How Do We Protect the Next Generation from Blowing Our Money?

Take these two steps to help ensure your legacy isn’t squandered.

(Image credit: Getty Images)

Can you even imagine a billion dollars? If you earn $45,000 a year, it would take you 22,000 years to amass such a fortune. Well, now imagine $1 trillion. That’s 1,000 billion. One trillion divided evenly among the U.S. population would mean that everyone in the U.S. would receive a little over $3,000. Now imagine $68 trillion. If we use the same math, each person would receive about $200,000.

What is so magical about $68 trillion? It is the amount of money that is projected will transfer from Baby Boomers (born between 1946-1964) to their heirs over the next 25 years, according to Cerulli Associates. Mind-boggling, at best. Generation X (born between 1965-1980) stands to be the primary beneficiary of this wealth transfer. But are they ready for that money?

Do Not Try This at Home

In my generation, you always had a financial professional in your life to help you design and implement your financial future. But our next generation of wealth inheritors often feels that they can “do it themselves,” via a click of their smartphone. They were practically born with a digital device in their hands. They use their smartphone to pick restaurants, bars, clothes and even romantic partners. Why can’t they pick stocks, too? Well, here’s why: It takes more money savvy to design a stock portfolio that fits your life goals than it does to pick a hot restaurant.

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Millennials: The New Day Traders

CNBC (opens in new tab) reported that the pandemic has highlighted that people having more time on their hands has caused “Online stock trading platforms (to) have seen a surge in demand in recent months as investors seek to take advantage of undervalued equities.” Millennials appear to think that they can make quick bucks by becoming day traders, but they could be overestimating their abilities and their possibilities.

Burton G. Malkiel, a Princeton economist and Wealthfront’s Chief Investment Officer, shared his thoughts in MarketWatch (opens in new tab): “Don’t confuse day traders with serious investors. Serious investing involves broad diversification, rebalancing, active tax management, avoiding market timing, staying the course, and the use of investment instruments. … Don’t be misled with false claims of easy profits from day trading.”

Estimates on the success of day traders vary, but all are rather dismal. In researching my article Day Trading: Smart Or Stupid (opens in new tab), I concluded only 10% of day traders really make money. That’s not how I’d like to see my heirs use their money, and I bet you probably feel the same way.

How Can you Protect Your Kids from Themselves? Step 1: Talk

Your legacy is about passing on your values and life skills on to the next generation. I feel so strongly that all this is not really about money. I’m guessing that your intentions for your money are not for your kids not to work and buy that Ferrari and sit on the beach drinking margaritas for the rest of their lives. You need to articulate your desires … before your kids are sitting in front of your financial adviser and lawyers, who are reading out the will. But these conversations are not easy.

I spoke to some experts on this very question of passing wealth on to the next generation, Jennifer Chandler, Managing Director at Bank of America Private Bank, and Jesse Mandell, SVP, Strategy Team at Bank of America Private Bank.

Chandler explained that she encourages “an open conversation about wealth, so family members can think through the implications of their wealth and its potential for enriching the quality of their lives and communities. A successful conversation about family wealth and values requires full family engagement and can benefit from a trusted professional adviser to guide the conversation.”

Many parents are nervous about their legacy, and they should be. Unfortunately, the old Scottish adage that Andrew Carnegie made famous — “Shirtsleeves to shirtsleeves in three generations” — seems to apply to this next generation of inheritors. The Cerulli study noted that “only 42% of parents are very confident their children will serve as good stewards of family wealth.”

Step 2: Consider a Trust, in Addition to a Will

If you are transferring wealth, you should have a will and an estate plan that is created by professionals.

“Roughly half of Americans don’t have a will, and even fewer have an estate plan,” indicates Fidelity. (opens in new tab) A will sets forth your wishes regarding the distribution of property, but an estate plan will go much further. An estate plan will deal with such topics as your wishes with regard to the distribution of assets. It helps to avoid some conflicts that can arise among beneficiaries, tax issues, court costs, philanthropic considerations, insurance and business succession, among others. As part of this estate planning process, you may consider setting up a trust.

Trusts can help you manage your property and assets and can make sure they are distributed after your death according to your wishes. The trust holds the assets for a person who is called the beneficiary. There are different types of trusts, and you need to consult a professional to find one that suits your needs.

Mandell, an expert in preparing the next generation for wealth, told me that “Research has shown that 66% of high net worth people have never established a trust because they think that trusts are complicated and that a will is sufficient.” A will is not sufficient.

Chandler added that “The value of a trust is not only to help protect a family’s assets but also to protect a family’s legacy. Having served generations of families, we have seen time and time again the power of a well-constructed trust to help the next generation find purpose and value in their inheritance.”

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Neale Godfrey, Financial Literacy Expert
President & CEO, Children's Financial Network Inc.

Neale Godfrey is a New York Times #1 best-selling author of 27 books, which empower families (and their kids and grandkids) to take charge of their financial lives. Godfrey started her journey with The Chase Manhattan Bank, joining as one of the first female executives, and later became president of The First Women's Bank and founder of The First Children's Bank. Neale pioneered the topic of "kids and money," which took off after her 13 appearances on "The Oprah Winfrey Show." www.nealegodfrey.com (opens in new tab)