Planning for wealth transfer between generations has traditionally focused on minimizing estate tax consequences. But overwhelming evidence shows that tax strategies, while essential, are not enough to satisfy the primary goal many wealthy families have — to sustain wealth across generations. According to a study by wealth consultancy The William Group in San Clemente, California, 70 percent of families lose their wealth in the second generation and 90 percent do so in the third generation.
Strengthening communication is essential for minimizing conflict and maintaining a healthy family dynamic. Use family meetings to acknowledge the different ways each family member communicates and how that might change under stress. In addition, get together outside of work. Families that work best together participate in activities outside of work, so try to find philanthropic activities that interest everyone.
Warren Buffett said, “The perfect amount to leave your children is enough so that they would feel they could do anything, but not so much that they could do nothing.” This is a reminder that children learn from the behavior of their parents, and managing financial affairs is no exception. Despite concerns about inheritances ruining a child’s drive or ambition, it is important to recognize the impact of meaningful conversations concerning family wealth as children mature.
Communication is key
Talking with children about family wealth in general terms can be very difficult, and talking about death and inheritance can make conversations more uncomfortable.
If possible, get children involved with charitable giving. Allow them to help select charities and explain their selection to the family and how this supports the family mission and legacy. If working with multiple generations, create a Family Leadership Council separate from the family business and have members across generations work together to lead it.
Invite family advisers, such as attorneys, accountants and investment managers, to engage in discussions. Including executive directors from nonprofits and members from other wealthy families may be helpful to learn about best practices and what works for others.
Protect your family legacy
It is never too early to start educating children on financial matters. Doing so helps them understand the responsibilities that come with wealth. Because every family member has their own educational needs and learning styles, a family adviser can help educate and encourage children to establish their own independent relationship with the adviser. This teaches them to balance a checkbook, manage cash flow, read their investment statement, understand trust documents and work with a prenuptial agreement at their own pace.
Specialists and advisers are important for business matters — and family matters. In the same way business owners and executives surround themselves with well-respected experts and specialists, families should do the same. Creating a circle of trusted advisers to provide support empowers family members to make educated decisions and protect the family legacy, both in the present and, hopefully, for the future.
The information provided is for illustrative/educational purposes only and is not intended to constitute legal, tax, investment or financial advice. The information discussed herein may not be applicable to or appropriate for every investor and should be ued only after consultation with professionals who have reviewed your specific situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.
Ronald Ambrogio is Regional President – Ohio of BNY Mellon Wealth Management
