From shirtsleeves to shirtsleeves in three generations, goes the early 20th-century American proverb. Then there's the 19th-century British version: Clogs to clogs in three generations. And from Italy, date uncertain: From the stable to the stars and back again. You'll find similar sentiments in almost every language, all expressing the same thought: It's nearly impossible to pass on family wealth and have it last beyond your grandkids.
Statistics back up the folklore. Studies have found that 70% of the time, family assets are lost from one generation to the next, and assets are gone 90% of the time by the third generation.
That's because a crucial element of successful inheritances is often neglected. Traditionally, the focus has been on the givers of wealth, but it should rather be on the receivers. Investing assets wisely and crafting a good estate plan are crucial to success, but so is preparing the heirs. "Estate planning is a process to transfer wealth, but it doesn't help the family develop an infrastructure to sustain it, or keep the family unified from one generation to the next," says Debbie Dalton, a Bay Village, Ohio, resident, whose family is learning how to successfully steward the wealth that her father, a chemical engineer, amassed as founder of cryogenic equipment maker Chart Industries.
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Preparing the next generation has a lot to do with financial literacy. But it has just as much (if not more) to do with passing down and putting into practice values that will sustain your family as well as your fortune. In other words, a successful inheritance is as much about parenting as it is about money management, and that goes as much for multimillionaires as for mom-and-pop investors with a six-figure portfolio to pass along.
Inheritances gone wrong
It's counterintuitive to think about the downside of inherited wealth, and it may be off-putting for families of modest means. But giving money to kids can be fraught with danger, says Brad Klontz, a psychologist and certified financial planner. First-generation wealth creators, often coming from poverty or a middle-class background, have worked hard, made mistakes, picked themselves up and persevered. Along the way, they've become self-disciplined, resourceful and resilient.
"You assume that those values will trickle down automatically," says Klontz. "But your children are having a vastly different experience of the world than you had." Parents who strive to give their kids what they themselves never had (which is what many worked so hard for, after all) can wind up fostering financial dependence, and raising kids who lack drive, creativity or passion, Klontz says.
In the book Inherited Wealth, John Levy lists a number of challenges that accompany a family windfall, observed over many years of consulting with families on inheritance issues. According to Levy, inheritors can lack self-esteem if they suspect that their success stems from their wealth instead of their efforts. Or, feeling guilty, they find it hard to accept good fortune that they didn't earn. Their emotional development can be delayed if they never face important life challenges. Boredom can be a problem, and because of the boredom, inheritors are at risk for substance abuse or other self-destructive behaviors. Finally, heirs can be stymied by too many options or paralyzed by a fear of losing their wealth.
Little wonder that rich people from Warren Buffett to Sting have vowed to "spare" their children from inheriting fortunes, choosing instead to give most of theirs away or spend it. Buffett has said the ideal inheritance for kids is "enough money so that they would feel they could do anything, but not so much that they could do nothing." Sting told Britain's Daily Mail, "I certainly don't want to leave them trust funds that are albatrosses round their necks."
But that attitude is rare among wealthy parents, says Rod Zeeb, CEO of the Heritage Institute, which trains advisers and works with families to prepare younger generations for their inheritances. "When it comes down to it, most parents don't want to disinherit their kids," he says. What they'd prefer is a game plan that will not only keep the family assets intact but also keep the kids grounded, healthy and productive.
Richard Hansen had a plan from the get-go. The retired Navy man, who lives most of the time in Virginia Beach, Va., has done very well as a military contractor for several government agencies, including the departments of State and Homeland Security. "I come from a working-class family," he says. "I always intended that if I made something of myself, I'd give back and make sure my children and grandchildren did, too. They were not going to be that second- and third-generation family that didn't understand where they came from."
Hansen's four adult kids all have jobs, and they are not wealthy — but they will be when they inherit. In preparation for that day, they've taken an active role in the family foundation, learning to invest money and to give it away wisely. Family members, including a teenage granddaughter, support causes ranging from ending homelessness to animal rights to the arts. Each of them knows what's involved in making the money to give away, how to pitch a project to a board of directors and how to analyze costs, set priorities and evaluate outcomes. "Each of my children can stand on his or her own anywhere in the business world," says Hansen. "That's the greatest thing I've been able to do for them — that, and making sure that they're not rotten, spoiled brats."
A five-point plan
A growing number of families are turning to advisers and specialized programs to help prepare the next generation for the riches they will inherit, in a way that goes beyond the benchmarks of money managers and the legalese of estate lawyers. Here's some of what those advisers recommend.
Get over the money taboo. Family finances are often an unpopular topic of discussion, especially if parents are worried that family wealth might spoil their kids. "It becomes a big elephant in the room," says Daisy Medici, managing director of governance and education at GenSpring Family Offices, a unit of SunTrust Banks. "The kids are surrounded by wealth and the opportunities that it brings, but the family doesn't talk about it," she says. Young people with no preparation who suddenly come into a trust fund because they've turned 21 — or, heaven forbid, the parents die in an accident — can be completely derailed, the same way lottery winners often are.
The same goes for spouses. "My father retired and a couple of years later was diagnosed with lung cancer. He died within six weeks," says Dalton. The tragedy was compounded by the fact that Dalton's mother was unprepared to take the financial reins, having been shielded from much of that responsibility during her marriage. "I was really angry at my dad for that. It was well intentioned, but my mother was paralyzed," says Dalton. It didn't help that the transition took place in 2008, as the family's investments were being pummeled by a bear market. The family assets survived the bear market, and Heritage Institute coaching has since helped Dalton's mom develop her own voice and leadership style. Coaching has also helped the family to coalesce around the Christian values they want to shape their legacy, says Dalton.
