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Intergenerational Wealth Transfer: How to Prepare the Next Generation

Teach the next generation about wealth stewardship and financial responsibilities.

As appeared in Wealth magazine

Intergenerational Wealth Transfer: How to Prepare the Next Generation

Teach the next generation about wealth stewardship and financial responsibilities.

The 2008 financial crisis and resulting recession reminded affluent families that wealth stewardship is paramount to helping ensure that future generations are able to safeguard hard-earned assets.

More recent economic uncertainties have only added to concerns that the younger generation may not have a well-informed understanding of inheritance.

Open, ongoing discussions with children about wealth – legacy issues, goals and objectives, specific terms of trusts – are crucial. These conversations help ensure that when it’s time for young adults to take on the mantle of financial responsibility, they are well equipped to do so.

Still, many parents and grandparents have avoided “the talk” as it can be overwhelming to discuss finances, says Suzanne Shier, tax strategist at Northern Trust. But delaying conversations only makes it more difficult.

These discussions are vital because success in handling family wealth is a step-by-step process. “You’re building a foundation,” Shier says.


Better Prepared Than You Might Think

Today’s uncertain economic environment may offer an opportunity for parents and grandparents who have delayed the discussion or want to set different expectations for wealth.

“Because of the recession, many young people have a level of maturity and awareness that might not necessarily have been the case when everything was on an upward trajectory,” Shier says. “Many young people have more realistic expectations about the opportunity for wealth – opportunities for wealth to grow and to diminish.”

Current market gyrations can help set parameters on expectations of wealth. “It’s important for younger inheritors to realize increased financial volatility in the markets might affect what they receive in the future,” says Ann Freel, director of family education and governance services at Northern Trust. “They need to know how the family’s assets have the potential to grow or shrink and, more importantly, how to plan accordingly for their own financial success.”

Tailoring Your Wealth Plan for Your Family’s Needs

Parents and grandparents still concerned that a younger family member isn’t equipped to accept the responsibility of wealth can tailor wealth transfer plans accordingly. They can delay wealth transfer through several vehicles if they have reservations about immediate transfers.

“Or the senior generation may decide to make smaller wealth transfers while their children are young adults, with both generations viewing these as ‘practice amounts’ the young person uses to learn how to save, invest, give and spend effectively,” Freel says.

Either way, she urges against “failure to launch” scenarios. “In a tough economic climate, it’s very tempting to keep the family purse strings drawn in order to help a young person who hasn’t yet found their financial moorings. But that doesn’t allow them to take responsibility for their own lives.”

She suggests parents and grandparents identify the specific kinds of support they are willing to provide a young person instead of as-requested financial handouts. For example, parents may decide they are willing to fund career counseling or attendance at professional networking events, or even provide limited financial support on a scheduled basis for a specific period of time with a clear end point.

“What matters is that the senior generation takes time to identify the financial boundaries they wish to maintain, offer other kinds of support and then spend time with the next generation to help them plan a path focused on developing their full potential,” Freel says.

Education Is Key

Younger generations need to understand the basics of their family’s estate plan so they can make judgments about their own investments, according to Freel.

For example, parents may set up a linear inheritance, where only direct descendants – not spouses of direct descendants – receive money. Married children must understand this and plan accordingly.

Children also need to understand it could be decades before they receive their inheritance because people live longer. “Children want and expect their parents to live long, healthy lives. At the same time, they don’t connect this to the fact that it means their financial lives may not include the bulk of their inheritance until they are 70 or even older,” Freel says. “Parents should help their children understand not just the amounts and strategies in their wealth plans, but also how these may unfold over time.”

Never Too Early to Start Teaching

For parents or grandparents of grade school-aged children, something as simple as an allowance can start kids on the road to fiscal responsibility. As kids get a little older, parents can help create budgets with categories such as “save,” “spend” and “give.”

But perhaps the best way to guide younger children is for parents or grandparents to act as role models for the type of demeanor and stewardship they expect of the children. “Young people see what we do more consistently than they hear what we say,” suggests Shier. “If what we do is not consistent with what we say, they don’t hear what we say.”

Pointing out role models that the younger generation can relate to – a successful young professional or a sports or entertainment personality who has been responsible with his or her wealth – also can encourage healthy fiscal conduct.

While financial education is important for children of any age, many wealthy parents are relieved to learn that “wealth conversations” should actually wait until children are older. “It’s better to focus on helping young people develop their personal financial skills and independence long before unpacking plans for the family’s assets,” Freel says. “Keep the emphasis on the young person themselves, not inheritance.”

Respect Above All

Older and younger generations often have divergent priorities that need to be addressed to reach a common ground. “Family members need to realize where the family’s ‘money boundaries’ are,” Freel says. “The same rules should apply to all adults in the family. Try to avoid developing a family culture where the senior generation’s financial life is ‘their business’ but the next generation’s financial decisions constantly are up for judgment by others.”

The good news is that the younger generation doesn’t view “money talks” as taboo, like they were considered several decades ago. “Younger family members generally are very eager to learn about financial matters when they understand how they can use this knowledge to create the life they want,” notes Freel. “When the senior generation offers to share some of their lessons learned as well as the nuts and bolts of family wealth plans, they generally are thrilled at how well the conversation progresses.”

In the end, mutual respect regardless of differences is most important. “Remember that you are family first and your shared financial life is only one aspect,” she says.