Co-authored by David Elyashar, CPA, CVA, Partner and Family Office Practice Leader at Wipfli LLP.
The following article was prepared in collaboration with our affiliate, Wipfli LLP. Wipfli ranks among the top accounting and business consulting firms in the nation.
Around 70% of wealthy families lose their wealth in the second generation — a number that jumps to 90% in the third generation.1
Why are these numbers so high?
Often, it’s because the family’s values and goals for the wealth haven’t been adequately passed on, and there may be a lack of financial education for the next generation. While the first generation that created the wealth may not have necessarily grown up with money, and thus may have a deeper appreciation for the “true value” of a dollar, the second generation has likely never known any other lifestyle. They may need a more robust education around money and all that it involves, from investing to charitable giving to trusts. They need to understand their parents’ values and how to preserve the family’s wealth so it passes on to their own children.
So, how do you get your children or grandchildren to attach the right kind of value to your family’s wealth? Here are six strategies:
1. Have conversations early
Being proactive is one of the most critical best practices we recommend. But how early is too early to have a conversation with the next generation about the family’s wealth?
Well, there’s no standardized process, and it depends on the family. Generally, you’ll want to consider holding a conversation once the next generation starts to demonstrate 1) an interest in learning more about the family dynamic and 2) a maturity to handle such a conversation. Once they demonstrate this, it’s a good time to set them on the path to preserving, maintaining and growing the family wealth.
2. Introduce the next generation to your advisory team
Crucially, your advisory team can help facilitate these conversations. It’s less about informing your kids how much wealth the family has and what they should do with it, and more about talking through the family’s goals and values. It’s about understanding each child’s interests, values and even potential future careers. And it’s about providing the education they need to understand finances and the family dynamic so they can make the most informed decisions as adults once wealth transfers to them.
Your team can and should be a valuable resource for the next generation. They can not only spearhead important conversations but also answer questions and help them develop financial literacy. Plus, introducing the next generation to your advisory team helps your kids put faces to names and understand each role — which is critical in the case of the unexpected.
3. Ensure they’re prepared in the case of an unexpected death
The unexpected death of you and/or your spouse could leave your children unprepared if you haven’t had the above foundational conversations and put together your will and other estate planning and wealth transfer documents. Make sure to set everything up now so that the next generation has guidance to follow. And make sure to introduce them to your advisory team so they feel more comfortable going to them for education and guidance.
Without this guidance, family relationships can fracture. For example, two young adults inherit millions after their parents pass away unexpectedly. One spends the money in a few short years. The other saves it. The first goes to the second asking for money. Now the family dynamic changes, the siblings’ relationship deteriorates and neither has the education or guidance to truly understand what to do.
Much of this can be prevented with the right education, conversations and estate planning.
4. Help them develop an identity separate from the family wealth
Having potentially grown up without wealth, the first generation likely has developed an identity separate from it. But that’s not always the case for the subsequent generations. Being wealthy is often a significant part of their identity. What’s more, they oftentimes lack the motivation to work hard to create even more wealth.
When you help the next generation develop a separate identity, it helps them be better stewards of the wealth going forward. Whether that’s through setting expectations around higher education, community involvement or maintaining a job, it’s important to have ongoing conversations with the next generation to help them establish their own identities.
For example, in one family, all four of the first generation’s adult children have discovered what interests them about the family dynamic and pursued it. One runs the family foundation, one handles the family investment partnership, one manages the third generation’s trusts, and one utilizes part of the wealth as an entrepreneur to grow more wealth. This setup has proved quite successful and has helped ensure the family will preserve its wealth for a long time to come.
5. Create value and attachment through philanthropy
Many families get their children interested in and/or introduced to the family’s wealth by looking at it through a charitable lens. Ask your kids to do research on a charitable organization with a mission they care about. Then have them present the pros for why the family should make a donation or a grant to that organization. This will help your children attach value to those funds you’re donating and make the money more meaningful to them.
Your advisory team can also hold conversations about charitable giving, including introducing the next generation to the family foundation, if you have one.
6. Gift wealth with a purpose
You can give $15,000 a year to individuals without incurring a gift tax — $30,000 if you include your spouse. And $30,000 a year to each child can add up quickly.
To attach value to these gifts, you can (and should) try to gift with a purpose. Don’t give this money to your children because you can give it to them without incurring a gift tax, as this makes the gift seem more like a part of the family’s tax-optimization strategy and not necessarily a meaningful gift. Give it to them so they can make a down payment on their first home, so they can purchase a car or so they can go on a honeymoon. The next generation is often more appreciative of the money if it’s meant for something.
Enhance your wealth transfer planning strategies
Getting the next generation educated and actively involved sets them on the path to maintaining and growing the family wealth for future generations. If you’re concerned about how to hold an initial conversation and what your options around education and planning are, talk to your advisory team.
At Wipfli Financial, we discuss everything from family investment partnerships, to trust and estate planning, to charitable giving strategies with our clients. We get to know the next generation so we can hold better conversations around the family dynamic with them. And we work with families on strategies to maintain and grow their wealth, get the next generations actively involved, and pass on good values for generations to come.
Contact us to learn more about how we can help you better transfer your wealth and values.