Raising healthy children amid wealth requires vision, values and purpose as much as dollars and cents. Parents who plan on passing great wealth to their heirs want their children to be motivated, well launched, differentiated human beings with a healthy relationship toward money and wealth. It’s not enough to tell them about an inheritance and how much it is.
That means parents need to be able to communicate with their children about complicated matters such as estate plans and philanthropy, and what it means to work and give their lives meaning.
Most parents in wealthy families—and their advisors—recognize the importance of instilling these values in children who have been reared in a culture of affluence, yet relatively few advisors actively address such intangible things.
We recently conducted a survey of high-net-worth parents who attended an educational program focused on promoting good communication in wealthy families. We posted questions like these:
“What are your greatest concerns about the transfer of wealth in your family from one generation to the next?” “What worries you the most about your children inheriting money?”
The answers fell into several categories:
1. Some were concerned that their family members might not understand the structures (estate plans, trusts) created for transferring family wealth.
2. Others were concerned that children may not be good stewards of material assets or that future generations may not adopt family values.
3. Still others were concerned that family members may not be well prepared to communicate about difficult issues that arise with the intergenerational transfer of family wealth.
4. Some were worried that the transfer of wealth could lead to a sense of entitlement in the children and undermine their self-sufficiency.
5. Another group was worried that wealth and the structures created for its transfer could lead to conflict in the family.
These concerns were realistic and relevant: Inherited wealth may disappear within a relatively short time, regardless of how families invest or blunt the impact of taxes, if the long-term purpose of the money is not spoken about, if values such as the benefits of purposeful work are not internalized by inheritors, or if the children do not develop money management skills.
We asked the respondents in our survey to tell us how they communicated about their family wealth.
• Did they discuss the values or family history that could help the next generation be wise recipients of family gifts?
• Did they have family meetings to discuss estate or wealth transfer plans?
• Did they provide funds for adult children to manage on their own in order to acquire relevant skills?
• Did they provide other forms of education in financial literacy?
• Were there meetings or conversations with trustees to understand the nature of trustee-beneficiary relationships?
We learned the following:
• Fewer than half (41%) of the families had had any detailed conversations about family wealth.
• Fewer than one-third (31%) of the families had met to discuss the values that would guide their financial decisions.
• Two-thirds of the families (66%) had never discussed an estate plan with adult children.
• Fewer than half the families (48%) provided financial literacy training to adult children.
• Fewer than half the families (41%) provided funds to adult children to invest or manage on their own.
• In two-thirds of the families (69%), adult children who were beneficiaries of trusts had never met their trustees.
• A quarter of the families (24%) had never engaged in any of these activities.
The surprising thing is that these were relatively well-informed families who were actually interested in improving communication. We might expect even less focus on values and less communication from less-informed, less-motivated families.
We observed patterns in the answers: Families often develop wealth transfer plans but avoid talking about them or about the vision, values and purpose that underlie those plans.
Our experience suggests there are a number of reasons for the disconnect:
1. People generally do not like talking about money. Whereas many formerly taboo topics are now acceptable in conversation, money remains a taboo in many families.
2. Psychologically, avoidance makes everything easier—until escape is no longer possible. Avoidance relieves anxiety and tension in the short term; in the long term, however, avoidance of relevant conversations often allows tension to build and unresolved concerns to linger.
3. Wealth transfer plans are often driven by concerns about money management and tax efficiency. The intangibles—vision, values, motivation, growth and development—are often assigned a back seat in the process, if they are assigned a seat at all.
4. Many wealth management or estate planning advisors are themselves not prepared for the necessary conversations about values. In fact, it is not unusual for us to hear from committed family advisors that they feel frustrated with their lack of preparation for assisting families with these important conversations.
So how should families and their advisors proceed if they wish to support and enhance wealth transfer plans that provide for good family communication? We have some suggestions.
The best approach to communication about wealth transfer begins with—communication. And it should extend over time. We encourage families to begin the process by sharing what is important to them as individuals and as family. This is not a discussion about money. It is a discussion about vision, purpose and identity. Parents are often most concerned about how much to tell the children about an inheritance and when. But the question should be different. Instead, it should be, “How can I raise my children to be well launched and wise recipients of the family wealth?”
Some questions that can help formulate vision are:
• What values would you like your children to live by?
• What experiences should they have?
• What skills should be nurtured?
• What is the purpose of wealth in their lives?
• How can family wealth be deployed in a positive way to have a good impact in the life of the family?
It helps for parents to be on the same page about these matters, so the process could begin with a series of meetings with parents only, followed by meetings that include the children. (Note: This process applies primarily to teenagers and young adults.) During these meetings, parents can share their answers to some of these questions about values, and then ask the children for their views on the same questions.
The family meetings can focus on how family wealth was created, the history and legacy that inheritors should consider. That’s in addition to a discussion about how the family will develop and share vision. Education in financial matters is another element to consider as part of these meetings, which might include a discussion about the principles of spending, saving, earning, investing and donating.
As part of this process, parents might consider setting up meetings with family advisors and trustees, and eventually providing some funds to adult children to manage on their own, with ongoing follow-up and discussion. A guiding principle that we follow is this: “In order for a younger person to take responsibility, there needs to be something to take responsibility for.” So it’s an important part of the process to give young inheritors some autonomy and the ability to make independent decisions. It’s also part and parcel of children developing separate, healthy identities.
The next steps depend on how these meetings evolve and how the children progress in understanding the guiding family vision. How much you tell them (and when) depends on how mature and ready they are—not how old they are.
It is often helpful to include a third-party facilitator in this process who can help structure meetings and enable all parties, including parents, to participate freely.
We conclude with a few basic guidelines:
• Don’t give too much too soon, but plan your giving according to the family’s vision and the children’s growth and maturity.
• Don’t let the tax “tail” wag the estate plan “dog.”
• Discuss the purpose of the wealth.
• Consider how money can be used to enhance, not to enable, your children’s lives.
And finally, remember—inheritors who most successfully manage the impact of their wealth are able to establish personal identities and life paths that are enhanced by their wealth, not defined by it.
David Lansky, Ph.D., is a principal consultant of The Family Business Consulting Group and author of the book Family Wealth Continuity: Building a Foundation for the Future. For more information, visit www.thefbcg.com.
Anna E. Nichols is the director of communications for Altair Advisers, an independent wealth advisory firm based in Chicago. For more information about the firm, visit www.altairadvisers.com.