Did you know nearly 90% of affluent wealth is lost by the third generation?

That number pains me, as I think about how hard our clients work to be good stewards of their family wealth to grow for future generations.

Sound multi-generational planning and education is key to increasing the likelihood that your family will be part of the 10% that “get it right.” So, “Teach them to fish.”

In a recent article titled, Transitioning Wealth the Next Generation, author Even Bedel, CFP®, correctly points out that in order to successfully transition wealth beyond one generation, "you must intentionally build a legacy of stewardship and financial responsibility." So how do you do that?

The following is an excerpt from Bedel's article that highlights three important aspects to building that sense of legacy with younger generations...It's worth your time to read:

Intentional Financial Parenting – Building the Bridge

Generation 3 (G3) will never experience the entrepreneurial risk, work ethic and time commitment sacrificed by G1 to build family wealth. G2’s role is to build a bridge between the two generations. As the conversations evolve throughout G3’s adolescence, the bridge can become more difficult to keep intact due to peer influences. This requires intentional financial parenting, as these conversations are unnatural. Research shows that it is more difficult for parents to discuss money topics with their children than it is to talk about sex.

It starts with the goal of developing a well-rounded child with a strong work ethic, financial awareness, and social skills across socioeconomic classes. Communication is essential for parents to establish effective discussions around money with their kids. Starting the conversation will open the door to questions along the way, which will lead to important financial lessons.

At some point, your children will learn about wealth and personal financial decision-making. So the question becomes, who will teach them? You or someone else? Sharing your financial experiences will help prevent them from making their own future financial mistakes.

Shared Family Financial Values

Stewardship is defined as the careful and responsible management of something entrusted to one’s care. Every family member should understand the expectation of being stewards of wealth, preserving it for future generations, and using it for the greater good. The preservation comes from teaching financial disciplines around frugality, saving, and investing, but the “greater good” comes from shared values defined by the family. This may include annual family meetings that define the family’s mission statement, goals, and values around money.

Like investing for your retirement, families should have a long-term view of wealth and transition of generational money. Teaching G3 the concept of “leaving it better than you found it” is an important mindset for building a long-term money view. In addition, young family members should see themselves as givers, not just receivers, of this wealth. Before they have children, they should understand the expectation and responsibility of giving to the next generation.

As children and adults, G3 should learn the family story. Many wealthy families who have found success in generational wealth transition will pass down the legacy of integrity through storytelling and other reminders.

Sharing the history of how G1 accumulated wealth, including the struggles and sacrifices, is a great place to start. If G3 understands the history, a respect and appreciation for G1 can develop. Hopefully this leads to the desire to carry on the legacy and be good stewards of the money, resulting in a higher likelihood of preserving and building the wealth.

Working with a Team of Advisors

Your financial advisor, estate attorney, and tax advisor should be on the same page. Your advisors need to understand the family’s long-term financial goals, values, and purpose for the money. With that understanding, as a team, they will be able to effectively advise on appropriate strategic decisions along the way.

It takes proper financial planning to tax-efficiently transfer protected assets to the next generation and appropriately invest the money. Just as communication is important from G2 to G3, it is equally important when working with your team of advisors.

McKinley Carter can work with you to design an education plan for future generations that includes passing along your financial values, providing resources for understanding the value of planning, tools for teaching them to be good stewards of their own money first, and to intentionally create ownership in the future of your family’s wealth. Remember, this plan doesn’t need to at all disclose the value of your family assets. It is simply laying the foundation. What better time to start than today?

To learn more about steps you can take for your specific situation, contact your McKinley Carter advisor. In the meantime, here are some value-add articles from our own INSIGHTS blog library that may be of interest:

• Parents Have the Power
• Sound Planning Strategies for Those Who Didn’t Grow Up as Part of The Brady Bunch

Source: Transitioning Wealth to the Next Generation, Inside Indiana Business, May 16, 2022.