Forbes recently reported that we are at the brink of the largest intergenerational wealth transfer in history1.
Over the next 30 to 40 years, $30 trillion in assets will pass from one generation to the next in the United States. The Center for Rural Pennsylvania estimates2 that in Lancaster County, Pennsylvania alone, $1.1 billion transfers from one generation to the next each year and will continue to transfer annually for the next 25 years.
The sad reality is that 70% of this wealth will never make it past the 2nd generation. Researchers discovered this statistic holds true going back more than a century after reviewing hundreds of family wealth transfers3. Should this trend continue, more than $800 million each year in Lancaster County could be lost, squandered, mismanaged, or wasted by the next generation.
My interest in this topic started more than a decade ago. We observed our clients expressing concerns about passing on the wealth they had saved to their children and grandchildren. They didn’t want their children to be spoiled by their inheritance. What could be done to assure inherited wealth helps their children?
Is a life well-lived measured by the size of our bank accounts and how much property we acquire? Or is it measured by our relationships and the condition of our relationships when we leave?
Researchers found a common factor in the 30% of successful wealth transfers that kept the families together and the wealth available to the 3rd & 4th generations. Successful families trusted each other and maintained good communication among the generations. If we want to build a legacy that will last, parents, children, and grandchildren need to develop trust and have regular, meaningful communication.
Long before television and smartphones, we knew that our parents and grandparents could teach us important lessons about living. They were the ones who had experienced life’s ups and downs, gained perspective, and were qualified to share their wisdom. Today, as people are living longer, it’s not unusual to have four or five generations alive at one time. We have a terrific opportunity for each generation to guide and inform the younger generations coming after them.
After parents die, their wisdom and experience die with them unless effort is taken to learn from them. Parents need to teach the next generation about how they acquired their wealth, and the responsibilities that go with inheriting that wealth. Many people seem to have given up on the idea that the best of what we can offer of ourselves and experiences can be passed on to our children. We cannot share our wisdom by simply adding their name as a beneficiary in the will.
I believe there are three lessons we all should teach our children about wealth:
There are no shortcuts to wealth
Those who take shortcuts—lottery winners, marrying for money, or inheriting a sizable estate without any preparation—often live dysfunctional lives, with their windfall creating larger problems than they faced before.
Receiving an inheritance without any preparation can be poison to children who will destroy themselves and their own families because they know nothing about the responsibility of handling wealth. You must work to prepare your children long before an inheritance is received.
Use wealth in service of others
Everyone is rich when wealth is used in the service of others—family, friends and humanity. Thomas Jefferson said the “pursuit of happiness” is an internal journey to know ourselves and an external journey of selfless service to others. It is best for children to learn this from their parents at an early age.
A family should develop a culture of sharing the family’s wealth with others and meeting to make these decisions together. Wealth management should flow to the next generation while parents are still living and can help guide the process. It will become wealth that has been gracefully and wisely relinquished—a gift that keeps on giving and a gift that cements parent-child relationships, not an inheritance that undermines and confuses.
Use wealth to strengthen family relationships
Wealth can divide or connect. Wealth can grow relationships or it can destroy them. Wealth is energy; it is there to employ. If you have wealth, does it control you, or do you control it? The answer is found when you examine your engagement with others in your life. It’s why some people with lots of money die impoverished, while some people of modest means who bask in the warm touch of family and friends die rich. Having regular conversations with the next generation provides an opportunity to frame a different set of values and leads to a different kind of relationship and commitment between parent and child.
Reframe the family’s charitable giving as a family project deserving of time and attention proportionate with the effort that went into making that money in the first place. Charitable giving should not be tax driven; it is values driven, with an emphasis on need and effectiveness. Anything less than that does a disservice to those in our family who came before us, and those whose sacrifice, hard work and deferred consumption led to the donation.
Selecting worthy causes is not just a process for the rich but also for those who have a modest amount of wealth to pass on. Don’t underestimate how even a small gift to charity can leave a big impression on children when they are included in that decision. Every family, regardless of their wealth, should have family meetings.
Your children need to understand that they are your legacy, not your money and possessions.
For your legacy to flourish, you must get your children involved, work with them to create something and contribute something to your community for the benefit of others.
What we leave behind, most importantly our words and deeds, are reflected in the lives of those we touched. Are you taking time to teach your children and grandchildren about the family and legacy you want to pass on?
- Researchers have found that 70% of wealth that is passed down will never make it past the 2nd generation.
- Those who take shortcuts to wealth often live dysfunctional lives, with their windfall creating larger problems than they faced before.
- We cannot pass on our legacy to our children simply by adding their name as a beneficiary to a will.
By Rick Rodgers
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An Indispensable Guide to Tax-Efficient Retirement Planning and Financial Freedom, by Rick Rodgers
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1 The Greatest Wealth Transfer in History? By Jess Stonefield. Forbes, May 21, 2018
2 Wealth Transfer in Pennsylvania. By the Center for Rural Pennsylvania, a legislative agency of the Pennsylvania General Assembly. February 2016
3 Source: Williams Group Wealth Consultancy. theWilliamsGroup.org.