Myra Salzer
05/01/2007
Forming a family office holds great appeal for many wealth creators: Pooling family funds creates a structure that can take care of generations of the wealth creator’s progeny. It offers a network of services to provide for a family’s every need over the course of many years. Those who earn family wealth may feel such an organization is in everyone’s best interest. But, in reality, family offices can rob many third-, fourth- and fifth-generation inheritors of their individuality and independence.
It seems that the larger a family office becomes over time, the more help it offers. In-house accountants, lawyers and employees take care of the family business, file family members’ tax returns, fill trustee positions, draft the prenuptial agreements, vote the proxies, plan the estates (using carefully selected outside law firms), schedule the jets, write the checks, buy the homes and vacation residences, lease the cars and handle the divorce settlements.
Freedom from the business of personal responsibility may sound appealing, but it comes at a steep cost. |
One client I work with inherited wealth managed by a family office. In her early 20s, she decided to become self-supporting and worked several jobs to make ends meet, including waiting tables and giving ski lessons. When she received her W2s, she reported her own income and filed her own tax return. A few months later, she received an angry call from the head of the family office. Naturally, the family office also filed a return, and because she filed independently, the IRS received two. "What a mess you made for the family office!" the executive told her. I cannot imagine that the original wealth creator and founder of this family office intended to deny her the experience of taking responsibility, but that is exactly what happened.
One must wonder how the family office will view the great granddaughter who moves to Italy or the great-great-grandson who wants to embark on a new business venture, and by doing so, puts the family wealth at risk. Will the office treat each member independently and fairly—or will some members feel forced to leave its confines? For one heir who decided to leave his family office, it cost him everything—including his family, with whom he has had no contact since he left. The remaining family members, several of whom attended a workshop I held on inherited wealth, have no idea what happened to him and are afraid to find out—and more afraid to test their own independence.
Family offices can require those they serve to attend numerous, time-consuming events, such as shareholder meetings or foundation board meetings. These gatherings usually take place during working hours and can require travel when the inheritor does not live in the same city. As a result, many inheritors pursue occupations that can accommodate the office’s schedule—rather than career paths they would really like to follow.
By the third generation, these offices frequently become self-sustaining entities disconnected from the family members. Somehow, in that third generation, the goal of meeting the family’s needs, serving the members and providing a forum where everyone is encouraged to develop and flourish often becomes secondary to the goal of growing the office.
There is nothing wrong with the idea of a family office. The founder’s intentions are usually earnest, but I wonder if they are, dare I say, ego-driven. It takes a confident person to build an empire only to risk having his family whittle it away over time. Before creating a legal structure that will impact the lives of future generations, wealth creators must examine their own motives and goals. More importantly, they must use their wealth to empower their descendents, rather than stifle them. Sometimes the greatest help anyone can give is the permission to learn and grow independently.
Myra Salzer is the founder of the Wealth Conservancy in Boulder, Colo., and the author of The Inheritor’s Sherpa: A Life-Summiting Guide for Inheritors.