”
There is a lot of money at stake. Valley Proteins renders oil and animal remains into a variety of products, including animal feed and fuel, that grosses $500 million a year and produced a substantial family fortune. It includes real estate and investment assets beyond the rendering business.
“I can’t spend the money I’ve got now,” Smith said. He lives well, flying the company plane to their second home in Georgia. He has a weakness for top-of-the-line BMWs, and he sent his son to Europe to buy one, as well.
But all three children have attended public schools, and all work at the company starting at 11 or 12. They also must work outside the company after college, so they “learn what you have to do to make $100,000 a year.”
“The hardest part of being a parent when you do have wealth: You don’t want them to go into the expectation of a lifestyle where they aren’t capable of providing for themselves.
“On the other hand, you don’t want to deprive yourself after working hard.”
Morgan Stanley’s McIntyre said that is a common conundrum among baby boomers who came from “mothers and fathers who were generally pretty hush, hush about money.
“The big fear all of them have is, ‘We are going to give our kids so much money that they are not going to have ambition.’ ”
Investor Frederic Malek said he didn’t have to worry about his children getting spoiled at a young age because he spent many of his early years trying to accumulate his fortune — a process interrupted when he was deputy director of the Office of Management and Budget.
“The mistake would be to provide too much, too soon,” Malek said.
The money began arriving in large chunks later in a career spanning hotels (Marriott president), airlines (Northwest Airlines chief executive), investing (the Carlyle Group) and real estate (Thayer Lodging Group).
His daughter married into wealth early but also earned a master’s degree in business administration and started her own company. Malek’s son launched and sold a successful business. His grandchildren have grown up in those wealthy surroundings, and they visit him at his homes in Northern Virginia; Aspen, Colo.; and Hilton Head, S.C.
“It’s about doing something sufficiently meaningful so that you have peace and satisfaction,” he said.
Smith of Valley Proteins said each child has a “small trust” set up when they were born that will mature in stages when they graduate from college, turn 30 and, finally, turn 35.
The big money is in larger family trusts and includes Valley Proteins.
Whatever happens, “they are certainly going to come into a large income,” Smith said of his three children. Beyond that, decisions will be made between the children and the estate attorney. “The trusts are written so they get income, and to the extent they need assets, they can invade them for the assets. I am not a big believer in ruling from the grave.”
The current issue facing Smith is whether one of his children can run Valley Proteins. He wants someone who has not only the ability but also the desire to run what he acknowledges is not the most glamorous business in the world.
Fred Schaufeld, 57, was a scrappy college kid with no money who eventually made his nine-figure fortune selling a consumer-electronics warranty company he had built. Like Fernandez, he owns a piece of the Washington Nationals, Wizards and Capitals and Verizon Center. He and his business partners started an investment firm, Swan & Legend, which has a hand in everything from José Andrés restaurants to Oscar-winning films such as “The Revenant” and “Spotlight.”
Like Fernandez, most of Schaufeld’s wealth is in investments rather than a family-operated business.
Unlike Smith, Schaufeld has a family office — very popular with ultra-high-net-worth individuals — that runs his fortune and administers the family’s charitable foundation.
Schaufeld said he sat down with his family office employees and his estate attorneys to familiarize himself with his estate before having a direct conversation with his children.
The reaction of his three kids was mixed.
“One didn’t really want to talk about it,” he said. “Another really was curious. And another was in the middle. But the reality is, they have to be knowledgeable about the wealth they are going to inherit.”
Schaufeld said first-generational wealth creators like himself tend to be more impatient on how to use it. In many cases, Facebook founders not withstanding, the wealth creators spend a big chunk of their lives — if lucky — hitting the jackpot.
“There is not a whole lifetime when I’m going to be a wealthy guy,” he said. “My kids have had money longer than I have had, and they are a little bit calmer about it than I am.”
Schaufeld and his wife have structured trusts that once held stock in his business but now have been diversified into other assets.
There are many ways to design trusts that include formulas for disgorging the wealth without having communications between parents and heirs.
Schaufeld said he preferred designed family trusts “where they had to deal with me personally.”
“It may be arrogance on my part,” he said, “but I was hoping to have the kind of relationship where I didn’t have to default to lawyers to do the parenting.”
Of his three children, his daughter, 28, teaches school and rides horses around the world. His son, 25, is an entrepreneur who makes interactive videos of business cases. His younger son, 22, recently graduated from Lehigh University in Pennsylvania, which is where his father went.
Schaufeld put in a tiered structure so his kids don’t burn out their fortunes too early. For example, the Schaufeld trusts allow his heirs to inherit their wealth in stages, starting at 25, followed by 30 and the remainder at 35.
“I probably favored giving it to them a little younger because I started my business at a young age and would liked to have had access to capital younger,” he said. “By the time they are 35, they better have figured out how not to blow it.”
Schaufeld’s older son, Jake, said he works because he wants to make himself useful and create something that is useful to others.
“I could either sit on my [rear end] or I could try and create something,” said young Schaufeld, who has invested $1.5 million of his family money into Real Time Cases, his video education business, which employs 13. “Because we have the money behind this … we can take some more risks. We are able to be a little more idealistic with the way we run the business and a little less cutthroat.”
He expects two-year-old Real Time Cases to turn a profit in the next year.
Fernandez’s mentor, Mario Morino, is 73, with three children ages 26, 24 and 22. Morino made his fortune in software and then as an early investor in the growth equity firm General Atlantic.
Morino grew up in a blue-collar Cleveland family, where he lives now and stays close to his roots.
He talks to other families about how to explain wealth to their kids. But rather than discuss it, he said, it’s better to set an example.
“No matter what you say and the great pontifications, what’s going to matter more to your kids is what you do. Maybe not immediately but later,” Morino said.
About three weeks ago, he called his first and only family meeting with his children and told them of his plans.
“They know we are giving most of our money away,” Morino said. “They will see something, but we want to take steps while we are living so that whatever they get, they will understand how to manage wealth themselves and how to use that to help other people.”
Fernandez hasn’t formally sat down with his children to have “the talk.”
“The conversation about kids and wealth and giving while living is an ongoing one,” Fernandez said. “I plan on making a little more money before I move on, so the pie should get bigger.”
He learned business through discussions with his late father. They routinely covered the topics of the day, from the hyperinflation of the Carter years to the stock market crash of 1987. Now he is having similar chats with his children.
Six years ago, his eldest daughter, Sofia, then 9, put up a lemonade and bottled water stand down the street near the Congressional Country Club in Bethesda during the U.S. Open. A county inspector actually came over and asked her to shut down because she did not have a permit. It was a good lesson on the power of government regulation.
“Before we got shut down,” Fernandez said, “we talked about what the right price points should be, how much it cost us to make [the lemonade], what our profit on each lemonade was. It’s a good example of doing something fun at an early age and learning the value of hard work and some of the frustrations that come with any business.”
As they walked home after getting the boot from inspectors, Sofia spied the $50 per car that neighbors were charging to park in their driveways during the tournament.
“She turned to me and said, ‘Next time, let’s sell parking spaces. We can make more money.’ ”