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All in the Family: Passing Along Wealth to Future Generations

Preparing for the great wealth transfer

Carla McConnell //October 21, 2019//

All in the Family: Passing Along Wealth to Future Generations

Preparing for the great wealth transfer

Carla McConnell //October 21, 2019//

Ultra-high net worth families have needs that differ from that of a typical family. The most difficult challenge wealthy families face is not the management of their financial capital but the management of their human capital. Privilege can provide a comfortable life and extraordinary opportunities, but perhaps not the experiences in struggle and sacrifice that some believe is essential to motivate later generations to work hard, invest in themselves and succeed.

The big question is, will the next generation be able to maintain their inheritance? Unfortunately, in many cases, the answer is no. A staggering 70% of wealthy families lose their wealth by the second generation, and in 90 % of cases, the family wealth is gone by the end of the third generation.

What leads to this astonishing failure rate in estate transactions? Typically, it’s not the investments themselves, but rather the family’s wealth philosophy and governance practices. Which means that maybe the failure to succeed is due to a breakdown in family trust and communication, which is indeed the most common reason for loss of wealth.

The Great Wealth Transfer

Over the coming decades, more than $30 trillion in assets will be transferred to Millennials and Generation X as the Baby Boomer generation, the largest and wealthiest generation this country has ever seen, passes their wealth on to their heirs. With this unprecedented amount of wealth transferring from one generation to the next, it’s never too early to engage future heirs and help prepare them for the responsibility of wealth.

Wealth Education

Multi-generational wealth comes with its own set of challenges, and as such, it is imperative that families articulate and preserve their deeply held values, so they can maximize the value of their human capital and create an enduring family legacy.

Money can be a very emotional area, which makes communication around it that much more difficult.

Wealth education can be a powerful resource for family members to manage more effectively the responsibility and opportunity that comes with possessing and stewarding substantial wealth. With financial understanding, and a grasp of the opportunities and responsibilities that wealth entails, comes confidence and success in managing, growing and preserving financial and human capital for many generations to come

Wealth education is the idea of the whole family working with a team of advisors on topics that include everything from basic education and learning around personal finance, to more complex concepts of investing, to issues around family governance and philanthropy.

Educating all family members is essential not only so that they may learn more about financial management, but also so that they build on the existing family ethos in order to live a fulfilling and meaningful life. When family members learn to communicate more effectively with one another about their values, hopes, dreams and aspirations, it can be a powerful tool.

Simply put, family wealth education helps ultra-high net worth families strive to maximize the value of their human capital by making it more likely that all members of the family will have the foundation to lead meaningful, fulfilled and engaged lives.

A New Generation of Investors

As family conversations ensue, the elder generation may want to be thoughtful about the differences in investment values, tendencies and goals of the younger generation.

Millennials are driving the sustainable investing movement. In fact, they are twice as likely to both invest in good corporate governance, social responsibility and environmentally aware companies and divest because of objectionable corporate activity. As they seek both financial return and social good, Millennials bring a concept of dual investment objectives – earnings return and making the world a better place – to the forefront of investment strategy. It may be important to align these new principals and aspirations into wealth transfer plans in order to keep the next generation engaged in saving for the future.

The Bottom Line

Family discussions about money are never easy and the potential pitfalls to an effective transfer of family wealth are seemingly endless, yet there are steps families can take to properly execute parents’ wishes and the eventual transfer of their wealth to the next generation.

It all boils down to three components: communication, education and planning.  If the parents have communicated with their children about their level of wealth, the expectations that family has in how to handle the wealth and the children have been educated with the right team and tools, the transfer can empower the children and provide a stepping stone to opportunity rather than a burden.

Carla McConnell is a vice president and private wealth advisor with Morgan Stanley private wealth management in Denver.