Why You Have to Be Careful in What You Pass Down

Warren Buffett's right-hand man, Charlie Munger, was asked if "leaving his kids a bunch of money would ruin their drive and ambition."

"Of course it will," Charlie said. "But you still have to do it."

"Why?" the friend asked.

"Because if you don't give them the money, they'll hate you," Charlie answered.

Charlie Munger is well-known for quips like this, but he's right. Because of this reality, many children of wealth creators struggle to find their level of success. They miss out on the character-building that comes from trying to make it themselves. There is less fear of failure because the parental safety net is always there. This begs the question, how will you distribute your money?

• What kind of mark will you leave behind once you're gone?

• How will you distribute the assets you've earned in life, post-death?

You may have assumed like I had, that you would leave everything to your family. Either through a shared asset or a trust, I would pass on whatever resources I had to my children and grandchildren.

I even went as far as to surmise that these assets—like a cabin or vacation home, for example—would serve as the vehicle through which I could ensure that my family made positive memories together when I was no longer around.

That's why, when interviewing a man I admire who has built a strong legacy, I was shocked to hear his conclusion: "Shared assets ruin families."

As I talked to more people, I surprisingly discovered that story after story supported this assessment. I've concluded that a shared asset is not the same thing as leaving a lasting legacy, and in fact, it often has the opposite effect, with family conflict stemming from the asset in question. In extreme cases, the shared asset actually acts to destroy the intended legacy.

I pressed the man further and asked, “What do you mean shared assets ruin families?” He told me the story of a farmer in small-town America.

The farmer had worked hard to acquire and maintain a large piece of land with several properties. When he died, he split the sum of the property and gave it to his two sons as a parting gift. The land was excellent and in a prime location. The father sincerely wanted to help his sons and give them something nice when he passed. He could think of nothing better than to give it to his posterity, believing there was no greater legacy to leave.

At first, this was the right assessment. His sons enjoyed the land and properties, took great care of them, and, in turn, gifted them to their children. But his well-intentioned gift was a time bomb thrown into his family tree. By the third generation, relationships between family members were completely destroyed. All members of the family split into factions. Even though it wasn't land they had earned individually, they all felt entitled to it. They all felt a deep ownership over the land. The conflict escalated to a degree where family members hated each other. Why? Because each family member was convinced that other family members received "the better land" or didn't "use it in the right way."

What started as a generous gift initiated an entitlement mentality and became the source of tremendous familial discord and estrangement. How sad would their grandpa be to discover that his generous gift to his children had caused such conflict among his grandchildren?

It begs a straightforward question: Do you think he would have given the land and properties to his children if he knew what the result would be further down his family tree?

And he wasn’t alone - his story was amongst dozens of others whose families had suffered as a result of a family property, business, or trust being passed down.

Through these interviews, I saw clearly that passing down assets is like leaving a legacy of a dead-end alleyway. It might take a few generations to get to the dead end, but there is always a dead end. At first, I was disheartened.

If you can't leave your legacy in an asset and a trust can turn sour, what are your options?

Again, you have to find what works best for you and your family, and the good news is that there are ways to do it better.

One example is a father who, wanting to avoid the destruction outlined above, has determined to save all of his wealth in a single trust and set clear parameters for giving it all away to charitable causes after he dies. While this may be a better option, it still isn't the best, as he misses an opportunity to give alongside his children while he’s alive. But it does pass down his values of service and outward living.

Some parents adopt the "die with zero" mentality. They block their children from ever benefiting from the family resources. Ambassador Shelby C. Davis, a legendary investor and founder of the philanthropic Davis Funds, told his son Chris that he "would never see a penny of it because the family didn't want to rob him of the opportunity of making it on his own." Chris jokes, "They could have robbed me just a little." While this may seem a little harsh, it gives your children something valuable: opportunity. They can have the ability to determine their future. Some parents add to this opportunity by only paying for things like education, down payments on houses, or money to start a business. They encourage their children to seize opportunities to determine their future, and in doing so, they also pass down values of independence and responsibility.

While you can't pass down shared assets and still preserve a positive legacy, you can pass down your story, values, and, above all, your Factory for Good.

Check out how to pass down your Factory for Good here.