Preserving Family Wealth

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Help your family maintain its financial strength from one generation to the next.

As more and more baby boomers edge toward retirement, they’ll start thinking about what happens next when they finally shuffle off this mortal coil (apologies to Shakespeare). Many are planning to leave generous inheritances to the next generation, some of whom have been left in the dark about the family finances.

In fact, billions – potentially trillions – will be transferred over the next 30 to 40 years. One estimate has more than $27 trillion of family wealth changing hands between now and 2050. In another study, consulting firm Accenture estimates that $30 trillion will pass from boomers to millennials over the next 30 years.

Some Flourish; Others Fail

Unfortunately, approximately 70% of family wealth disappears when it’s distributed across multiple generations. There are many reasons why. Statistics say it’s because most families don’t have the ability to make joint decisions or can’t make a system work with multiple stakeholders. To stack the odds in your favor, you’ll need to bring people together, learn each other’s habits and quirks, and create a strong family unit even as the dynamics change through births, deaths, divorces and second marriages.

Research suggests that the odds of sustaining wealth across generations are as low as 30%. Less than 3% of these failures stem from poor estate planning or poor investment returns.

Those who don’t have a plan in place to shepherd the wealth across generations may find themselves subject to the “shirt sleeves to shirt sleeves” adage, where the first generation builds the wealth; the second expands it; and the third squanders it and has to start over. But what we really want is for each succeeding generation to protect that wealth for the good of the family and the world around them. The question is: how do we start that process? The wealthiest families have found success through long-term planning, setting common goals and open communication. But you don’t have to be rich to take advantage of some of these habits. Anyone investor or business owner can learn a thing or two.

Establishing Good Habits

Start the process early. Children as young as 6 can learn about the value of money and work. Adults tend to forget that. They focus their future planning on succession and tax mitigation, but neglect to discuss how beneficiaries will utilize the assets. Even worse, they may not factor in how life changes (divorce, death, remarriage) could affect the family dynamics.

To make sure your children and grandchildren understand their responsibilities when it comes to wealth, start the conversation as soon as possible. Teaching and mentoring should take place over a period of time. You’ll need years to pass along your values, ideas and shared history to all the members of your family. As you’re doing so, you’ll likely foster a sense of belonging and shared purpose.

Supporting Your “Team”

Families are more than their wealth. Strengthen each individual by supporting their goals and dreams. Help them flourish and build the confidence, resilience and perseverance they’ll need to make their own way and carve out a path for their success. That means bolstering their emotional maturity and values so they’ll become adults who can make mature financial decisions.

Introduce Your Family to “The Plan”…

You’ve likely already formed relationships with attorneys and advisors who’ve helped you build out your estate and financial plans. You may have even told your family about your estate planning documents, but you may not have gone a step further by connecting them to those who’ve helped build your plan.

When your kids are old enough, take an intentional approach to introducing them to your wishes for the future. Your advisors can answer questions they may have and help them gain the knowledge they’ll need to carry on your legacy. The goal is to make sure your children understand your intentions and know what’s going on when it comes to your finances. Even if your loved ones don’t yet have a rapport with your advisor, they may develop one over time or connect with a younger person in the same practice, allowing a continuity between what you’ve built and what your children want to accomplish.

One caveat: Be clear with how much you want your advisors to share with your children. This will depend on their age and, to some extent, yours. If you’re getting older and need help, your kids should feel comfortable turning to your advisors for information.

…But Don’t Divulge Everything at Once

The promise of sudden wealth may inspire your children to rest on your laurels, so to speak. You’ll want to walk the line between educating them about your circumstances and encouraging your adult children and grandchildren to make a life of their own as independent, responsible, productive citizens. Any potential inheritance should be viewed as a safety net or a gift that must be treasured, not squandered. However, it is important to have a plan in place so Uncle Sam doesn’t become your biggest beneficiary. If you don’t want all your wealth to transfer to your kids and grandkids, discuss leaving a legacy that benefits your favorite charities.

85% of family wealth evaporates because of a breakdown in trust and communication or a failure to prepare heirs. Your advisor may be able to bridge these communication problems.

Educating Loved Ones

Those who come before leave clues for those who’ll come after. Do what you can to give your family a fighting chance to retain and grow their inheritance. Explain how grandpa rolled up his shirt sleeves and invested time, sweat and tears into building a business from the ground up. And be sure to share the values that went along with that success, so your heirs will understand how diligence, delayed gratification and good stewardship benefits not just them but those to come, as well. You’ll also want to make sure they’re responsible and capable enough to handle substantial amounts of money. Your advisor can offer some guidance and financial education to make sure the bases are covered.

“Families that share and learn together tend to work well together, growing their financial, intellectual and social capital.”
– James Hughes, Author

Strategic Joint Decisions

Each generation will have different ideas about how to use money to benefit their lives and those around them. While you may not always agree with your kids, give them a say in how the family wealth should be used. That can help connect generations and shape your family’s future, while promoting openness and harmony. If nothing else, family discussions will lend incredible insight into each other’s values and temperaments and will give you an opportunity to instill appropriate conflict resolution skills. If you can’t make the process work, call in a knowledgeable mediator to get over any sticking points. Figuring out solutions together allows your family to bond and gives you a better chance of continuing wealth through the generations. Not all decisions will be harmonious or even good ones, but if the good ones outweigh the bad, then you’re off to a good start.

Three Common Mistakes

Avoiding the Conversation 
Too many assume the kids will just pick up the knowledge by proximity. Instead, think of money transfer as a teaching opportunity to share your family’s history and values. Ask your kids if they know the basics. Gauge whether they have the judgment and wisdom to manage great wealth.

Focusing on Accumulation
Your bottom line is not the only measure of wealth. True wealth includes the collective human and intellectual capital.

Bailing Children Out
Children need to face and conquer obstacles on their own. This gives them the tools (and resilience) needed to be successful later in life.

Be Hopeful and Realistic

These guidelines are just that: guidelines. They won’t work for every family, but they should give you a starting point as you face the future. As you’re planning, remember to be realistic. We often have high expectations of our children, but some can’t or won’t live up to them. Their values may not be in line with yours, or one may be more interested or more responsible than another. Whatever your family’s circumstances, work with people you know well to give all of you the best chance of keeping your wealth within the fold.

Sources: Raymond James research; James Hughes, author of “Family Wealth: Keeping it in the Family”