A lifetime of hard work and of deeply held values can be passed along successfully.
By Ken Eaton
Over the next 30 years, the greatest transfer of wealth from one generation to the next, in history, will occur. With that in mind, here is a sobering statistic: 70 percent of all inter-generational wealth transfers fail, meaning that the wealth that the parents worked so hard to earn and preserve gets dissipated by their children. The primary reason cited for that failure is the same reason for most failures, lack of preparation.
What can you do to make your families odds better?
It’s important for wealth managers to help families understand the privileges, perils, and responsibilities of intergenerational wealth, and how to effectively transfer your assets and your values to your children, and their children. Here are a few of the tips that we have learned over the last 30 years.
Most people think of a legacy as just an amount of money or property that is left behind at death, but it’s really much more than that. It is the transfer, from one generation to the next, of the ideals and values that have made a family strong and successful. That transfer should start when the parents are still very much alive.
Start early. Indulging our children may make us feel good as parents, but it teaches them to depend on us, not on themselves. Making choices and deferring gratification are essential foundations for a successful financial future, and you can start teaching those lessons before they are even old enough to count change, by simply making them choose between toys or activities instead of getting everything they want.
As your children get older, teach them to set and achieve financial goals. You can buy that bicycle or video game for them, but helping them to open their own account and save their own money to buy it will give them a sense of control and accomplishment that will motivate them to save for larger things later in life, rather than borrow, when the stakes are higher.
Share with them, if you can. We would never encourage you to sacrifice your financial well-being to give money to your children. However, if you know that your children will ultimately receive an inheritance, giving them gifts today can prepare them for the wealth that they will receive in the future. By being creative with your gifts, you can also help them become more self-reliant, which is important, since most people will not receive an inheritance until they are well into their 50s or 60s. For instance, you can open and fund a Roth IRA for your children as soon as they start receiving paychecks, including from after-school or summer jobs. You can contribute the lesser of their W-2 earnings or $5,500, and all earnings are tax-free forever, and having their own investment accounts will teach them the power of compounding growth far better than any book or lecture.
Whether they receive an inheritance or not, our children are responsible for their own success or failure. But careful preparation will put them on the right path.
When they get older and start a career, you can incentivize them to save for their own retirement by matching the contributions that they make to their company retirement plans or their children’s education savings plans.
It’s OK to give unfettered cash, but the best gifts are ones with a specific purpose. Other gifts that can boost a growing family are helping with a down payment on a house, help with childcare expenses, or tuition for a higher education.
Teach them to share. Studies have shown that people who give to charity feel more satisfaction in life than those who don’t. Teaching your children to give their time and treasure, and involving them in your own giving plan, is an easy way to show they have more than they need.
Put plans in place. While we all hope that we will live long, healthy lives, no one can predict the future. If you haven’t already, decide how you would like for your assets to be distributed when you die and whom you want to control them if your children or grandchildren aren’t ready to handle the responsibility. Then, find a good estate-planning attorney to draft documents that put your plan in place, and that make sure your beneficiary designations correspond with those plans. Re-examine your plans periodically to make sure that they are still valid.
Tell your children about your plans. Even with plans in place, if your children don’t know what to expect, the proverbial “reading of the will’ and the subsequent division of assets, especially sentimental personal property, can cause arguments and hurt feelings that lead to family discord. Take the time to explain your decisions and give your children the chance to ask questions now so that everyone will be on the same page when you are no longer here to answer them.
In the end, whether they receive an inheritance or not, our children are ultimately responsible for their own success or failure. Thoughtful preparation and communication will improve the odds that the legacy we leave them will put them on the right path.
Ken Eaton is a principal for Stepp & Rothwell, a wealth-management firm based in Overland Park, Kan.
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