Preserving Wealth Depends on Strategic & Consistent Heir Education
You’ve worked hard to build your estate, and maintain it over time. Eventually, it will be time to leave your estate to your children. How will you make sure that they are prepared?
Just as you have a responsibility to manage your wealth, you have a responsibility to educate your children about how to manage it. Children also have a responsibility to learn. One of the hardest parts of passing along wealth is that often, children fight over the money. As parents, your job is to ensure that your heirs are educated not only on money management, but also on life’s values, and what’s important to your family and your legacy.
Talking to your heirs about the family wealth is not a one time conversation. It’s a continuing dialogue that takes place over many years as your children grow and your estate changes. It’s important to start talking to your kids about wealth early, and to be willing to continue the conversation. Open communication about the family’s financial situation and values will set your heirs up for the greatest chance of success.
The dialogue about family wealth changes over time. Children might have a certain frame of reference as teenagers, but that dynamic changes once they marry and spouses are introduced into the family. The conversation about transfer of wealth happens over and over again, at different milestones in life. As the point of departure nears where there will be some significant asset transfer, all of the cumulative talks where you have been educating and steering the child over time can come to fruition.
Here are some guidelines for ensuring that the heir education process goes smoothly.
Start Education Early
The best time to start talking to your children about money and the family’s assets is as early as you feel comfortable. The process ultimately has two parts that should be handled separately: teaching money skills, and revealing family wealth.
Conversations about money and financial education can start as early as 5 years old, and should continue into adulthood. Think of it as a process of apprenticeship, where your children will learn from you how your family’s estate should be handled. Incremental learning and incremental responsibility will be the cornerstones of a successful education process.
When you feel like your children are mature enough to handle wealth management, and you respect the people they are becoming, it’s time to go to the next step and educate them about the family’s wealth and their inheritance. Advisors say that making them aware of your family’s wealth, and their responsibilities pertaining to it, early on will set them up for the best chance of success.
Model Good Behavior
When individuals have accumulated a certain level of wealth, they face unique challenges because one day they will need to pass that estate down to their heirs. Often, they feel conflicted because they want their children to be independent and support themselves, but they also want them to benefit from the family wealth. They want children to learn to be frugal and modest in their savings, but they want them to have the best because the family can afford it. It can be difficult to teach children the value of money when passing down a significant estate.
If you don’t have your own values straight about money, it’s impossible to teach money skills and values to your heirs. Often, the first place to start is with yourself, and getting clear on what you want your wealth to accomplish for your family.
If you are not generous with your wealth, how will you encourage your children to be that way? You must model the financial behavior you wish to see from your heirs. From as early as it feels comfortable, generations should be making decisions about the family’s money together.
Instill Philanthropy
Studies show that the people who give most aggressively and demonstrate the highest level of commitment to philanthropy are people that also participate in boots-on-the-ground volunteer work, getting their hands dirty and making a difference. If philanthropy is part of your family’s value system, the best way to teach your children to maintain that focus is to get them involved in a charitable cause early.
You need to allow the next generation to make their voices heard when it comes to philanthropic endeavors. Don’t just sit around a table and make decisions about which organizations to give family money to, encourage your heirs to participate in the work these organizations do, and experience the difference that money makes.
If you want your children to learn financial values, charity is a great place to start.
Give an Allowance
For families who really want to begin financial training early, introducing an allowance is a wonderful learning tool. Giving your children money to spend as they choose provides teachable moments all the way through their teenage years. New research shows that when you establish the spend-save-share pattern early, children are less likely to be materialistic. Studies also show that gaining confidence about handling money early on can build self-esteem.
An allowance also acts as a release valve, giving them a way to spending money without feeling guilty. Otherwise, if you take a stoic approach to safeguarding every dollar of the family’s wealth, it loses the appeal for the next generation. Keeping your heirs engaged in estate planning means providing them a way to participate.
