Teaching Heirs How to Manage Wealth
Written by Stacy Akaka
In today’s economy of “self responsibility”, the ability for an individual to retire depends upon their success in saving for retirement and building wealth. This creation of wealth is in stark contrast to the retirement of previous generations that relied upon pensions and family support to retire and whose retirement was limited because of shorter life spans. This new paradigm requires many more families to face an issue that previously impacted only a select few and that is the transfer of wealth across generations.
Many parents think that they can minimize the risk of mismanagement of money by their children by having an estate or financial plan with a clear purpose. Unfortunately, the plans are usually too narrow to guide or motivate heirs. In many cases, heirs can lack the motivation or knowledge to grow, preserve or transfer wealth.
Transferring wealth to future generations should include an awareness of the family’s wealth and values, a sense of money management, the ability to interact with outside advisors, and a deeper understanding of charity and those initiatives that interest the younger generations.
Below are some ways of teaching financial responsibility to heirs.
1. Define family’s history and values – A family, in conjunction with its advisors, should define the family by looking at its history and values. When heirs have a better understanding of where their family came from and the hard work and sacrifice that was required to reach a level of financial success, it helps instill these values in their lives and the lives of their children.
2. Start early and often – Involve children at a young age in discussions on being fiscally prudent, imparting on them the value of hard work and the importance of planning for the future versus focusing on immediate personal wants.
3. Depending upon the level of fiscal responsibility of the heirs and the interests of the family, it is prudent to work with advisors to determine what vehicles are best for the transfer of the wealth. (i.e., trusts versus straight transfer).
4. Having the next generation begin working with the family’s advisors to make sure they start their financial life in the most effective manner and avoid making costly mistakes.
5. Charitable support – If a family has charitable inclinations, using these interests as a way to engage family members on which charities to support and how to support them both financially and with their time.
6. When appropriate, having a discussion with them on the wealth to be transferred and your desires on how it can help them and future generations live successful lives. This can be a discussion that happens over time and at a pace that feels comfortable based on the level of financial maturity of the heirs.
7. Ongoing support – Wealth transfer planning is a process, not an event. The steps outlined above should be part of an ongoing plan to build financial knowledge in the next generation.
When heirs receive money without prior coaching on the purpose of money, they will seldom take the time to understand the values that helped accumulate the value of the inheritance. For the transition of wealth to be smooth, it is important that families and advisors work together to develop a clear plan that will successfully pass assets from one generation to another.