You Cant Take It With You: Preparing the Next Generation for Inheriting Wealth

If you ever want to make people uncomfortable, suggest they start talking finances with their family.

For a variety of reasons, many accomplished people view the idea of laying out their assets, investment strategies, expenses and priorities as something to be avoided. Unfortunately, not communicating with the next generation about wealth can lead to those hard-earned assets fading away.

We are in a particularly interesting time as our economy begins a slow and bumpy recovery, and as new wealth is being accumulated at younger ages thanks to the success of organizations such as Facebook, Microsoft and Amazon. We know that 80% of wealth today is first generation,[1] which means those earners havent necessarily had financial role models or observed first-hand success in wealth transfer.

And many with new wealth are questioning the sustainability of their assets. A 2011 study found that roughly half of wealthy individuals do not expect their heirs to attain the same level of wealth simply because they are not prepared to handle money.[2]

In my professional life, our firm has worked primarily with ultra high net worth families for over 25 years. Weve seen wealth passed seamlessly from generation to generation, and weve seen assets misused and misunderstood. Along the way weve identified a number of best practices that are relevant for earners of any income level who would like to pass assets and financial values on to family members.

Dont Assume Financial Literacy

Just because a family has enough money to pay their bills, or for the finer things in life, does not mean their children will grasp the basics of financial management. Currently only 14 US states require high schools to offer financial literacy courses. A recent study found over two-thirds of college students do not understand the terms of their student loans.[3] Sadly, we see financial illiteracy across all income levels. If the next generation is to be expected to not only inherit but to be good stewards of a familys wealth they need to be educated about how money works. We offer literacy courses for our clients children, but any family can begin these conversations by discussing budgeting, the power of compound interest, cautions regarding the use of debt and an understanding of costs.

Actions Speak Louder Than Words

Children form opinions about a family values and priorities based on their personal experiences. Its important to let children see you discussing the family finances, and when they are old enough, be brought into financial decisions. Let them see you live below your means. Let them see you plan, prioritize, delay gratification and negotiate around financial decisions. Whatever relationship the senior generation exhibits with their wealth, lifestyle choices, philanthropy and work ethic will establish a tone for wealth stewardship more than any words on a page ever will.

Have The Talk Early and Often

We often hear clients express concerns about telling their children how much money the family has out of fear it may become a disincentive to hard work or education. There will always be a healthy tension between sharing too much too soon or, at the other end of the spectrum, going to the grave having been completely silent on the topic somehow expecting the kids to be ready for their sudden wealth.

This doesnt need to be an all or none situation. We have found that slowly drawing back the curtain on the financial picture, in age appropriate ways, is extremely effective. For example, young children can benefit from earning an allowance and having some autonomy with their spending. Teenagers can be brought in on family philanthropic decisions. Older teens can begin attending family meetings (with advisors, if appropriate), and become co-trustees over trusts for their post-college benefit. In the case of family businesses, young adults can become co-managers of a family partnership. As each step is taken, the next generation learns the familys financial values and priorities and demonstrates their abilities to effectively manage the resources.

Plan Ahead

It is absolutely fine to prioritize aspects of your familys financial plan, particularly for young families. Nothing has to happen all at once.

Begin with assuring your near-term priorities and liquidity are planned for. Follow this by funding educational needs of your children or grandchildren. Ensure adequacy for your own financial independence with healthy cushions of safety. Ensure your purchasing power is preserved and sustainable over the long-term. Then and only then begin to aggressively fund legacy goals.

It is possible to perpetuate wealth through multiple generations. As long as the family has realistic expectations; a clear articulation of success; an understanding of the cause and effect implications of todays actions; involvement (not guessing) of both generations; an educated group of participants; clear definitions of roles and responsibilities; and an actionable plan then the assets should flow successfully for generations to come and continue to be well stewarded.

Kenneth Hart is CEO of Cornerstone Advisors (www.buildbeyond.com) in Bellevue, one of the top RIAs in the country with over $2.4 billion in assets under management.

[1] Source: Thomas J. Stanley, Ph.D, William D. Danko, Ph.D The Millionaire Next Door: The Surprising Secrets of Americans Wealthy,

[2] Source: 2011 U.S. Trust Insights Into Wealth and Worth, survey of 457 wealthy Americans with $3 million or more of investable assets

[3] Source: National Economic Research Associates (NERA), March 2012 study of 6,500 student loan borrowers, High Debt, Low Information: A Survey of Student Loan Borrowers.