You’ve probably heard the numbers; about $68 trillion in U.S. wealth is expected to change hands from older generations to younger generations in the next 25 years. Unfortunately, much of that wealth won’t make it the 3rd generation, the grandchildren. Rarely is the issue that the financial advisor didn’t do a good job. Most of the time, the reasons why the wealth disappears are things like trust and communication, lack of preparedness in the younger generation, and unclear family mission/values.
I’m guessing you probably do not want to make those same mistakes, so what are the best ways to ensure your wealth lasts for generations to come? Consider these tips:
Think beyond what’s considered long-term
Most financial advisors consider 5-10 years the beginning of a long-term investing timeframe, which extends into about 20-30 years; typically, many of my clients have been with me for over 20 years. When we are talking about generational wealth, though, planning timeframes extend much farther than that, possibly even up to four or five generations.
Planning for four or even five generations is essential when you think about the fact that financial wealth is often squandered by the time the third generation rolls around. What this does is enable a different mind-set that focuses on continually trying to grow your assets, far beyond your retirement years.
Prepare your heirs
Teaching financial responsibility starts early, with things like summer jobs and allowance. Once your kids are about the age of 16, some families like to start family meetings to discuss the structure of the estate. Things to talkabout might start with your priorities for your wealth and what that looks like, whether it be paying for college/higher education, funding family vacations, or purchasing real estate.
If your family is philanthropically inclined, allowing family members to present their charities of interest and discussing overall philanthropy strategy is also a terrific way to create alignment and designate specific actions family members can take to be part of the process.
Once your children are well-established and emotionally ready, perhaps around the age of 30, you can incorporate more long-term strategies and further sophisticated topics into the meetings. If you’re not comfortable discussing specific numbers, that’s okay. Keeping it at the strategy level is fine.
Be sure to include spouses, too, to avoid any misunderstandings that can happen through second-hand conversations! The bottom line is that you want to make sure your heirs are prepared to manage wealth and see it not as an entitlement, but a tool for growth. Using a clear preparation strategy, ensure your children learn independence, instead of being spoiled and pampered.
Establish family values and purpose
A recent survey from 2018 found that the most important thing wealthy individuals wanted to do was communicate with their families how to use their inherited money wisely. However, only 46% of survey respondents had actually talked to their families about their values and operating principles (source).
When I run family meetings for my clients, I try to make the process fun. The whole family participates in the process of determining the family values and purpose, but the trustee plays a key role in setting the stage and becoming an educator for future generations. Documenting the values, mission, and even heritage is important because as the money passes down several generations, it can be difficult for those future generations to understand what the first generation went through to build the wealth.
It’s equally as important to listen for the trustees, or first-generation, to listen to their children and grandchildren and incorporate their feedback into the family values and purpose; the family meetings that I facilitate always focus on achieving buy-in from the younger generations. Why? Because if they don’t feel heard, they will probably not be good stewards of wealth. Generational wealth does not usually last multiple generations without buy-in on values and purpose from the whole family. Because of the different needs and interests of each generation, it’s important to remember to revisit the purpose and values on an ongoing basis; the process will be somewhat fluid.
Careful estate planning
When considering a longer-term timeframe that spans four or five generations (or longer!) for your estate plan, it’s crucial to work with your financial advisor. It’s a complex process that contains many moving parts, from your gift plan to investment vehicles, to the people in your plan, to the goals of your family.
A vital part of the discussion, of course, is tax ramifications. Just like your money compounds over time, so do taxes. As an example, if you’re focusing on a multi-generation wealth plan, it could make sense to set up dividend-paying investments in a tax-deferred or tax-free account, while keeping lower-taxed investments in the more taxable accounts.
Ultimately your wealth is only part of a multi-generation legacy. Instilling future generations with values, goals, and the ability and drive to work will go along way into making your wealth last multiple generations. The goal is to help future generations become successful without making them dependent. Money should be viewed as a tool that families can use to help each other. Isn’t that what family is all about?