A conservative estimate suggests that approximately $20 trillion of wealth will transfer to successor generations over the next 35 years. While about a third of that wealth is expected to be donated to philanthropic initiatives, it is critical that the older generations of wealthy families also take definitive measures to educate and communicate with the younger generations, so those young people can assume the roles and responsibilities that significant wealth requires.
Passing wealth from one generation to the next in practice is difficult. As the proven adage states: The first generation creates the wealth, the second generation manages it and the third generation loses it. Generations one and two are typically associated with founding and/or growing a family business or other wealth-generating activity, while the third and fourth generations are frequently less involved.
An often-cited Williams Group study, conducted over 20 years, found that the failure rate for a family’s successful intergenerational wealth transfer was a staggering 70 percent.1
Given the abundance of estate-planning and wealth-management professionals assisting wealthy families, one might reasonably wonder whether the clients are being ill advised. The simple answer is no. Studies show that the fundamental issues at the root of this failure likely lies within the family dynamic itself.
The Williams Group study goes on to say that 60 percent of this failure to pass wealth to successive generations is due to a lack of communication and trust among family members.2 Feeling disconnected from the creation of wealth can result in the third and fourth generations having trouble determining their role in managing and maintaining that wealth. Over time, this lack of direction can lead to poor communication and self-motivation issues among younger-generation members.
A failure to be proactive will often lead to failure.
No wonder, then, that parents are so concerned about the impact their wealth will have on their children. The most prevalent concerns parents expressed about their children included:
- Too heavy an emphasis on material possessions
- An absence of appreciation for the value of money
- Spending beyond their means
- A lack of initiative 3
To address these concerns, advisors should help their clients develop family mission statements that properly align values and priorities, facilitate inheritance conversations and assist with the communication of legacy initiatives.
Introducing younger family members to their parents and grandparents’ team of professional advisors is vital and will help those generations understand their roles and responsibilities, in the context of overarching family objectives.
Additionally, trusted advisors can also serve as financial mentors to these younger family members as they reach adulthood and establish themselves in the family structure and society.
Advisors need to adapt: Despite the concerns mentioned above, much of the emphasis in current wealth-management advisory services remains focused on the assets rather than the family dynamic. While investment management, income and wealth-transfer tax planning and asset protection remain important, helping wealthy individuals prepare family members to be good stewards of wealth is a crucial component to successful wealth transfer and should not be overlooked.
Families need education regarding the preservation of the family legacy, the inherent responsibilities that accompany substantial wealth and the importance of communication to ensure that wealth can be transferred successfully to future generations.
Proactive family advisors recognize this need and are expanding their role to advise client families with respect to legacy education, values, philanthropic goals, governance and fiduciary roles. Utilizing these softer, “nonfinancial” planning techniques allows advisors and families to develop a robust wealth-transfer plan, empowering the future generations of these families with the knowledge and skills necessary for managing wealth when their inheritance arrives.
1 Roy Williams and Vic Preisser, Philanthropy, Heirs & Val-ues. Bandon, Oregon: Robert D Reed Publishers, 2005.
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This article was originally published in the October/November 2016 issue of Worth.