Questions, Decisions & Definitions to consider for Family Wealth Stewardship
Read through the synopsis of each scenario and answer the ten questions that follow. The goal of this exercise is to begin thinking about your families succession and legacy.
SCENARIO 1. A family squabbles over the payout ratio and characterization of retained earnings in a closely held business. One side suggests using a payout ratio of 80.0%; the other says that 100 percent should be the payout since the return on cash is close to zero.
Question 1: Are retained earnings, apportioned to the respective capital accounts, to be considered an additional paid-in-capital investment by each owner?
Question 2: Which payout ratio would you choose based upon your answer, 80% or 100%?
SCENARIO 2: The family is concerned about the current business climate and the firm's ability to survive and support their life style cash flow requirement. A decision was made to create a Reserve of one year's operating expense plus reasonable working capital.
Question 3: How would you define reasonable working capital in such a situation? A text-book definition is Current Assets minus Current Liabilities, Would you agree that this is a reasonable definition? If not, what other consideration do you suggest be included and why?
Question 4: What impact does your answer to Question 3 have with respect to your responses to Questions 1 and 2?
SCENARIO 3: The family invests its cash reserves in money market mutual funds. The cash reserves have been maintained consistently and steadily for more than 10 years. There is no Investment Policy Statement (IPS).
Question 5: What would be your recommendation for things to consider to satisfy family members depicted in SITUATION 1 and SITUATION 2 and the life-style cash flow requirements?
Question 6: Why would your response in Question 5 help reduce or eliminate friction among the family members because of conflicting goals?
SCENARIO 4: Separately, the family enjoys the estate plan benefits of family limited partnerships (family operating company, financial securities, real estate). The partnership's goal is to invest using a 10 to 20 years time horizon. The contributed capital 15 years ago was $8.0 million. The high water mark, Year 7, is $15.0 million. The current value is $11.0 million. The distribution policy was 3.0% of portfolio valuation on December 31 of the preceding year. The expected return was 8.0% with an annual rebalancing to maintain the market's value at risk.
Question 7: Has the partnership made or lost money? Explain your reasoning.
Question 8: What actions do you recommend to recapture the "high water" mark during the next 10 to 20 years? Are there any conflicts within SITUATIONs 1 - 4 to consider?
SCENARIO 5: The grandfather patriarch died at 83 years of age a little more than 5 years ago. He had 3 children and 7 grandchildren. The ages for his three children are: 43, 52 and 59. The grandchildren range in ages is 18 months to 18 years.
Question 9: List in order of priorities the following:
____ Family Vision
____ Family Governing Values
____ Specific Investments
____ Investment Risk Tolerance
____ Time Horizon considerations and conflicts
____ Responsibilities of Leadership
____ Responsibilities of Management
____ Establishing a "Family Bank"
____ Plan development of skills required to manage "Family Business & Investments"
____ Write Investment Policy Statement
Question 10: Why are family stories important implementing a family legacy?
FUTR promotes an educational series entitled Responsibilities of Stewardship for Families. The first step is an on-line webinar. The second is a family conference retreat. FUTR is pleased with its long-standing relationship with Passage Consulting. Please e-mail requests for information to CEO@futrfamily.com. Visit our website's Resource area, www.futrfamily.com to read more case studies.
We look forward to being a valued resource as you explore Stewardship Practices that conservatively manage the family's wealth and unite its members in the pursuit of their dreams for generations to come.
