Avoiding the "Shirtsleeves to Shirtsleeves" Phenomenon

“There’s nobbut three generations atween a clog and clog.” —Old English proverb

“Wealth never survives three generations.”
—Chinese proverb

“From stalls to stars to stalls.”
—Italian saying

“The third generation ruins the house.”
—Japanese proverb

“Shirtsleeves to shirtsleeves in three generations.”
—American proverb

In 1933, a successful, family-run packing company based out of Greenville, South Carolina, celebrated its 33rd anniversary with feature stories and pictures in The Greenville News. Though the founder had died, the business was thriving in the hands of his three sons. At its height, the packing plant was the largest privately owned meat producer in the Southeast, processing beef, lamb, and more than 30,000 hogs annually. During the Great Depression, the company was the largest employer in Greenville, occupying an entire city block, and offered great diversification to a city heavily concentrated in textile manufacturing.

By 1962, the business was a mere shadow of itself and sold for $1 million, a fraction of its original worth. Only a few years later, in 1964, the business went bankrupt. Today, a parking lot occupies the place on East Court Street in Greenville where the Balentine Packing Company once stood.

As the above proverbs and sayings suggest, this is not an uncommon situation, though, for me, it is a deeply personal one. W.H. Balentine, the founder of Balentine Packing, was my great-grandfather. By the time the business reached its third generation (my father), there was nothing left.

Families and businesses of all sizes are susceptible to this unfortunate phenomenon. Just take a look at the annual Forbes billionaires list; while the Walton and Mars families are two notable exceptions, it is rare to see a family on the list for more than three generations. Among many first-generation families, the entrepreneur is so focused on building the business he doesn’t think beyond generating the wealth to consider what happens next. This lack of planning and preparation can have a significant impact on future generations. Time and again, when what’s left of the family fortune reaches the third generation, there is often a sense of guilt at inheriting wealth it didn’t create, and moreover, a deep sense of fear of knowing that once the money is gone, there will be no way to replace it.

As both a wealth manager for the past 40 years and an entrepreneur who has sold an operating company, one of my great callings in life is helping other entrepreneurs and their children and grandchildren avoid the pitfalls of intergenerational wealth transfer. This is also deeply ingrained in how I have lived my life and raised my three children. Properly preparing is truly a lifetime endeavor, as it involves playing an active role in your family, along with proactive tax and estate planning to keep up with ever-changing policies.

1. Teach your children about money. Having counseled millionaires and billionaires, I have determined it is not the amount of money one has which causes a child to grow up spoiled; rather, it is the parenting. This may be especially true of first-generation wealth entrepreneurs who want to give their children and grandchildren all the things they didn’t have growing up. However, the results can be detrimental. Buying your daughter a new car on her 16th birthday isn’t doing her any favors. Instead, instill in your children the joy which comes from earning a living. Teach them how to budget, the importance of saving, the miracle of compound interest, and how to invest. As the old saying goes, “Give your children enough to do something, but not enough to do nothing.” Passing down family values is equally, if not more, important than the actual wealth passed down. Penning a family philosophy of wealth is a good way to communicate your hopes and intentions for generations to come.
2. Communication and transparency are essential. The transfer of wealth is an emotional issue. According to the Family Business Consulting Group, 70% of family businesses last only one generation. While research shows 25% of the time it’s due to a failure to prepare the next generation for leadership and stewardship, 60% cite a lack of communication and trust among family members. If your business is still family-owned, do not assume one of your children or grandchildren will want to take the helm. Accept that your children’s paths and interests may look vastly different than yours. As such, it is crucial to develop a business succession plan, which may involve other employees assuming leadership, establishing a board of directors through which your children can play a role without running the day-to-day aspects, or selling the business outright.
3. “Nothing can be said to be certain, except death and taxes.” Structure your company and ownership to ensure you will receive the greatest after-tax benefit upon its sale. Some examples include intentionally defective grantor trusts (IDGTs), grantor retained annuity trusts (GRATs), valuation discounts through family partnerships, and transfer mechanisms. Once the sale of your company is complete, revisit your will as soon as possible. Careful planning can ensure your heirs will not be overly burdened with taxes upon your passing. Anecdotally, the extremely private Mars family’s estate planning raised eyebrows following the 2016 death of Forest Mars, who left behind a $25 billion estate. In its 2017 billionaires list, Forbes estimated the wealth of his four children at $6.3 billion, for a total of $25.2 billion, implying very little or no estate taxes were paid. Nothing in life is free, however, as the Mars family, along with 17 others, have purportedly spent more than $500 million lobbying Washington regarding estate taxes. Though I certainly cannot promise zero estate taxes, Balentine will work proactively with your team of attorneys, CPAs, and insurance advisors, and, together, we are often able to reduce the tax burden substantially. Given the ever-changing laws in this area, it is always best to consult with an attorney or CPA.
4. Marriage matters. Two well-known Atlanta businessmen have been included on Forbes’ “The World’s Billionaires” list for many years. However, during much of that time, one had double the fortune of the second, even though they were 50/50 partners upon the sale of their company. The discrepancy was simple: divorce. For this reason, every business owner should consider a prenuptial agreement. If divorce does occur, it is best to hire your own counsel and seek to understand the full balance sheet. In the event of a second marriage, additional children with another partner, or the addition of step-children, estate planning becomes even more critical. There are far too many examples of wills gone wrong, leaving heirs and family members battling out estates in courts. It is also important to note common law spouses do not receive the same benefits and estate tax exemptions of a legal spouse, which can cost them millions in taxes upon your death.
5. Charitable giving. Through proactive charitable planning, we have been able to save clients millions of dollars, oftentimes allowing them to fund organizations about which they care deeply. It’s truly a win-win. Each family’s situation is unique, so there is no one-size fits all approach. We have walked many clients through the pros and cons of direct gifts, private family foundations, donor-advised funds, and charitable trusts. Involving your children in philanthropy, no matter their ages, is a wonderful way to teach them about money management and to build a deeper understanding of family values.

Wealth can bring out the best and worst in people. It can create wonderful bridges or cause deep divides. It is a universal truth, dating back to the biblical days of Cain and Abel. By properly preparing from both a business and a personal standpoint, you can help your family avoid the stereotypes of shirtsleeves to shirtsleeves and instead create a lasting legacy for good.