How to Manage Family Liabilities for Generational Wealth Building

June 15, 2021

In financial terms, assets and liabilities compete against one another in terms of the business’s balance sheet. Assets are items a company owns that provide economic benefit, while liabilities are financial obligations that detract from the total assets. Generally speaking, assets include receivables or revenue from income, investments, inventory, and equity, while liabilities are otherwise considered payables and include goods, services, or monies owed.

But when we take an enterprise view with the objective of building a sustainable business that can be passed down for generations, other types of liabilities must also be accounted for—the family liabilities. Family liabilities are elements of the balance sheet that deflate the value of shareholder enterprise equity, and the value of the business at large. Like the assets identified in the six elements of wealth, these liabilities are not just quantitative, but qualitative in nature. Poor relationships or conflicts within the family can be just as detrimental to near-term and far-term goals as financial issues. 

The goal of the enterprise, then, is to increase the value of family assets while decreasing potentially damaging family liabilities. While this concept seems simple, the dynamics of families can make either side of the equation difficult to address. It helps to look at each component individually to understand how we can improve the overall outcome and build lasting wealth. 

To better illustrate some of the most injurious family liabilities, we break the threats down into four categories: long-term, intermediate internal, intermediate external, and short-term. This method helps identify conflicts that could threaten to disrupt the generational success you are working so hard to maintain. 

1. Long-Term Family Liabilities

Failure of family governance

Family governance involves bringing your family together in conversation to co-create a shared vision of wealth with purpose. Thoughtful collaboration encourages the entire family to actively invest in seeing the enterprise succeed. When a family enterprise fails to communicate, it can be difficult not only to get buy-in from everyone involved, but can lead to even more damaging rifts within the family unit.

family liabilities

Failure to understand that success requires a 100-year plan

It’s easy to think about what is in your business for yourself today, but what about how that business will develop and evolve to support your family and community in the future? To plan for generations, families must widen their lens to include this lengthened time span in their planning process. Of course, this is a much more nuanced approach than most advisors take that goes well beyond the financial and structural elements of wealth. The view must be expanded to include the aspects of your family enterprise that will sustain your family’s legacy.

Failure to manage all forms of family capital

While monetary assets carry the most quantitative value, human talent may have the highest qualitative value. A successful 100-year plan includes “mining” and incorporating the human capital within your family to support its growth. How to best incorporate the family talent in the business isn’t always obvious to business owners right way. It can oftentimes take a third party to help point out where a certain skill set could fit in; but, overall, the family talent pool can be the most powerful investment opportunity a family enterprise has.

2. Intermediate Internal Risk Factors

This next set of family risk factors will be spread a bit more across the board as each family has their own internal issues with which to contend. These internal threats can range from death to divorce, addiction or other “secret” vices, gambling, poor credit and/or financial health, poor beneficiary or trustee relationships, an unusual increase of family members in each generation, and even investment programs that do not extend beyond fifty years.
The more conflicts on the table, the higher the family liability skyrockets. Unfortunately, these internal family risk factors are arguably some of the most difficult to mitigate as they often involve touchy, personal subjects, preconceived belief systems, and deep-rooted habits that can be difficult to break. But it is these near-term conflicts that can ripple dissent and discord decades into the future, so they must be carefully addressed as they arise. These situations are often best handled with the help of an outside facilitator. The facilitator serves to help all parties understand and focus on the important issues needed to reach a resolution.

3. Intermediate External Risk Factors

Of course, there are only so many elements that affect our wealth that are in our locus of control. Over time, we must be vigilant of and ready to act in response to those factors which we cannot control including inflation, inadequate trustee management, estate and wealth transfers, taxes, non-anticipated catastrophes, changes of political systems, and lack of personal security.

To our own benefit, certain factors like inflation and estate tax planning can be reasonably factored into business and financial planning, but others—such as a global pandemic or change in political system—cannot. It is precisely these macro and micro external events that make planning an ongoing process. Business owners must often re-evaluate and shift strategies along each stage of their journey to account for potential changes, analyze the impacts those changes could have on their wealth, and grow and transition the business in the right direction. It is best to plan for possible uncertainties and remain flexible along the way.

4. Short-term Risk Factors

This list of short-term liabilities is by no means extensive, but four factors are the most common foes all businesses owners must face. Income taxes and market fluctuations fall on the numbers side of the equation, while the absence of a mission statement and lack of financial education fall on the other. 

It’s not at all unnatural for high-net worth business owners to fear potential tax law changes or fluctuations in the market. However, that doesn’t mean investors are without options. Even in tough situations, there are a number of strategies to employ to mitigate an increase in liabilities. Historically, too, we must remember that the market shows an overall positive trend. Fluctuations can be addressed with the proper diversification, allocation, and tax-loss harvesting strategies to keep the business thriving until numbers swing back in your favor. 

Establishing a mission statement and educating all members of the family on the business finances allows for a deeper, more thorough understanding of what the family wishes to accomplish and how it will do so over time. It is these coordinated efforts and strategies that will ensure the family’s actions remain in line with the family’s values—ultimately building a lasting legacy for which you and all members of your family can be proud.

Increasing Assets While Decreasing Liabilities

When looking at multi-generational planning, it’s not just about what is in it for the family today, but how the enterprise can benefit the family and greater community long after you are gone. With proactive and purposeful planning, families can mitigate or eliminate the risk of family liabilities that could potentially disrupt the long-term security of your 100-year plan

If you’re interested in learning more about our exclusive work with multi-generational family enterprises, we encourage you to download our more extensive guide here. Email Somer Schimke at or call 605-275-9181 to schedule a first conversation with our team.