How to Prepare for Intergenerational Wealth

Passing on wealth to the next generation is often a primary goal for those who want to leave a legacy.  However, with the transfer of substantial assets comes the responsibility to ensure that the recipients are well-equipped to handle them.

Here's how to prepare your family for inherited wealth.

Earned vs. Inherited Wealth

Here’s a startling statistic: 70% of wealthy families lose their wealth by the second generation. And a whopping 90% by the third.

Why the difference between second and third generations?

Some believe the second generation has benefitted from bearing witness to their parent's hard work and their struggle to accumulate wealth.  This experience may explain why they adopt the values of their parents by emphasizing education, sacrifice, and hard work.

The third generation has a different experience. They have only known a life of affluence and may not appreciate what’s required to maintain – much less perpetuate—it.

If you want to leave a legacy that lasts, here are some suggestions for preparing the next generation for the inheritance they will be fortunate to receive.

Communicate

It can be quite challenging for wealthy families to have open and honest conversations about money. Complex emotions and power dynamics can make it difficult to address financial topics constructively. There may also be concerns about how discussing money could affect family relationships or lead to disagreements about inheritance or other financial matters.

Nevertheless, wealthy families need to discuss financial matters, including an inheritance, with their children because it ensures that everyone is on the same page and that financial decisions are made in the best interest of the family as a whole.

Candid conversations about money avoid potential disagreements and misunderstandings and set the stage for preparing the next generation to handle their inheritance. These discussions may lead to involving the next generation indecisions relating to family wealth, where shared values and passions can be discussed and evaluated.  It is also an opportunity to share the family’s story.

Educate

Educating future generations who will inherit wealth about financial matters is critically important. Without this knowledge, they may not know how to manage their finances properly and could potentially lose or seriously diminish their inheritance.

Financial education should include basics like spending and saving, investing, debt management, and planning for longer term goals, such as home ownership or retirement.  When appropriate, other complex topics should be introduced. These may include trusts and estates, taxes, nuptial agreements, philanthropy, or managing the family business.    

Understanding these concepts can help the next generation manage and grow their wealth.

The importance of financial education can’t be overstated. Some believe it is “the key to generation wealth.”

Prevent Family Conflicts

Family conflicts between heirs can be incredibly damaging to the value of an estate.

It’s common for siblings or other family members to disagree about dividing up assets or distributing property after a loved one dies. These disagreements can quickly become bitter disputes, with each party fighting for their interests instead of working together to develop a fair and equitable solution. These conflicts can sometimes lead to costly legal battles that drain the estate's resources and leave all parties worse in the long run.

Families with significant assets have an enhanced responsibility to engage in estate planning to ensure assets are distributed following their wishes and avoid conflicts arising when estate planning documents are ambiguously drafted, out-of-date, or non-existent.

Your estate planning lawyer should be sophisticated in tax-saving strategies, like gifting, charitable donations, and using trusts.  Otherwise, your estate could be significantly reduced by estate taxes.

Encourage Stewardship

Inheriting wealth isn’t just about maintaining a lavish lifestyle. It's also an opportunity to make a difference in the community and the world. By instilling the values of stewardship and philanthropy, family members can understand the broader responsibilities that come with significant assets.

Hosting discussions on charitable giving, creating family foundations, or exploring impact investing are ways to encourage a culture of giving and purpose-driven wealth management.

Safeguard Mental Health

Sudden wealth can sometimes lead to emotional or mental challenges, like guilt, anxiety, or a sense of loss of purpose. Preparing family members emotionally and mentally to handle significant assets is as crucial as equipping them with financial skills.

Professional counseling, mentorship, or peer support groups can offer emotional and psychological support, helping family members adapt to their new financial status without losing their sense of self.

The Role of an Independent Trustee

An independent trustee oversees the administration of trusts and other financial arrangements, ensuring that the settlor's wishes are carried out and that beneficiaries are protected. Selecting a trust company to serve as a trustee is an important decision.

Initially, you should understand the difference between directed and regular trustees.

A Directed Trustee performs administrative tasks related to the Trust Agreement but does not make investment choices for the Trust. A regular trustee performs all the functions of a Directed Trustee but also has responsibility for managing and investing trust assets.

Suppose you don’t want your funds managed by the company you appoint as trustee. In that case, you should designate a directed trustee and provide in the trust agreement who will be responsible for making investment decisions.

You can find helpful suggestions for questions to ask a professional trustee here.

The Role of a Wealth Advisor

A wealth advisor plays a crucial role in intergenerational wealth management. Their primary responsibility is to guide how to preserve, grow, and transfer wealth across generations.

Here are some critical aspects of a wealth advisor's role in intergenerational wealth:

• ‍Wealth preservation: Wealth advisors help clients develop strategies to protect their assets from potential risks, like market volatility, inflation, or unforeseen events. They analyze the client's financial situation, goals, and risk tolerance to create a customized plan to preserve and grow wealth over time.‍
• Investment management: Advisors assist clients in making informed investment decisions by providing research, analysis, and recommendations. They help diversify investment portfolios across different asset classes and guide clients on long-term investment strategies that align with their financial goals and risk tolerance.‍
• Estate planning: Wealth advisors work closely with clients and their estate attorneys to develop comprehensive estate plans that ensure the smooth transfer of wealth between generations. They help clients navigate complex legal and tax considerations, like wills, trusts, and beneficiary designations, to minimize estate taxes and facilitate the transfer of assets according to the client's wishes.‍
• Tax planning: Advisors, in consultation with tax professionals, help clients optimize their tax strategies to minimize the impact of taxes on intergenerational wealth. They stay updated on tax laws and regulations and guide tax-efficient investment strategies, charitable giving, and other tax planning opportunities.‍
• Education and communication: Wealth advisors are crucial in educating clients and their families about financial matters. They provide on going guidance, conduct regular reviews, facilitate family meetings, and offer financial education to help the next generation understand the importance of financial planning and responsible wealth management.
• ‍Philanthropic planning: Advisors assist clients in incorporating philanthropy into their intergenerational wealth planning. They help identify charitable causes aligned with the client's values and develop strategies for impactful giving, like establishing charitable foundations or donor-advised funds.

Overall, a wealth advisor acts as a trusted partner, providing comprehensive financial planning services to help individuals and families navigate the complexities of intergenerational wealth management.

Final Thoughts

Preparing for intergenerational wealth is a deeply personal commitment to ensuring one generation's values, hard work, and vision flourish in the next. The process involves transparent communication, extensive education, conflict prevention, and fostering a sense of stewardship.

Partnering with the right professionals, from independent trustees to seasoned wealth advisors, can make this task more manageable. By taking these proactive steps, families can aim not just to pass on their wealth but to instill a legacy of purpose, responsibility, and philanthropy that stands the test of time.

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