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Family bickering can waste a fortune

Written by Gordon Pitts

No one needs to hold charity bottle drives for Liesel Pritzker, 20-year-old actress and black sheep of the Chicago family that controls the Hyatt hotel empire.

Yet Ms. Pritzker's war against her staggeringly affluent family is a case study in the corrosive effect of bad communications on inheritances, say U.S. wealth advisers Roy Williams and Vic Preisser.

Ms. Pritzker and brother Matthew, 21, have mounted a high-profile lawsuit against their father and other family members for allegedly cheating them out of their rightful share of one of the United States' largest private fortunes.

The Pritzkers' $15-billion (U.S.) estate may be eye-popping, but their story is typical, Mr. Williams and Mr. Preisser say.

From their survey of 3,250 families, as well as other research, the advisers estimate that about 70 per cent of family wealth does not make a successful transition to the next generation.

"The issues of communications, lack of trust and betrayal are again and again the reason for the high failure rate of families around the world," Mr. Williams says.

The annals of Canadian family fortunes are also replete with examples of assets that failed to move intact to the next generation because of faulty communications and trust -- combined with other factors -- including Montreal's Steinberg supermarket empire and the Mitchell meat-packing business in Saskatoon.

Liesel Pritzker, who starred in the 1995 movie The Little Princess, can certainly survive on whatever she extracts from the family fortune. Even after the disputed transactions, she can lay claim to an estimated $160-million in assets.

But the suit's cost to the family, its privacy and future relationships has been enormous. "That was a real breakdown in communications leading to a breakdown in trust," says Mr. Preisser, who sees open dialogue between generations as the key to ensuring the successful transfer of wealth.

Ms. Pritzker turned 18 without knowing just what share of the massive hotel and real estate fortune she stood to inherit. The little she did know made her mad. She and Matthew sued their father, Robert, and other relatives, contending they had emptied nearly all the siblings' assets from their trust funds to benefit their cousins and the family foundation. Those amounts are alleged to be more than $1-billion.

"The problem was that her father was managing [the estate] as if she were a child," Mr. Preisser says, instead of opening the books so that Liesel could actually see how her money was being deployed.

The Pritzker estate was recently ordered by a judge to open up those parts of the family's financial settlement that pertain to Liesel and Matthew.

A lot of trouble would have been avoided if that had been done long ago, the two advisers say.

The problem of generational transfers often lies not in the way the handoff is structured, but with the preparedness of the heirs, says Mr. Williams, who with Mr. Preisser operates a family advisory firm based in Stockton, Calif. They were in Toronto recently to meet with the BMO Harris Private Banking Group.

One barrier to adequate preparation lies in parents' conflicted mindsets, Mr. Williams says. They often fear that wealth will ruin their children. Guilt-ridden over their own unexpected affluence, parents often try to shield the children from knowledge of the assets that they will eventually inherit.

The issue is complicated by tense family relationships. "Money is a magnifier. If parents are having trouble with their children, money will just magnify it," says Mr. Williams, who with Mr. Preisser has written Preparing Heirs, Five Steps to a Successful Transition of Family Wealth and Values.

One of their recommendations is that the family establish an explicit "wealth mission" that lays out the purpose of the family fortune, whether it's the survival of the business, its financial growth, the personal development of family members, or community involvement.

But instead, they find that parents increasingly turn to philanthropic giving as an emergency option, rather than as part of a well-thought-out mission.

In many cases, Mr. Williams says, parents don't see any alternative to giving it away. "They don't want to destroy the kids by giving them tens of millions or hundreds of millions of dollars," Mr. Williams says, adding that they are often motivated by tax savings, as well.

Yet many families also experience philanthropic exhaustion after the wealth moves into the second generation. "The kids don't see the same reasons for continuing the philanthropy that their parents do," Mr. Preisser says. "A lot of philanthropies are just kind of closing down because the rationale for them was never shared with the children."

Early association with philanthropy, they say, can be a great way to prepare children for inheriting the business or other assets. "It is one of the earliest and most permanent value-setters for children, the perfect modelling for primal behaviours, but that is completely overlooked," Mr. Preisser says.

The trouble is that any talk of the wealth and its potential uses doesn't start until too late -- often, way too late. In their book, the advisers describe one entrepreneur in his late eighties who finally decided to turn his company over to his only daughter, who had worked with him all her life.

He called her in and told her he was promoting her to president. He was shocked when she pointed out that she would be 65 in the next week and planned to retire. Perhaps, she said, one of the grandchildren might be interested but she doubted it -- one was a doctor and the other was a musician.

Similarly, if Liesel Pritzker had been able to talk about her future inheritance at 12 or 15 years old, there might be no headline-grabbing lawsuit. And the Internal Revenue Service might not have been alerted to potential tax issues concerning the Pritzkers' offshore trusts.

The IRS's sudden interest shows that a breakdown in communications with one family member has a ripple effect that can end up costing everybody, the two advisers say.

Published in the Globe and Mail, April 27, 2004

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