The idea of delayed gratification is another important skill for children who will inherit an estate to develop, and issuing an allowance helps develop that skill. Children will come up with ideas frequently for what they want to spend the money on. Parents can begin a process of writing down all those ideas as they come up. At the end of the month, help your children prioritize that list. Then, match it to the savings that has been accumulated and make spending decisions. This teaches not only delayed gratification, but also demonstrates the trade-offs that come with making decisions about money.
Encourage Summer Jobs
Another good practice for parents who will pass down a sizeable estate to their children is to encourage them to have a summer job. Even if it’s bringing the child into your own office, establishing a way for them to earn a salary provides a valuable lesson.
Earning money for themselves gives children a sense that they can become productive and add to the family wealth. It also helps them understand the value of hard work.
Manufacture Scarcity
For families with significant wealth, there is no scarcity. They may be able to have the things they want when they want them. However, parents don’t want to teach their children entitlement, and it may serve them to say no ‘just because’ on occasion.
Often, this is a challenge for families dealing with first-generation wealth. They’ve worked hard all their lives, and they want to enjoy the fruits of their labor. It’s natural to choose a neighborhood, a car, or even the children’s schools based on the lifestyle you can afford. However, when you do that, you expose your kids to a different environment. It can be difficult to enjoy your wealth without passing on the message to your heirs that this is normal and should be expected.
This is another reason why charity is such an important part of financial education for your heirs. Getting kids involved in organizations that deal with people less fortunate than they are can be enlightening. If you build philanthropy into your children’s approach to money, you build in a sense of responsibility.
Emphasize Good Stewardship
It’s important to emphasize prudence and good stewardship when teaching your heirs how to take over your estate. Often, children think they know better than their parents when it comes to managing money. They may be smarter and better educated, and feel that they know more about how the family wealth should be handled or distributed.
The challenge is for parents to convey a sense of responsibility to their heirs; good stewardship is both a mindset and an education. The mindset is that you are part of a larger family – one link in a chain that goes both backward and forward – and you need to take care of your siblings and other members of the family.
It’s important to teach children the story and context that’s behind the accumulation of family wealth. It involves other members of the family who built something that is being passed down. In that story, there are highs and lows, setbacks, victories, and all of this is important in setting the context for stewardship.
The education part is simply math. If you have a portfolio and you look at its value over time, your heirs need to understand how different withdrawal rates will affect that value. It’s frequently an eye-opener for children and families when they realize that they have to be very deliberate about this process in order to preserve the wealth through generations.
Hold Family Meetings
Communication is at the heart of any transfer of wealth between generations. Even if it’s a difficult conversation, it’s a necessary one. When a significant estate is involved, multigenerational family meetings become vital to ensure that everyone is on the same page about what happens to the family money over time. Different generations communicate differently, and see wealth differently.
Sometimes, it helps for a family to establish a mission statement for their estate. A declaration of what the family believes in that can be followed and nurtured through the generations.
Effective family meetings should not be solely about money. Once you expand the conversation to include the intellectual capital, the social capital and human capital that exists within a family, it can open their eyes to the family’s identity and ability to make a difference and leave a legacy.
Often, wealth transfer plans are driven by tax efficiency and there isn’t enough attention paid to what impact that’s going to have on the lives of the heirs. For a successful transfer, preparation is important. Each family needs an intentional strategy of educating and preparing heirs for receiving the wealth before it happens.
Think of wealth as something you inherit for a short period of time. Do what you can to preserve it, and educate your children so that they have the responsibility to continue to preserve it for generations to come.
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Several of our friends and colleagues contributed to this article:
Donna Trammell, Managing Director & Director of Family Wealth Stewardship, Bessemer Trust (http://www.bessemertrust.com)
Barry Frankel, Partner, Habif, Arogeti & Wynne (http://www.hawcpa.com)
David Dodson, Executive Director, Morgan Stanley Wealth Management (http://www.morganstanley.com)
To learn more about how wealthy families can talk to their children about wealth, listen to the Wealth Matters Radio Show (http://gaslowitzfrankel.com/radio-show/).
