The Secret To Sustaining Intergenerational Wealth

Many of us have heard the cautionary tale of “shirtsleeves-to-shirtsleeves in three generations,” in which a family builds a fortune only to have it gone by the third generation. Many successful families understandably wonder how a family can lose its wealth in such a short amount of time. And more importantly, they want to know how they can avoid that fate. How does a family build and maintain intergenerational wealth for two generations, three generations and beyond while still maintaining family harmony?

I’ve worked with many families who have asked exactly those questions, and what I tell them is the skills it takes to build and maintain a growing investment portfolio are typically not transferred with an inheritance. Rather, building lasting intergenerational wealth requires a thoughtful combination of education, engagement with the next generation, and an intergenerational “road map.”

The Critical Importance Of Communication

In my experience, the No. 1 factor among families who successfully maintain intergenerational wealth is open, honest and frequent communication among all family members.

Communication can take many different forms, of course: everything from informal, age-appropriate conversations with children and grandchildren about the formation and history of a family business and the values that enabled it to succeed, to more structured annual or semiannual family meetings where all generations are encouraged to discuss the desired impact of the family’s wealth.

There are common themes that every successful family should address in the spirit of transparency and inclusion, including:

Defining The Purpose Of Their Wealth

Every family should know what their overarching goals and aspirations are when it comes to wealth management and distribution. What are the expectations in terms of lifestyle among the different generations? What are the “red flags” that won’t be tolerated in terms of how the wealth is spent?

It’s critical to invite a diversity of opinions on this topic and make it clear that all suggestions are welcome and encouraged. Everyone in the conversation should feel empowered and that their input is valued. Only then will you achieve genuine buy-in.

Preventing Wealth From Defining The Family

Building wealth simply for the sake of having more wealth is ultimately meaningless. Redefining what wealth means is essential for any family who wants to make a meaningful impact with their good fortune.

Ask yourselves, “How can we ensure that our wealth remains a tool to achieve our objectives rather than a defining aspect of our identity? What steps can we take to maintain a healthy perspective on wealth?” Solicit feedback from every generation. Seek to find areas of alignment where you can build out a long-term tactical plan for the wealth.

Identifying Shared Agreements And Disagreements

With any truly open and transparent conversation about money, differences will arise (shocking, right?). It’s to be expected and ultimately healthy if those differences are treated with respect and genuine consideration.

Avoid getting defensive. Rather, focus on where there is common ground and build upon that. Accept that there will be areas where family members will have to “agree to disagree,” but do so with humility and love. Only then will you be able to work together to make informed decisions.

It’s Never Too Early To Start

It’s never too early to start having age-appropriate conversations with one’s family about wealth. For kids under 10, take them out for ice cream. Broach the topic at the breakfast table. Normalize conversations about money, and provide the rising generation with a “voice” in the family’s future.

One particularly effective way to get younger children involved is to discuss the causes or charities they want the family to support, potentially through a family foundation or donor-advised fund. An example might be an animal welfare organization or a charity that supports other children in need. Take their suggestions to heart, and if you choose to act on them, demonstrate the impact of their generosity.

Buying shares in companies that align with a child’s interests (a video game company, for example) can ignite an interest and fascination with investing.

For teenagers and young adults, once they land that first job, encourage them to invest up to 100% of their income into a Roth IRA (though they likely won’t want to invest their entire paycheck). The point is to show them how that investment will likely grow and the power of compounding over time.

Just encouraging young adults to work a job and experience the responsibility that comes with that can help establish a life-long work ethic that can serve them and the family well in the long term. Holding down a job can also help a young person feel a degree of economic independence, which is empowering and liberating at just the right time in life.

Mapping Out Where Your Family Wants To Go

Don’t feel you have to go this alone, as talking about money is a “family matter.” Surround yourself with the right team of advisors and subject matter experts to help facilitate these conversations. Having an expert encourage a robust and productive discussion where everyone is heard can be an invaluable first step in developing an intergenerational road map grounded in your family’s mission and vision.

An intergenerational road map typically details the values that act as “guardrails” for the family. Be clear and compelling with those values and root them in real-world examples of family members who have lived them. Show how those values have contributed to the family’s success over the years.

A road map can also include a set of expectations for how the family’s wealth should be (and should not be) spent. What will be allowed? Will there be a “family bank” for family members to access money to start a business or buy a home, for example? What is the process to access a family loan? How are decisions made? All of this and more should be clear in a road map document, which should be reviewed at least annually.

Avoiding the “shirtsleeves-to-shirtsleeves-in-three-generations” curse is about aligning the family around a shared vision, a cross-generational set of values that serves as the “north star” for the family’s future and the desired impact of wealth.

Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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