By Kip Kolson, Special for USADT
It is beautiful day. Dad is a successful entrepreneur who has amassed a nine-figure net worth composed of several businesses, real estate, and significant public and private investments. Dad is taking mom, their three married children and spouses, and two grandchildren for a weekend vacation in Napa Valley on the family’s Beechcraft King Air private airplane he owns and flies himself for business trips. He filed his flight plan and is taxing onto the runway. Mom is in the co-pilot seat and the family in the back of the plane. An hour later they are flying over the mountains when mom screams as dad slumps in the pilot’s seat grasping his chest and blacks out.
Dad is the only one who knows how to fly the plane. Mom and none of the children have had flying lessons or a pilot’s license. They do not know the altimeter from the fuel gage. They have no idea where they are or where the nearest airport is located. Even if they could find an airport or flat area large enough for a landing, the likelihood is they would fly the plane into the ground resulting in the airplane and the family being destroyed.
A second scenario is dad made sure mom and all the children had flying lessons. Everyone has experience in the pilot’s seat. The children had opportunities to take the airplane up whenever they wanted and, though their children (the grandchildren) are still young, they too are learning to fly the plane. In this situation there is a high probability everyone on the plane survives, they can find an airport, and radio the tower to have an ambulance and medical staff ready to get dad to a hospital, possibly saving his life. The airplane, and dad, will be available and ready to fly another day.
Unfortunately, this hypothetical drama plays out everyday in families everywhere, especially when that family airplane is carrying expensive and complex cargo in addition to human capital. When we are interviewing new prospects interested in learning about the family enterprise holding company services we provide, we hear “We have wills and trusts, but we do not want the children to know what they will inherit.” They fear the children will be incentivized to do nothing and be unproductive if they know they will inherit a lot of money. Or, revealing their estate to the children now will create dissention and family conflicts because the children will start battling over who should get what, and why they deserve more than their siblings. The parents will avoid these battles rather than trying to solve them when there is potential for resolution and default to leaving them for the attorneys to solve, usually to everyone’s detriment.
My plane metaphor is a good example of what a family can or will not achieve when they do or do not do what is necessary and right. The first thing they must do is determine where they want to go. This may seem obvious, but few families actually make a conscious decision where the family would like to be in the future. There have been no family meetings or conversations where everyone provides input and preferences for what each person needs from the family and gets consensus about what the family will achieve. They have no idea where they are going. They are lost before taxing onto the runway.
Once a destination has been determined, a flight plan is created. It specifically identifies departure and arrival times, estimated flight duration, fuel requirements, locations for refueling if necessary, airport locations, necessary equipment, weather conditions, and geographical obstacles to name a few requirements. The process is repeated for the return flight. The flight plan is documented and filed with the flight authorities. We call this family financial and leadership planning. An estate plan, by itself, is NOT a flight plan, it is a set of instructions dividing up and terminating the estate rather than an opportunity to explore new horizons. Even if dad and mom have done some estate planning, as I described above, they typically exclude the children from the process. The children have no idea what they are supposed to do with their portion of the airplane. A plane cannot be cut into equal pieces. One child gets the wings, another the fuselage, another gets tires, another the radio, and another the engine. It is no longer an airplane but scraps for the junk yard. Proper planning should include the children in designing the flight plan, so the airplane remains intact.
Another hazard of not involving children in buying into the flight plan is everyone will be looking for a parachute when the sole pilot becomes incapacitated. Some may need and want the bigger parachutes and others will want the prettier parachutes. Fighting over the parachutes could result in someone not having one, or parachutes are reduced to a size of being ineffective and life threatening. If no one knows where the parachutes are stored, the panic to find one and get it on as the plane is plummeting to the ground could mean not everyone will safely exit the airplane and float gently to earth.
Then there is the necessary equipment; the compass, altimeter, fuel gage, GPS, radio, throttle, the pedals, and the stick or wheel. In my analogy these are comparable to the family’s resources; mainly the financial, intellectual, and human capital. If any of these are broken or used improperly, the plane will be lost and never reach the desired destination. All the equipment can be working properly but useless if no one knows how to read the instruments or adjust the gages to provide the needed information. Even if someone manages to get the plane out of the dive and level again, but is unable to determine location and direction, the plane will eventually run out of fuel and crash.
I am not a pilot but have been told the two most frightening times of a flight are the takeoff and landing. I imagine safely landing an airplane is equivalent to the young female gymnast who does flips, twirls, and landings on a 4-inch balance beam. She had years of training, practice, and experience. Even then she can occasionally fall off the beam causing serious injury.