Sometimes parents are silent because they're not sure their money will outlast the health challenges of old age or mercurial financial markets. Whatever the reason for the lack of communication, heirs who are ill-prepared are left to wonder why their parents thought they were incapable of handling the information or couldn't be trusted with it. Better to be upfront about the wealth you have and your plans for it. And don't forget about how it came to be in the first place, especially if the wealth was created several generations ago.
Embark on a mission. Make sure your legacy is about more than money. Many families find a mission statement helpful. After meeting with a family, wealth transition coaches at the Williams Group, in San Clemente, Calif., will have family members write on an easel the values they want to emphasize in their lives — say, education, philanthropy or self-sufficiency. "It takes half a day, and the paper is several feet long," says founder Roy Williams. "Most of them frame it and hang it in their family offices." In light of those core values, the family identifies the long-term purpose of their wealth in a mission statement.
Williams considers crafting the mission statement a crucial exercise. His study of 3,250 families found that a breakdown in trust and communication is behind 60% of failed inheritances. Involving the whole family in determining common objectives and deciding how they'll be accomplished avoids the trap of Mom or Dad dictating the future to their children. It can also smooth tensions between family factions — between those running the family business, for example, and those not involved.
Raise money smart kids. From an early age, children should be taught budgeting and delayed gratification, even if you can afford to give your kids everything they want and more. It doesn't matter if the monthly budget is $3,000 or $30,000, "there's no amount of money that can't be spent through," Medici reminds her clients. When kids are little, get them a piggy bank with three slots or three separate piggy banks — one for spending, one for saving and one for giving. Remind grandparents who are fond of cash gifts to make them in multiples of three.
Let older kids budget an allowance to cover their expenses. Figure the monthly average spent on a teen's car insurance, cell phone and so on, and then give the young adult an allowance to pay those bills. The tough part is letting the phone get shut off or taking back the car if the bills are not paid. "It all goes back to the law of consequences," says Zeeb. "Without a budget, kids never learn to prioritize or make decisions."
Provide financial training wheels. Don't make the mistake of delaying all access to the family fortune in order to preserve it. Brian Matter, a certified financial planner at Creative Capital Management, in San Diego, encourages clients to seed an investment account when children are in their late teens. Allow the child to make investment decisions, and agree to match a percentage of the returns earned over a specific time period. The child can withdraw money from the account, but the parent can't add to the principal. This teaches the child about investing and spending, and it illustrates the power of compound growth as well as the opportunity cost of robbing a nest egg. "We had one client try this, and the child decided to withdraw all the money within the first six months for a lavish trip to Paris. The parents changed their estate plan as a result," says Matter.
The Dalton kids and their cousin share responsibility with their parents for the management of a family lake house in upstate New York, owned jointly and organized under the legal structure of a limited liability corporation. Debbie Dalton says she expects that the kids will soon take an active role in directing some of the family's charitable giving, as well. Such experiences boost the odds that when it's the next generation's turn to manage the family business or an investment portfolio, "they'll have the skills, knowledge and insight to be effective," says Jeff Ladouceur, a director at SEI Private Wealth Management.
Assemble a good team. In addition to a cadre of advisers that includes investment managers, tax preparers, estate planners and trust lawyers, bring in mentors for the next generation — especially for teens and young adults, who might not always see Mom and Dad as the font of all wisdom. Enlist qualified associates, such as financial advisers, board directors you may know and other successful businesspeople. "The smartest thing I did was bring in outside expertise at the highest level," says Hansen, the contractor, of the board members he has enlisted for his foundation. "Several of them have managed millions — billions — of dollars. The value they add is incredible."
A de facto advisory board comes in handy when your kids' friends and classmates start to hit them up for contributions to investment schemes or business start-ups — the surest way, other than overspending, for young adults to fritter away an inheritance, says Zeeb. "They want to help their friends by nature, but the best way is to defer. If the committee says yes, the kid's a hero; if it says no, it's not his fault."
In the end, you'll have the best shot at preserving both your wealth and your family with a multigenerational effort that begins when your kids are born, not when you die. Dalton, for one, is pleased with the path her family is now on, and she urges others to get started. "Unlike investing, where timing can be critical, there's no bad time to invest in your family's legacy. You should start now."
The power of a trust
As a parent, your vision of how your legacy is passed on to the next generation and beyond probably doesn't linger on legal vehicles. But such structures are key to achieving your goals.
When it comes to distributing assets, many families turn to trusts. Trusts come in more flavors than Baskin-Robbins ice cream. Depending on the arrangement, they can minimize estate taxes, protect your estate from the mistakes of your heirs or maintain privacy by avoiding probate. The cost to set one up typically ranges from $3,000 to $10,000; it can be more, however, depending on complexity, with additional costs for individual tweaks and maybe 1% of assets to administer it.
A revocable or living trust lets you keep control of your assets while you're alive. Although assets usually pass directly to your heirs, bypassing probate, a revocable trust won't spare you from estate taxes. If that's your main goal, then an irrevocable trust, which effectively removes trust assets from your estate, is the way to go. A lifetime asset protection trust might be in order if you have concerns about the ability of your heirs to preserve your estate. Beneficiaries are protected against creditors, bankruptcy — even future ex-spouses — because assets belong to the trust, not the beneficiary.
Whichever trust you choose, consider inserting a personal message to your heirs to breathe life into an otherwise sterile document. You might include the stories behind family heirlooms, for instance. Or, instead of imposing edicts and tying distributions to certain achievements, express why you value education or entrepreneurship. "This is the last message we get to leave," says John Warnick, of the Purposeful Planning Institute. "When it comes in a positive and warm way, it has a tremendous impact."
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