Six ways to set your children up for success with family wealth

Estate planning at its core is not just about reducing the burden of inheritance tax for your beneficiaries. Some view it as their responsibility to equip their heirs with the education, values and skills they will need.

Six ways to set your children up for success with family wealth

It is estimated that 70 per cent of wealthy families will lose their wealth by the second generation and 90 per cent will lose it by the third1. Most high-net-wealth individuals (HNWIs) do not want to be part of that statistic. But in order to avoid the trap, you will need to be open and honest about money in a way that many people find uncomfortable.

For those passing on their wealth, it’s not enough to lay the groundwork to protect it from taxes and ensure the majority goes to the intended recipient. You also want to make certain that your children and grandchildren will continue to prosper, or at least to make efficient use of the wealth that they have had built for them. And you don’t want your money to undermine the values you hope to pass to your descendants, if this is indeed possible for the generation that will succeed you.

These are the six steps we believe should be considered to prepare your children and grandchildren to inherit your wealth, in whatever form it takes, and to accept the responsibility that comes with it.

1. See your children clearly

Your fondest wish may be to see your eldest daughter take the reins at the family firm, but if she yearns to be an entrepreneur instead, forcing the situation is likely to make you both unhappy. By seeking your children’s opinions and seeing where their interests lie, you can develop a plan of inheritance together that makes room for their own life choices.

It will also allow you to help them develop the skills they are going to need for their future.

If another wants to run a non-profit company, give them the know-how and education to make it a success. And send the child that wants to run the family firm to get an MBA.

2. Build family values together

The chances are that you’ll want to pass on your own personal values and experience to the next generation, as well as any family mission that’s important to you. By involving your children in discussions about common values, you will create a team that’s pulling towards the same goals and will work better together after you’re gone.

While this is particularly true when a family business is one of your assets, it’s also applicable when you’re thinking about imparting the value of money as you see it. Involving the whole family in philanthropic endeavours is one way to share values. You can also consider encouraging children to work for their own money – even from a young age – or volunteer in their spare time.

3. Start financial education early

You’re not going to be able to sit down at a piano and play Mozart without ever taking a lesson. So why do we expect people to be able to handle their finances when we don’t teach them even basic financial planning?

Indeed, all children, regardless of means, benefit from learning simple concepts like saving to attain goals and operating within a budget. That can start with pocket money for non-essentials and mature into allowing teenage children to manage their own clothing budget or take control of a portion of the family’s charitable donations. You may even want to allow older teens to allocate and manage a small portfolio for exposure to investments.

4. Help your children build the right relationships

As a HNWI, some of your most important relationships are professional, whether with partners at work or with your professional advisers. Don’t keep those relationships siloed from the personal. Once your children are grown up, they can be part of meetings about your finances or deciding the direction of the firm. There they can learn from the professionals and build their own relationships with your most trusted advisors. These connections will help them to manage the family assets later.

5. Honesty is key

Many HNWIs worry that if their children know that they’re set for life, they’ll become lazy and unambitious. If that attitude leads to losing the family wealth, there’s also the chance that your children will have failed to develop the skills or experience they need to make money on their own. As a result, you may feel that it’s wise to hide the extent of your money or to avoid talking about money at all.

In an age-appropriate way, you should involve your children in conversations about money and, when the time is right, be open about how your wealth will be distributed – and why.

6. Make everyone part of the conversation

It’s important to include all members of the family in your estate planning at the appropriate time. You should educate and encourage your grandchildren, as you have your own children. They should be a part of family meetings about finances, family values and the business – as appropriate and with their parents’ help, of course.

You also need to think of spouses and long-term partners as a part of the family. After you’re gone, they will be involved in managing the family wealth, making financial decisions and even influencing business strategy at the firm. If you want to successfully pass on your family values and mission, they may need to be part of the conversation.

We have a wealth of information available on how we can support you and the next generation with everything from making a lasting impact and leaving a legacy and taking over the family business. For more details, speak to your relationship management team, download this brochure (1.9MB, PDF) or find out more information.

1 https://www.nasdaq.com/article/generational-wealth-why-do-70-of-families-lose-their-wealth-in-the-2nd-generation-cm1039671
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