Transferring your legacy
4 ways to prepare children now to oversee their inheritance later
In the popular imagination, families that accrue an above-average amount of wealth or assets eventually pass down those same fortunes generation after generation. It’s a common misconception—particularly when you look at actual data.
According to a Wealth-X report, 68% of the world’s wealthiest people (i.e., those whose net worth exceeds $30 million) are self-made. Look further, and you’ll see that 24% of those individuals possess a combination of inherited and self-created fortunes, while a mere 8.5% solely inherited their wealth.
Those figures become less surprising when you consider how difficult it is to transfer wealth effectively. A decades long study of 2,500 families found that 70% of family fortunes run out by just the second generation. By the third generation, that figure increases to 90%.
Why is wealth retention so difficult? While there are many ways to mishandle wealth, chief among them is a lack of preparation. Parents may spend time and money to ensure that their estate is organized properly, but those efforts may be in vain if they don’t also ensure that their children are prepared to receive that wealth. To empower future generations to oversee and sustain inherited wealth, equip them with the values, the knowledge, and the life skills they need to do so.
Without early and frequent communication, your children and future generations may find themselves overwhelmed and underprepared when they receive the wealth you have accrued.
Parents who hesitate to prepare their children for inheritance may do so with the best of intentions. They may worry about raising spoiled or entitled offspring, or they may feel uncomfortable discussing topics like wills and trusts before their kids are mature enough to grasp such concepts. Furthermore, many people struggle to know how much control they should exert over their wealth after their passing; this causes hesitation when it’s time to make concrete decisions about how to divide their fortunes.
While those misgivings are understandable, a failure to prepare children for the responsibilities that come with managing an inheritance isn’t in the best interest of the child or the assets. To help the next generation thrive, take the following proactive steps:
1. Devise a proper estate plan. It’s easy to neglect estate planning. Aside from the discomfort of facing your own mortality and the thought of your children navigating the world without you, estate planning requires considerable effort and expense. That’s probably why only 32% of Americans have created a will—and even fewer people have taken the care to construct a thoughtful estate plan.
Still, estate planning enables you to audit the tools at your disposal to minimize asset distribution costs and maximize the inheritance left to your heirs. Start by establishing guardians for your children in case they are minors when you die, and consider making a plan to hand over assets iteratively instead of all at once to prevent your heirs from being overwhelmed by a large inheritance at a young age.
2. Give your children a sound financial education. So much of financial success boils down to being informed. The stakes are high for any parent, and they can increase with your net worth. If you want your children to handle and retain your wealth responsibly for future generations, impress upon them the importance of concepts such as saving, compounding interest, and the benefits of asset diversification.
Educate your children early on by giving them money to use (or lose) as they see fit. Whether they succeed or err, they should learn lessons that will help them take the helm of their financial futures when they receive their inheritance.
3. Keep your children apprised of changes in net worth. As with many subjects, the key to successful communication between parents and children regarding finances is openness and honesty. That might not mean giving your children every last detail regarding your financial situation, but you can provide them with an age-appropriate amount of information about your wealth and how it will affect them moving forward.
You can also give your children a small say in wealth management by allowing them to choose a charity to receive a donation. Delegating a say in how the family’s wealth is managed gives children a sense of responsibility and helps them view the family’s money through the lens of a steward instead of just a recipient.
4. Encourage your kids to build their own wealth. Parents may worry that the promise of an eventual inheritance will stunt their children’s ambitions. To alleviate this fear, parents can put milestones in place over a set period to grant their children a limited amount of control over that inheritance.
A trust that gives children increased access as they get older may encourage them to establish themselves in their careers. It also gives them control of smaller sums early on, which should give them the financial experience necessary to direct larger amounts of wealth responsibly as they get older.
You may have spent your entire life building a fortune that allows you to take care of the ones you love—but you should plan for a time when you’re no longer around. No matter what steps you take, pass on good financial habits to your children early to ensure they have the resources and life skills to live comfortably and productively.
The contents in this article are being provided for educational and informational purposes only. The information and comments are not the views or opinions of Union Bank, its subsidiaries or affiliates.