By John Drachman
It’s only natural for parents to feel awkward around their adult children where money is concerned.
Parental procrastination over discussing “what will happen when we’re gone” though can stall inheritance conversations until it’s too late – resulting in less transparency, unnecessary taxes, costly estate fees, and potential family strife. That’s why family wealth bequests to adult beneficiaries so often follow a predictable pattern of wealth erosion regardless of the inheritance’s size– or country of origin.
This cycle of wealth creation and destruction in the U.S. is summed up in the catchphrase, “shirtsleeves to shirtsleeves in three generations.” In Japan, a similar saying goes, “the third generation ruins the house” while Italians have referred to this phenomenon of loss as “From stalls to stars to stalls.”
Like the spin of a roulette wheel, some 90% of families will lose their wealth by the third generation, according to Vest Financial Group’s David Kleinhandler. That still leaves 10% of family inheritances that are successfully passed on to more than three generations of beneficiaries. Here are four best practices the 10% use to make their family wealth last:
- Focus on values first when discussing money. This step is actually easier than it sounds. Millennials are a particularly values-conscious generation. Many have expressed interest in environmental, social and governance (ESG) investing as a way to make money while giving back to society. Parents can meet their children on their own terms here and open up a dialog about the role family capital plays in building futures.
- Ask your adult beneficiaries what they want for their “children’s children.” Thinking long-term, they’ll begin to view parental wealth as a fulcrum for their own long-term succession plan – a plan that engages them in preparing the next generation for family leadership.
- Introduce the psychic rewards that come with being a family steward. Together, families can create greater purpose, unity and kinship as their perceptions about money evolve from the transactional to something greater and lasting that comes from achieving shared goals. Beyond being a beneficiary, adult children who embrace the role of family stewardship can gain a deep sense of satisfaction. Visionary deployment of the family’s financial capital can improve not only their lives and the lives of their successive generations, but also the development of institutions and endowments they care about.
- Preserve family wealth transparently. Successful families organize periodic family discussions to review the financial balance sheet and ponder asset growth from one year to the next. This can be a good time to review the fiscal progress of each family member as well. Adult children who understand the values that underlie family wealth will be better prepared when their parents inevitably pass.
Such family discussions however are still not easy to initiate – but don’t let that keep you from making the effort. Financial advisors who specialize in estate planning are especially skilled at leading family discussions around generational wealth management. They provide a knowledgeable, neutral presence as well that can offer critical advice in the near term while empowering you to make adjustments to your will, trust or estate plan over the long-term. The rewards for taking the speculation out of transferring your wealth this way are lasting – and immeasurable.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.