From shirtsleeves to shirtsleeves in three generations, goes the early 20th-century American proverb. Then there's the 19th-century British version: Clogs to clogs in three generations. And from
Statistics back up the folklore. Studies have found that 70% of the time, family assets are lost from one generation to the next, and assets are gone 90% of the time by the third generation.
That's because a crucial element of successful inheritances is often neglected. Traditionally, the focus has been on the givers of wealth, but it should rather be on the receivers. Investing assets wisely and crafting a good estate plan are crucial to success, but so is preparing the heirs. "Estate planning is a process to transfer wealth, but it doesn't help the family develop an infrastructure to sustain it, or keep the family unified from one generation to the next," says
Preparing the next generation has a lot to do with financial literacy. But it has just as much (if not more) to do with passing down and putting into practice values that will sustain your family as well as your fortune. In other words, a successful inheritance is as much about parenting as it is about money management, and that goes as much for multimillionaires as for mom-and-pop investors with a six-figure portfolio to pass along.
Inheritances gone wrong
It's counterintuitive to think about the downside of inherited wealth, and it may be off-putting for families of modest means. But giving money to kids can be fraught with danger, says
"You assume that those values will trickle down automatically," says Klontz. "But your children are having a vastly different experience of the world than you had." Parents who strive to give their kids what they themselves never had (which is what many worked so hard for, after all) can wind up fostering financial deĀpendence, and raising kids who lack drive, creativity or passion, Klontz says.
In the book Inherited Wealth,
Little wonder that rich people from
But that attitude is rare among wealthy parents, says
Hansen's four adult kids all have jobs, and they are not wealthy -- but they will be when they inherit. In preparation for that day, they've taken an active role in the family foundation, learning to invest money and to give it away wisely. Family members, including an 11-year-old granddaughter, support causes ranging from ending homelessness to animal rights to the arts. Each of them knows what's involved in making the money to give away, how to pitch a project to a board of directors and how to analyze costs, set priorities and evaluate outcomes. "Each of my children can stand on his or her own anywhere in the business world," says Hansen. "That's the greatest thing I've been able to do for them -- that, and making sure that they're not rotten, spoiled brats."
A five-point plan
A growing number of families are turning to advisers and specialized programs to help prepare the next generation for the riches they will inherit, in a way that goes beyond the benchmarks of money managers and the legalese of estate lawyers. Here's some of what those advisers recommend.
Get over the money taboo. Family finances are often an unpopular topic of discussion, especially if parents are worried that family wealth might spoil their kids. "It becomes a big elephant in the room," says
The same goes for spouses. "My father retired and a couple of years later was diagnosed with lung cancer. He died within six weeks," says Dalton. The tragedy was compounded by the fact that Dalton's mother was unprepared to take the financial reins, having been shielded from much of that responsibility during her marriage. "I was really angry at my dad for that. It was well intentioned, but my mother was paralyzed," says Dalton. It didn't help that the transition took place in 2008, as the family's investments were being pummeled by a bear market. The family assets survived the bear market, and
Sometimes parents are silent because they're not sure their money will outlast the health challenges of old age or mercurial financial markets. Whatever the reason for the lack of communication, heirs who are ill-prepared are left to wonder why their parents thought they were incapĀable of handling the information or couldn't be trusted with it. Better to be up front about the wealth you have and your plans for it. And don't forget about how it came to be in the first place, especially if the wealth was created several generations ago.
Embark on a mission. Make sure your legacy is about more than money. Many families find a mission statement helpful. After meeting with a family, wealth transition coaches at the
Williams considers crafting the mission statement a crucial exercise. His study of 3,250 families found that a breakdown in trust and comĀmunication is behind 60% of failed inheritances. Involving the whole family in determining common objectives and deciding how they'll be accomplished avoids the trap of Mom or Dad dictating the future to their children. It can also smooth tensions between family factions -- between those running the family business, for example, and those not involved.
Raise money smart kids. From an early age, children should be taught budĀgeting and delayed gratification, even if you can afford to give your kids everything they want and more. It doesn't matter if the monthly budget is
Let older kids budget an allowance to cover their expenses. Figure the monthly average spent on a teen's car insurance, cell phone and so on, and then give the young adult an allowance to pay those bills. The tough part is letting the phone get shut off or taking back the car if the bills are not paid. "It all goes back to the law of consequences," says Zeeb. "Without a budget, kids never learn to prioritize or make decisions."
Provide financial training wheels. Don't make the mistake of delaying all access to the family fortune in order to preserve it.
The Dalton kids and their cousin share responsibility with their parents for the management of a family lake house in upstate
Assemble a good team. In addition to a cadre of advisers that includes investment managers, tax preparers, estate planners and trust lawyers, bring in mentors for the next generation -- especially for teens and young adults, who might not always see Mom and Dad as the font of all wisdom. Enlist qualified associates, such as financial advisers, board directors you may know and other successful businesspeople. "The smartest thing I did was bring in outside expertise at the highest level," says Hansen, the contractor, of the board members he has enlisted for his foundation. "Several of them have managed millions -- billions -- of dollars. The value they add is incredible."
A de facto advisory board comes in handy when your kids' friends and classmates start to hit them up for contributions to investment schemes or business start-ups -- the surest way, other than overspending, for young adults to fritter away an inheritance, says Zeeb. "They want to help their friends by nature, but the best way is to defer. If the committee says yes, the kid's a hero; if it says no, it's not his fault."
In the end, you'll have the best shot at preserving both your wealth and your family with a multigenerational effort that begins when your kids are born, not when you die. Dalton, for one, is pleased with the path her family is now on, and she urges others to get started. "Unlike investing, where timing can be critical, there's no bad time to invest in your family's legacy. You should start now."
The power of a trust
As a parent, your vision of how your legacy is passed on to the next generation and beyond probably doesn't linger on legal vehicles. But such structures are key to achieving your goals.
When it comes to distributing assets, many families turn to trusts. Trusts come in more flavors than Baskin-Robbins ice cream. Depending on the arrangement, they can minimize estate taxes, protect your estate from the mistakes of your heirs or maintain privacy by avoiding probate. The cost to set one up typically ranges from
A revocable or living trust lets you keep control of your assets while you're alive. Although assets usually pass directly to your heirs, bypassing probate, a revocable trust won't spare you from estate taxes. If that's your main goal, then an irrevocable trust, which effectively removes trust assets from your estate, is the way to go. A lifetime asset protection trust might be in order if you have concerns about the ability of your heirs to preserve your estate. Beneficiaries are protected against creditors, bankruptcy -- even future ex-spouses -- because assets belong to the trust, not the beneficiary.
Whichever trust you choose, consider inserting a personal message to your heirs to breathe life into an otherwise sterile document. You might include the stories behind family heirlooms, for instance. Or, instead of imposing edicts and tying distributions to certain achievements, express why you value education or entrepreneurship. "This is the last message we get to leave," says
Anne Kates Smith is a Senior Editor at Kiplinger's Personal Finance.