By Andrew Campbell, CFP®, Senior Wealth Advisor
Six Steps to Prepare the Next Generation for the Responsibility of Wealth
It’s a phenomenon known as “shirtsleeves to shirtsleeves in three generations,” and it is all too common among families of significant means. You’ve likely heard the horror stories: a highly successful family spends decades building wealth, but once the wealth creator(s) retires or passes on, the values and vision that helped create the wealth begin to fade from the family’s collective memory. By the time the third generation comes of age, the entrepreneurial spark and financial discipline that made the family financially independent are long forgotten and the family’s hard-earned wealth is gone.
The reality is nearly 90 percent of multi-generational wealth is depleted by the time the third generation takes over the responsibility of managing the wealth. A number of factors play into this phenomenon, but it is often driven by lack of communication and preparation of heirs more so than poor investment decisions.
Thankfully, it is a fate that can be avoided. The solution is to align the family around a shared vision, with the right conversations taking place at the right time about the responsibilities tied to wealth. Below are six strategies to help avoid the “shirtsleeves-to-shirtsleeves” curse:
Be clear about your goals and objectives
It starts with you. Meaning, take the time to be crystal clear about what you want your wealth to accomplish, and how you want it to impact your family (potentially for generations to come). Before sharing your plans with the rest of your family, be as specific as possible with yourself in identifying your own goals. Doing so is critical because too often the recipients of family wealth have their own perceptions tied to the intent behind, and expectations surrounding, the wealth they receive. That can lead to discord and dysfunction in the family … to say the least. Instead, strive for alignment on what the vision is for the family’s wealth transfer so no one comes away feeling confused or misled.
Also, when it comes to passing down assets, understand that what is fair may not always mean equal. In other words, each heir may not necessarily need to inherit an equal share of the wealth. Perhaps one child has significant medical needs that justifies more. Perhaps another is a highly compensated hedge fund manager, while still another struggles to make ends meet. Do they “need” the same amount of assets? The answer will ultimately be rooted in your personal philosophy, with no universal right approach. But, especially when fair isn’t equal, the key is to carefully articulate the “why” behind who will be getting what.
Communicate at the right time with the right people
Once you’ve clearly outlined your own goals and aspirations, start thinking through how, when and with whom you want to share your plans. Perhaps you start with your spouse or partner, and then your adult children. Although it may feel awkward to have these conversations, it’s important to discuss your vision honestly and candidly with those who will ultimately be impacted. That said, the timing of conversations about family wealth is critical. A 12-year-old has a different “need-to-know” threshold than a 30-year-old, for example.
Often wealth is transferred with a particular goal in mind (fostering financial responsibility, establishing savings for a rainy day, encouraging charitable giving, etc.). If that is the case, be as specific as possible about your intentions so that everyone involved knows what to expect and the spirit in which the transfer is to take place.
Also, be judicious in what you disclose. You can’t “un-share” net worth statements, for example. Big dollar figures can fundamentally change a young person’s outlook and potentially alter their trajectory for accomplishment. Be careful about what you share and when.
Set a foundation of financial literacy
Educating the next generation on the responsibilities of inherited wealth is top of mind for many wealth creators. It starts with establishing a foundation of financial literacy. Conversations about money should be age and circumstance specific, but it’s rarely too early to start. Look for opportunities to spur conversations about money, the values and work ethic it takes to make it, and the responsibility of spending it wisely. Just keep in mind the age and maturity of the family member you are communicating with.
As the next generation’s financial intelligence grows, introduce concepts such as stocks, bonds, credit cards, mortgages, interest rates, investment rate of return, estate planning, etc. An overview of the legislative landscape as it pertains to taxation can be incredibly helpful as well (tax rates, income vs. estate taxes, capital gains vs. ordinary income, etc.).The point is to normalize these conversations and encourage further exploration so that when the topics become personally relevant, your heirs aren’t starting from ground zero.
Have the right advisor team in place
As conversations about managing finances become more complex, and as wealth transfers approach, it is important to have the right team of advisors in place to fully support family members who stand to receive significant wealth. The next generation needs to know who they can rely on to understand all the moving parts of their financial picture. They also deserve to know who is involved in the ongoing management of the family’s wealth and what their roles are (investment advisor, financial planner, estate planning attorney, accountant, etc.).
So, introduce younger family members to your advisor team early on. Make it fun. Sometimes a relaxed setting can make the conversation easier. The point is to build those relationships and ensure everyone is comfortable with each other so a sense of trust develops.
Also, even with the best-laid plans, the unexpected can and does happen. Introducing your family members to your team of advisors early on helps ensure your loved ones are prepared to take on the stewardship of the family’s wealth in any eventuality.
Ensure your estate planning and asset titling is in place and up to date
Beyond setting goals and having candid conversations with family members and advisors, it is important to have the actual legal mechanisms in place to facilitate the successful transfer of wealth. That entails a current and up-to-date estate plan that accurately reflects your wishes. Multiple decisions and directives need to be documented concerning beneficiary designations, asset titling, health care directives, powers of attorney and more for wealth transfer to take place as you intend. In addition, it is just as important for anyone who expects to receive a substantial inheritance or gift of assets to have their own estate and wealth transfer plan.
Many people put off estate planning as “something you do later in life.” Don’t. You may expect to live for many more decades, but an up-to-date estate plan can help protect you and your family if the unthinkable were to happen.
Finally, if you are a business owner, make sure your business transition plans work in concert with your estate planning documents. Coordination is key.
Don’t wait. Start now.
Outside of a robust asset base or a lucrative business, one of the best tools in the wealth creation and transfer arsenal is time. Whether it is simple compounding returns or a more complex wealth transfer strategy, a long “runway” can produce incredible results in maintaining, growing, and transitioning a family’s wealth. No one has ever wished they had less time to cultivate an asset base. So, there’s no better time than now to start preparing the next generation to be responsible, successful stewards of your family’s financial legacy.