This has been a description of the first scenario, the family airplane with only one trained and experienced pilot, a disaster waiting to happen with no survivors and a destroyed airplane.
But what if mom and all, or at least a couple of, the children had flying lessons with a competent and experienced flight instructor? What if they first spent time on a flight simulator before getting into the cockpit, then in the pilot’s seat next to the flight instructor and logged sufficient hours to qualify for a license? What if they learned about the mechanics of an airplane and actually worked on the engine and maintaining the airplane properly? What if they have taken off and landed the plane hundreds of times, flown in inclement weather, created numerous flight plans and navigated to a multitude of destinations, and practiced shutting down the engine and gliding to a landing?
Families need to change their perspective from being a loose-knit group of individuals fighting over pieces of the plane to becoming an ongoing fully-functioning enterprise that preserves and grows the family’s financial, human, intellectual, spiritual, and social capital for the family’s benefit and every family member now and for future generations if they want to become a 100-year family. They need to keep that family airplane operating and in the air in search of new adventures and ventures and delivering prosperity and wellbeing to the family and society for the next 100 years.
Keeping the family airplane flying offers numerous opportunities that everyone potentially can achieve what they want. Each member will have different desired destinations, different paths they want to explore. If they are qualified to fly, they can use the family airplane (family enterprise holding company) to take them where they want to go. It is common, especially in the business world, to time-share airplanes without having to own your own plane because planes are expensive. This is essentially what the family enterprise holding company offers the family. If traditional estate planning divides the airplane between multiple children who cannot afford to own their own plane, they likely will not reach their desired destinations, but they can time-share the family airplane.
Keeping the family airplane intact allows everyone to participate in the adventures/ventures they would not be able to access otherwise. For example, if each child inherits $2 million, of which $1 million is cash and investments; they may be limited in investing in real estate as it normally requires significant amounts of investment and putting all their eggs in one basket reduces diversification and increases risk. However, if the family enterprise holding company retains the family assets it could invest $5 million in an apartment building of which each child will have a beneficial interest since they are stakeholders in the holding company. That opportunity would have been missed if the assets had been divided up rather than retained.
In a recent New York Times article, Dr. Dennis Jaffe shares insights from his research on 100-year families who have successfully navigated storms and turbulent headwinds to keep their family airplanes flying. “They made the choice to invest in the family. They’ve seen that the quality of the people in the family and who they are is going to determine if the family succeeds in the future. The business decisions are important, but they are really derived from the quality of the family. Second and third generations in successful families with wealth focus on including people in business and the family decisions, they want to invest in some sense of US as a family. To keep this entity together, they have to develop a respectful, positive, useful way of working together. They have to collaborate because there is going to be conflict and stress. They have the added benefit of a coterie of advisers to ensure the children understand finance, business, and family governance. Everyone needs to have basic skills and training to understand not only what their responsibilities are, but also what they are responsible for. You need to have a high level of skills to be a responsible shareholder. If you are a shareholder with (millions) of dollars you have to develop a lot of skills. The alternative is you break apart as a family. Or worse, you fulfill the prophecy of shirt sleeves to shirt sleeves in three generations.”[i]
Dr. Jaffe is saying to become a 100-year family there must be a commitment to retaining the family airplane, training everyone in how to fly and maintain the plane, recognizing there are different roles for everyone, and total agreement on the ultimate destination and flight plan even though there will be many side trips and detours. As Dr. Jaffe says, not doing this will cause the family plane to break apart.
“One standing alone can be attacked and defeated, but two can stand back-to-back and conquer; three is even better, for a triple-braided cord is not easily broken.”[ii] “Tell it to your children, and let your children tell it to their children, and their children to the next generation”[iii]
Hopefully, your family will never say or hear, “Mayday, Mayday” because no one has been trained to fly the plane.
Kip Kolson is the president of Family Wealth Leadership, a multi-family office and family coaching firm, and author of You Can Have It All; Wealth, Wisdom, and Purpose—Strategies for Creating a Lasting Legacy and Strong Family. You can order your copy at Amazon, the FWL website below, or email firstname.lastname@example.org
[i] The 100-Year Family: Here Are Some Tips for Becoming One by Dr. Dennis Jaffe, The New York Times, Paul Sullivan, November 6, 2019
[ii] Ecclesiastes 4:12, (TLB)
[iii] Joel 1:3, (NIV)