This article was originally published in Maclean's Magazine on October 15, 2007
Giving Away Fortune Can Benefit Family, Society
When Peter Munk, the chairman of Barrick Gold, reaches deep into his pockets for the millions it takes to bankroll a cardiac centre or a new school for international studies, the thought that he might be giving away his children's future fortunes never crosses his mind. That's because for years, Munk, who turns 80 next month, has often reminded his five kids that they shouldn't count on getting very much - if any - of his estimated $300-million fortune when he dies. After all, says Munk, he's already passed along everything his kids need for success - including a "sense of values," a "sense of decency" and a fully paid education. "Leaving a large sum of money in their hands, which they have not earned, was an absolute no-no," he says.
Munk, it turns out, is a bit of an exception. A recent survey revealed that most millionaires and billionaires plan to leave their children at least 75 per cent of their fortunes. In fact, about US$30 trillion will be silver-spooned to rich kids in the U.S. between 2002 and 2052. In Canada, $1.2 trillion will move from one generation to the next between now and about 2030. But should it? As one study of 3,250 successful families indicates, the transition of wealth between generations fails - the family splits up, fortunes are lost - about 70 per cent of the time. Who can forget Wallace and Harrison McCain's nasty food fight in 1994 over who would inherit the famous Canadian frozen food empire? "Historically, within three generations, it's shirt sleeves to shirt sleeves," says Marvi Ricker, the Toronto-based vice-president and managing director of philanthropic services at BMO Harris Private Banking.
That fact should give pause to anyone who has considered willing all of his or her money to the kids. The issue for most wealthy people is whether the increased opportunities made possible by the money outweigh the burdens. As their ranks swell (Ricker says there are currently a half-million Canadians with more than $1 million in assets, 8,000 of whom have more than $20 million), an increasing number are in the position to at least consider the option of making large charitable donations, rather than treating the kids like a charity case - or worse, turning them into one. "Some of the families I deal with don't plan to leave very much to some of the kids - in fact some kids have already received what they're going to get," says Ricker. "[The parents] feel the kids just can't handle the money - that they'll just blow it."
Warren Buffett isn't concerned about his children frittering away his US$52-billion fortune (which might require the purchase of at least one small country), but the chairman of Berkshire Hathaway has been dead set against inherited wealth for decades. He claims it's unfair to both the children involved and society. The Oracle of Omaha, who has often said that wealthy parents should leave their children with enough money to do anything they want but not so much that they don't do anything, is proving that he means business. Buffett has pledged to donate about 85 per cent of his money, including more than US$30 billion to the Bill & Melinda Gates Foundation, which focuses on finding cures for diseases in the developing world. Though Buffett is giving most of his money away, he isn't exactly stiffing his kids. In fact, all three - Susie, Howard and Peter - are in charge of billion-dollar family foundations made possible by their dad's generosity.
Buffett's grand gestures, which include a US$5-billion foundation named after his late wife Susan, have inspired many - most notably good friend and fellow billionaire Bill Gates. Several years ago, long before the Gates' kids were old enough to "argue against the idea," Bill and Melinda, acting on Buffett's recommendation, decided that when the time comes they'll leave Jennifer, Rory and Pheobe only about US$10 million each - a staggering inheritance by normal standards, but pretty restrained given the family's US$56- billion fortune. The rest will go to the foundation. (Research does show that the larger a family's fortune, the smaller the percentage is passed on to heirs.) This will help ensure that the kids will never become precious high-tech heirs and heiresses.
After all, as Vancouver-based mining and movie mogul Frank Giustra pointed out last month during a Canadian Club event in Toronto, spending a billion dollars on material goods is nearly impossible. Giustra, who recently pledged $100 million toward his joint venture with Bill Clinton aimed at alleviating global poverty, said he actually sat down and made a list of all the things one might buy if they could - his included four houses, a plane and a yacht - and came up well short of the billion mark. So why not, said the father of two, give some of it away?
Those who have earned their fortunes, say experts, understand they're not doing their kids any favours by putting them in a position where they won't have to work and instead shop or socialize - "or," says Ricker, "overdose on drugs because they're so bored and so self-disgusted." "Even if people think their kids are pretty good, they worry about their grandkids," says Rod Zeeb, an attorney and co-author of Beating the Midas Curse. No one wants to be responsible for creating the next Paris Hilton.
