Studies estimate that 70% of family wealth is lost by the end of the second generation and 90% by the end of the third generation.[1] Do not let your loved ones become part of this statistic. You must understand and work to overcome the disconnect among the generations regarding the transfer of wealth. We are here to help you.
Why Is Most Family Wealth Lost by the Third Generation?
You could assume that errors in financial and tax planning and investment strategies are the main cause of wealth lost over the generations (in other words, blame it on someone else’s mistakes). However, according to a study conducted by The Williams Group, these factors are included in the category “all other causes,” which account for only 5 percent of lost family wealth. Instead, the largest contributing factor to generational loss of wealth (60 percent) is from trust and communication breakdown among family members, followed by failure to prepare heirs to handle the wealth they receive (25%).[2]
To truly understand the problem and the statistics, we must first define an “heir.”
An heir is someone entitled to receive a decedent’s property under a state’s default laws when the decedent dies without a will. The list of people who will inherit based on the state’s default plan varies depending on the state in which you live. Most state laws recognize spouses, children, and grandchildren as heirs.
Why is there a lack of communication and trust that inevitably leads to unprepared heirs? Surveys have shown that fear is the dominant emotion that prevents clients from communicating with their heirs about their wealth:
- Fear about running out of money
- Fear about creating an “entitlement mentality” in heirs
- Fear about heirs squandering their inheritance
- Fear about outsiders influencing heirs
- Fear about not treating heirs “equally” and creating sibling rivalry
- Fear about how disclosure now might limit choices and changes in the future
Parents who fail to communicate their financial and estate planning goals to their children risk two outcomes:
- The children misunderstand that conditions placed upon an inheritance are designed to maximize and preserve their lifelong financial stability and comfort.
- The children interpret a promised inheritance as a license to be lazy and complacent while waiting to play the inheritance lottery.
Planning Tip: While it may not be easy to open up to your children about your financial beliefs and fears, it is essential to overcoming the odds that subsequent generations will lose most of your wealth by the time your grandchildren die.
Here are some questions you should ask yourself to enable you to openly share your financial philosophy with your loved ones:
- What does money mean to me?
- What attitudes about money do I want to teach my heirs?
- What can I do to help my heirs develop financial competency?
- Assuming there are only three choices for who will receive my wealth after I am gone—family and friends, charity, or the Internal Revenue Service—who do I want to receive the benefit of my wealth, and in what order or proportions?
- What is the best way for me to convey my wishes to my heirs?
Answering these questions will help you identify and express your concerns, views, and goals about your wealth and how you want to pass it down (or not pass it down) to your children, grandchildren, and beyond. In addition, discussing your philosophy about money with your heirs will allow them to know what to expect after you are gone instead of being left in the dark.
What Must You Communicate to Future Generations to Facilitate Wealth Transfer?
You must communicate the following information to your family to ensure that they will be prepared during difficult times:
- A net worth statement or, at a minimum, a broad overview of your wealth
- Your final wishes for burial or cremation and memorial services
- The estate planning documents that you have and the purpose that each document serves:
- Durable financial power of attorney: designates who will be in charge of managing your accounts and property if you are living but unable to make decisions; states what authority your chosen decision-maker has; avoids court supervision of your financial affairs
- Medical power of attorney: names who will be in charge of making medical decisions for you if you cannot; avoids guardianship
- Advance directive or living will: clarifies your wishes regarding life-sustaining procedures
- Health Insurance Portability and Accountability Act (HIPAA) authorization form: names the person you have chosen to access your protected healthcare information
- Revocable Living Trust: avoids guardianship during life and probate at your death; keeps your final wishes private; minimizes delays, costs, and bureaucracy
- Pour-over Will or Last Will and Testament: a catch-all for money and property not transferred into your Revocable Living Trust or by beneficiary designation prior to death, or the primary means to transfer your wealth if you are not using a Revocable Living Trust
- Irrevocable Life Insurance Trust: removes life insurance from your taxable estate; provides immediate access to cash
- Other advanced estate planning tools: protect money and property from creditors, predators, outside influences, and ex-spouses; enable charitable giving; minimize taxes; create dynasty trusts
- Who will make decisions for you if you become incapacitated (unable to make decisions) or die, including the agents named in your durable financial power of attorney and medical power of attorney, the successor trustee of your Revocable Living Trust and other trusts you have created, and the personal representative named in your Last Will and Testament
- The benefits of properly drafted lifetime discretionary trusts created for your heirs:
- Foster educational opportunities
- Provide asset, divorce, and remarriage protection
- Protect special needs beneficiaries
- Allow for professional account and property management
- Minimize estate taxes at each generation
- Create a lasting legacy for future generations
- Your goals and intentions for inheritance: what the money is and is not to be used for (for example, education, charity, business opportunities, or retirement instead of vacations and Ferraris), and who will be the trustee of lifetime discretionary trusts created for heirs
- Location of important documents: this includes how to access your digital assets such as social media, online bank accounts, and crypto assets
- Key advisors and their contact information: estate planning attorney, financial advisor, certified public account, insurance agent, spiritual advisor, etc.
Planning Tip: Work with your advisors to organize annual family retreats that are designed to educate your heirs about your wealth transfer goals and the plans that have been put in place to achieve these goals. This way, you can keep your family updated if there are any changes. You can also pair the retreat with a family vacation to continue making great memories together each year.
Final Thoughts about Successful, Multigenerational Wealth Transfer Planning
Opening up and discussing your fears and beliefs about money will help you to create a personalized road map for transferring your wealth. Your road map should incorporate your family values, family history, and ultimate goals for future generations. Educate your loved ones about your road map to prepare them for the opportunities and challenges they will face after you are gone.
We can assist you in defining your philosophy about money and creating and maintaining a successful, multigenerational wealth transfer plan. Call us at 708-448-5169.
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[1] The Williams Group, https://www.thewilliamsgroup.org/about-us.
[2] The Williams Group, https://www.thewilliamsgroup.org/our-history.
