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Kingston: Building generational wealth, part II

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Malcolm Forbes famously said, “I made my money the old-fashioned way. I was very nice to a wealthy relative right before he died.” According to the Williams Group, 70 percent of wealthy families lose their wealth by the second generation and 40 percent by the third. U.S. Trust surveyed individuals with more than $3 million in investible assets to determine how they are preparing the next generation for managing wealth. Of those surveyed, 78 percent believe their heirs are not financially responsible to handle inheritance, and 64 percent indicate they have disclosed very little about their wealth to their children.

Three Generations of Data

A recent study tracing family wealth across three generations, led by Fabian Pfeffer at the University of Michigan, found that the most significant way families transfer wealth is by facilitating the educational success and home ownership of the next generation, concluding that wealth transfer is frequently accomplished earlier in life, by less direct methods than simply through inheritance in the next generation’s late adulthood. Pfeffer states, “Much of the transmission of wealth to the next generation goes through these earlier life processes, such as supporting children’s education, supporting their ability to purchase a home, or to get married. All of these, in turn help you accumulate wealth. Of course, there are a lot of very wealthy children who receive huge inheritances. However, this is a small percentage of the population and these inheritances tend to occur when other benefits of coming from a wealthy family have already manifested, when the children are about age 50. So, bequests are the cherry on top.”

Teach Them

Teaching your children about money at an early age, makes all the difference in their ability to manage inheritance later. When they are young, teach children how to open a bank account, how to open an investment account, about budgeting and giving. Talking with them about these now, letting them gain experience with small amounts of money, introducing them to more advanced financial concepts, as they mature, will provide them with important life skills and better prepare them for managing larger assets in the future.

Involve Them

As your children become adults, include them in meetings with your professional advisors and involve them in the family financial decisions. These simple steps will allow you and your heirs to develop skills for talking about wealth planning and potential inheritance. My experience is that estate owners sometimes do not communicate with their children regarding their assets because they are not certain that their assets will last beyond their lifetimes. Even that can be important to share with your children because they will likely be the ones you name to make financial decisions in the event of your incapacity. Estate owners may believe that if their children know what their assets are, the children may think that they should be given more now. However, this may provide an opportunity to communicate your objectives, that you want them to be independent, self-reliant and that you stand ready to assist them.

Consider a Mission Statement

Writing a Family Mission Statement that defines your values and long-term purpose may be a beneficial exercise. Having studied over 3,000 families, the Williams Group found that a breakdown of trust and communication is behind 60 percent of failed inheritances. Involving the family in determining common objectives can smooth tensions between family members. Communication is the key and becomes critical when a family business is a part of your estate.

Kevin Kingston, CLU, is managing director and financial adviser at Savant Wealth Management; savantwealth.com

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