Blogs

Your Wealth, Your Legacy: Three Lessons From Encanto

Like many young families, we spent the winter contracting the coronavirus and watching Disney’s Encanto on repeat. If you haven’t seen Encanto, I recommend it: Encanto is a charming tale about a dysfunctional family set in Colombia with a catchy soundtrack by Lin-Manuel Miranda.

As parents to three young kids, my wife and I have come to appreciate how well Disney can entertain the family as a unit. Disney+, in that respect, has been a no-brainer for the Revels family. We’ve rewatched classics like Aladdin and danced in the kitchen together to the Moana soundtrack. The funny thing about Disney is that although the films are written for children, many contain deeper themes that speak to adults as well. Toy Story addresses the everlasting value of friendship through the eyes of adventurous toys. Cars uses racecars to tell a story about the importance of community in achieving success. Encanto, too, has a deeper story. In making the film, Lin Manuel Miranda said he wanted to “capture the complexity of an intergenerational Latino family living under one roof”¹ – like the one he grew up in.

As an advisor to entrepreneurs, I couldn’t help but think about how the intergenerational families we work with experience some of the same wealth and legacy challenges as the Madrigals. If the Madrigal family hired Balentine to assist them in their wealth and legacy journey, here’s the advice we’d give them.

1. Have Courage in Your Convictions

We see how bright you burn 
We see how brave you’ve been 
Now, see yourself in turn 
You’re the real gift, kid, let us in 
– “All Of You” from Encanto   

Mirabel, the movie’s heroine, loves her family and wants just one thing in life– to make her family proud. But what makes her the hero is that she has the courage to act to save their home, the Casita, when others in her family can’t, or won’t, even when it becomes clear that the family is in danger.

Inertia is a powerful force: it’s much easier to maintain the status quo than make a change. But for investors, so much has changed in the world around us that we would be silly to keep doing things the way we’ve always done them. To find your inner Mirabel, here are three easy places to start:

  1. Get a Plan. “If you don’t know where you’re going, any road will take you there,” quips the Cheshire Cat. How much do I need? Am I on track? Can I make that big purchase now and still get to where I want to go?
  2. Revisit your Allocation. Does your portfolio look the same as it did two years ago? Ten years ago? For investors that qualify, adding private capital to the portfolio can help offset lower returns we expect in public markets, especially in fixed income.
  3. Leverage Technology. The first mutual fund was opened to investors in 1928. Since that time, we have put men on the moon, cloned sheep, and invented a vacuum robot that cleans your house by itself. And direct indexing now gives us the ability to “replicate” a mutual fund using individual stocks, customize it to fit our needs, and make it more tax-efficient

Unlike Mirabel and her family, this is not a matter of life and death. But it may very well be your life savings – the stakes are high. Don’t stick your head in the sand, have the courage to act.

2. Create an Estate Plan

Abuela, the Madrigal matriarch, is a principled woman who cares deeply about her family’s legacy and her community:

We swear to always
Help those around us 
And earn the miracle 
That somehow found us 
The town keeps growing 
The world keeps turning 
But work and dedication will keep the miracle burning 
And each new generation must keep the miracle burning
-The Family Madrigal” from Encanto

At a high level, Abuela’s legacy goals are clear: she wants to protect the Casita and take care of the village. The Encanto, after all, was created after her husband Pedro’s sacrifice, and it is all that remains of her relationship with him. But what about the details? Who will take her place at the head of the table after she dies? Will her descendants know how to move forward as she would have? And who gets the house?

These themes are also present in our work with intergenerational families. When tasked with the responsibility of stewardship, heirs may not feel empowered to make changes, even if it makes good financial sense, because they don’t know how to properly honor the deceased wealth creator. In addition, without a clear plan, beneficiaries are put in a position where they must act in accordance with what they have heard or intuited. With varying perspectives, it can be hard to reach consensus on how to move forward.

I’ve learned it is important for family leaders to write down their wishes in an estate plan. One key consideration for estate planning, and one relevant to Abuela’s preservation of the Encanto, is the upcoming estate tax exemption change. For those who will likely have a taxable estate at death, the estate tax exemption will drop in half, adjusted for inflation, on January 1, 2026, based on current tax law, regardless of any action by Congress. This puts those with a taxable estate in a “use it or lose it” situation, meaning failure to act now may result in a lower exemption amount (and potentially higher estate taxes) at their death.

If you find yourself in a similar situation as Abuela, here are two potential ways to prepare for this change:

1). Explore a Qualified Personal Residence Trust (QRPT): To take advantage of today’s higher exemption amount, consider putting your home in a Qualified Personal Residence Trust (QPRT). The advantages of doing so are threefold:

a). It removes a significant financial asset and its future appreciation from your estate. The point about appreciation is sometimes forgotten, but it shouldn’t be: Median home prices increased 17% in 2021 alone and can be significant over time.
b). It allows you continued use of the home for the term of the trust.
c). More importantly, it puts your wishes in writing, and cements your family’s legacy by keeping the home in the family for years to come.

2). Consider a Charitable Remainder Trust: For any excess capital left in the estate, you can set up a charitable remainder trust. A one-time gift of cash or securities now could pay you a “pension” in your retirement years, while the “remainder” would go to the charity (or charities) of your choice after a set period. It also gives you a charitable tax deduction in the year the gift is made, which could come in handy if you decide to do a Roth conversion this year.

3. Communicate Openly

We don’t talk about Bruno, no, no, no! 
– “We Don’t Talk About Bruno” from Encanto 

Every family can be dysfunctional at times – even families with magical powers. The Madrigal family is dysfunctional because it doesn’t want to address its fears. They “don’t talk about Bruno,” the black sheep of the family, because he had a vision that the Casita would be destroyed. I grew up in a southern family. We didn’t really talk about things that were unpleasant– that was our “Bruno.” But what I’ve learned from working with many different families, and now having one of my own, is that all families have a degree of conflict and dysfunction. Communicating openly about tough issues is key to preserving wealth through generations. Speak straight, listen generously, clear the air, and move on.

That’s easier said than done. Conversations about wealth and legacy can be the toughest for families. The Madrigals are terrified of confronting the loss of the Casita and their magical powers. My clients fear confronting their own mortality and unpleasant discussions about “who gets what” when they die. Though these conversations can be difficult, they can also lead to discussions about how we measure success and the legacy we wish to leave behind. In their recently-published book, First Generation Wealth, our Chairman Robert Balentine and CEO Adrian Cronje identify a few prompts that can spark conversations between parents, siblings, and others in the family about this important topic:

  • What are your desires and life ambitions relative to money? Beyond money?
  • What hopes and fears do you have about the future?
  • How do you define “wealthy”? What differences do you see between wealth and legacy?
  • What are you grateful for relative to our family’s abundance? What does it enable in your life and the lives of others?
  • What causes are important to you? What would you like to improve in the world beyond the home and family?

Conclusion

Families are complicated. To navigate the dysfunction, we must communicate openly with one another. To make our intentions clear, we should make plans now and communicate those to our heirs in writing. And sometimes, like Mirabel, we must be brave for our family; doing things that are uncomfortable and different from the way we have done them in the past.

Adiós!  

Contact Us

Looking for guidance managing your wealth? Balentine is committed to providing the education and advice our clients need to realize their goals.