Or one of the stars of Born Rich, the 2003 documentary directed by Jamie Johnson, heir to the Johnson & Johnson fortune. The film, which featured Ivanka Trump, S.I. Newhouse IV and Georgianna Bloomberg, among others, provides a glimpse of the lives of the world's richest kids. Some struggle with insecurity, and the constant fear of disinheritance, not to mention a strange sense of entitlement - at one point, Juliet Hartford, A&P supermarket heiress, jokes that she'll give all her money to the homeless ("no, I'm kidding"). It's enough to make one question the whole idea of inheritance.
This is actually a notion with some pedigree. Most of us don't see anything wrong with giving our children a start in life - a comfortable home, an education - or leaving them a little money. But hereditary privilege has long had its critics. Adam Smith, the father of capitalism, believed social privilege should be earned. "Every generation," he wrote in The Wealth of Nations, "has an equal right to the earth and to all that it possesses." And Thomas Jefferson raised the question of whether such privileges should be banned altogether, for much the same reason (an idea some might have revived in light of Leona Helmsley's recent bequest of $12 million to her beloved white Maltese, Trouble).
Most people, of course, wouldn't disavow inheritance in their own lives. Chuck Collins did. A member of what Buffett describes as the "lucky sperm club," the great-grandson of the German meat-packing millionaire Oscar Mayer wanted no part of his family's fortune. He feared it would be a barrier to his future success. So at 26, he gave every penny of his US$500,000 share to charity. "When you're in your 20s you don't want your life defined by something that happened three generations earlier," says Collins. "I've seen friends inherit money and have it be, as Andrew Carnegie said, a curse. They couldn't figure out what their own calling was."
In Collins's case, issues relating to inheritance have become his life's work. As executive director of the Fair Economy Action Fund, Collins leads the effort to preserve the ESTATE tax in the U.S. He even wrote a book with William Gates Sr. (Bill's dad), Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes. Now 47, with an 11-year-old daughter, he says he's often asked by friends if he regrets not keeping the money for her sake. He doesn't. He estimates his fortune would be worth about US$6 million today, but Collins, who grew up in a "bubble of privilege," doesn't think he could better provide for his daughter if he had more money.
Peter Munk's view that wealth shouldn't be hoarded by the generations who didn't earn it was shaped in large part by his working-class upbringing. "In Europe every generation had to start again - unless you were a British aristocrat," says Munk. "That added the most important ingredient that I used for my success, which is self-confidence." He adds that he has "very little sympathy for all those extra crutches you need in life."
So when Anthony, Munk's eldest son, wanted to work in Alberta's high-paying oil fields one summer during university, his father, who could have easily bought him any car that he wanted, told his twentysomething son to hitchhike (Anthony did). He is now a managing director at Onex Corp. All of the Munk siblings have found success independent of their dad's fortune. "Imagine how distorted that would be if I were to leave $50 million to each," says their father. And though Munk jokes that he doesn't "know what they say behind my back," his kids fully support their father's charitable efforts; since launching his foundation in 1992, Munk has given tens of millions to worthy causes.
Experts say it helps that, like Buffett and Gates, he set out the ground rules for his kids early on. "Otherwise, they're lottery winners," says Zeeb. The key is starting conversations about money when they're young. That way nobody is surprised by what they get - or don't. Increasingly, the wealthiest families are setting up foundations, not unlike Buffett's and the Gates', which allow them to be altruistic but also provide a sense of meaning and direction for their kids. "Philanthropy is a great training ground for preparing the next generation," says Ricker. "It keeps the family together and does good things." Not to mention, she adds, "it's now sexy to give your money away."
As a lot of people are finding out, it's also more fun to do it while you're still alive. The charitably minded used to will their fortunes to the church, the local hospital or their favourite not-for-profit. Increasingly, the rich, especially boomers, want to see their money in action. "You want your transfer of wealth to be productive," says Paul Schervish, the director of the Centre on Wealth and Philanthropy at Boston College. "You don't want it wasted in philanthropy, you don't want it wasted by family and you don't want it wasted by taxes." Giving your kids the opportunities you didn't have is one thing, says Ricker, "but people are beginning to realize that there's a limit, and there might be such a thing as overdoing it."
Maclean's October 15, 2007