It comes as no surprise that the largest wealth transfer in history will unfold over the next 30 years as Baby Boomers leave their assets to their children and grandchildren. There’s an army of estate planning attorneys and financial advisors who are ready, willing, and able to help with the planning. Yet many of these plans will fail even in cases where all the documents are in place. Failure does not mean that your children and grandchildren will not receive the money. It means that the money may create stress and resentment among siblings and other family members instead of the benefits you may have imagined.
Numerous studies on wealth transfer show that many beneficiaries are not prepared to receive such wealth. The problem is more pronounced in wealthier families, but it can be seen at all levels of the socio-economic ladder. Rarely are the failures due to poor legal, tax, or investment advice. The failures are usually the result of a breakdown in trust and communication among family members.
There is a common concern among wealthy families that kids will lose their motivation if they are aware of the scope of the family’s wealth and their likely inheritance. I have not seen this to be the case. The fact is children are perceptive and keenly aware of the family wealth. They are more likely to take it for granted unless they understand where the wealth came from and how it is managed, spent, and given back.
The solution is to have open, honest communication about money with your family members before they inherit the assets. This does not mean that they need to know how much money you have or see copies of your financial statements or financial plan. The key is that the future inheritors appreciate the challenging work and sacrifice that was involved in earning and saving the money. You need to pass on your values along with the money. That is not necessarily difficult to do, but it cannot be delegated to your professional advisors.
There are two main aspects of family financial discussions that I want my readers to understand:
- Personal Stories: The best way to teach anyone about money is personal stories. These are the memorable moments and lessons in the wealth creator’s life. It is not enough to provide a general overview of how the family nest egg or business was built. The most impactful stories show the vulnerability of key family members and how certain situations and hardships built success and character. Kids will remember personal beliefs that motivated and drove their parents and grandparents to take risks, save, and invest for the future. It is through an understanding of those transformative moments in the family’s history that children begin to appreciate values and develop a feeling of responsibility that comes with their family’s financial success.
- Questions, Not Lectures: Parents and grandparents cannot simply impose their beliefs, values, and priorities on younger generations. The younger family members should be heard and respected, and they should have a role in shaping the family’s values and philanthropic focus. Try asking your beneficiaries questions instead of telling them how they should act or what their financial priorities should be.
Successful wealth transition cannot be built overnight or through a single action or trust document, but instead requires open, ongoing communication and education.
For more on this topic, read: Your Family Wealth Philosophy and/or give me a call if you would like to discuss.
Have a great week.