Teach Your Kids to Preserve Family Wealth, Not Squander It

The adage “shirt sleeves to shirt sleeves in three generations” succinctly captures a phenomenon that may keep some people up at night—that wealth created by one generation is typically lost by the third generation because of a lack of financial discipline and understanding. 

Financial advisors say it bodes well that so many of their wealthy clients are eager to ensure that their heirs are well-adjusted and good stewards of wealth. We asked six advisors to describe specific ways parents can help set their progeny up for success, and while estate-planning strategies play a part, it turns out that there’s no substitute for good parenting.

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Write a Yearly Family Letter

Deana Healy, vice president, financial planning and advice, Ameriprise Financial 

Preparing the estate for an easy transfer of wealth to heirs is an act of care. I like clients to prepare an annual letter to children with a summary of the financial situation and a statement of financial purpose. This lets families share details about where to find wills and trusts and other estate documents, about the key contacts the family should be aware of—who the estate-planning attorney is, who the financial advisor and accountant are, where the life insurance policies and account statements are—and how to access things digitally.

In terms of more technical estate-planning opportunities, trust provisions are certainly a way to make sure that family values are passed on to the next generation. Often there are age-related triggers so that when a beneficiary reaches a particular age, they get a particular payout. But they can also be structured with incentive provisions. 

You might think about adding academic achievements as an incentive provision, or life events like marriage or buying a home. There also can be disincentive provisions; if there are challenging behavioral issues, you could have provisions written to delay a distribution unless or until those behavioral issues have been addressed. All of that said, without open communication, those provisions can cause hard feelings or family conflict.

Model Your Values

Tony D’Amico, CEO, Fidato Wealth

For families looking to transition wealth, step one is to define their values and determine what it looks like to manifest those values in real life. We had one client who values entrepreneurship. They created a trust that allows for discretionary distributions, but they included nonbinding language that made clear their values and how they would manifest. For example, they encouraged use of their funds to start or expand businesses. They believe in education, so they encouraged their children to use the money to purchase a home in a neighborhood that has a good school district, for example.

Step two is to model those values. If values aren’t taught early enough in life, there’s trouble later. So you’ve got to start teaching and modeling your values basically when your kids are in elementary school. 

The third step is to teach beneficiaries how to manage both a profit-and-loss statement and a balance sheet. Too often, a family business or wealth gets handed down but the financial management skills haven’t been taught.

The fourth step is to be fully transparent. Explain to the kids that typically the first generation creates the wealth, the second enjoys it, and the third destroys it. And identify all that needs to be done to keep that from happening.

Link Gifting With Saving 

Jessica Caruso, executive managing director, Mercer Advisors

A lot of folks think about the $19,000 annual gift-tax exclusion as a way to get around estate tax, and it totally is, but it can also be really beneficial in financial education. I’ve seen a lot of parents and grandparents gift part of the annual exclusion to a Roth IRA for a working teen or for a young adult. I’ve also seen them set up and fund investment accounts on behalf of a young adult. Instead of handing them a check, you’re telling them, “Hey, let’s get you investing and learning about the markets so that later, when that windfall happens, you’re not figuring out how to manage a portfolio.” 

You can do a match program: “I’m going to match you up to $19,000 for any savings that you do.” Or, “If you put $3,000 in your Roth IRA, I’ll contribute the other three.” It gets the younger person working and saving, and you’re coordinating your gifting strategy with education.

Remember that an estate plan can ensure an efficient transfer of wealth, but it can’t ensure an efficient transfer of your values. So parents can start teaching kids about family values at a really young age. Especially for families with considerable multigenerational wealth, I’ve seen that play out with their charitable intent. They’ll get young kids and grandkids, or even adult children, excited about making an impact in their community by getting them more and more involved in charitable decisions over time.

Set Up an Irrevocable Trust

Mitchell Prosk, senior client advisor, Crescent Grove Advisors 

One idea is a basic irrevocable trust. Parents create the trust for a beneficiary and place annual gift-tax-exclusion gifts into the trust. It’s a tax strategy that benefits the parents by reducing their taxable estate and that eventually benefits the beneficiary due to less estate tax paid on any inheritance. Often, this type of trust is a vehicle where parents put money for a beneficiary to be used later in life for buying a home or investing in a business. 

Another technique that has been very successful for families subject to the estate tax, and which isn’t overly complicated, is using a grantor-retained annuity trust, or GRAT. Generally speaking, parents place assets into the trust for a set term. At the end of the term, if the appreciation of the assets was above the set interest rate, the GRAT is successful, and there is a remainder. The remainder passes out of the parent’s taxable estate to the beneficiary. When successful, it’s a really nice and powerful wealth transfer technique. 

If a GRAT isn’t successful, the cost is just setting up the trust with the attorney. There is the potential for the basic irrevocable trust and the GRAT strategies to dovetail at the end of the GRAT term. If the GRAT is successful, the remainder can go into the irrevocable trust that was already created for a beneficiary and that can continue to catch annual-exclusion gifts.

Educate Children Early

Adrianne Yamaki, founder and managing partner, Strategic Wealth Capital

Set up an allowance or job system so that younger kids can earn and spend their own money; 9 or 10 is a good age to start. This teaches kids very important executive-function skills: how to prioritize, make trade-offs, and experience limitations. My kids have debit cards from their bank accounts. We put 50% of birthday money from family into these accounts, along with the pay we give the kids to do jobs around the house. We don’t give them money for doing dishes or other community chores, but I will pay them, for example, for picking weeds or doing my laundry.

Involve children in discussions about family money decisions, and talk through it with them so they can hear your own values and how you make these decisions. You can keep it age-appropriate, but discussing choices—such as summer vacation travel, and the difference in the cost of going to Spain versus camping in a national park—will illustrate trade-offs and help them understand what is important to you as a parent, such as valuing experiences over owning goods. 

At different life stages, such as when they’re starting their first jobs, spend time with your children or have your financial advisor spend time with them, walking through the big items to consider. One is budgeting: How much are you spending monthly versus bringing in? Discuss saving in a 401(k) at work—how do you allocate, and how much should you put away versus spend now? And talk about what they should do with extra savings—how should it be invested?

Avoid a Sense of Entitlement

Samuel Sugg, private wealth financial advisor, Wells Fargo Advisors

I work with 40 high-net-worth and ultrahigh-net-worth families. There are some neat characteristics you see in the successful ones. They believe in their kids; they trust and communicate with them. It starts in their children’s formative years, to when they’re teenagers and their parents are engaged with them, in sports, and in serving the community. They build trust with each other.  

If kids ever get a sense of entitlement, it’s very difficult to pull that out of them. Entitlement dampens the work ethic and can have a huge impact on the entitled person’s life. In the business world, people care little for this type of attitude, and in any endeavor, a lack of work ethic is going to produce marginal results. Those marginal results can make an entitled young person feel like they haven’t lived up to their parents’ expectations.

To help avoid entitlement in your children, encourage them to become resilient by allowing them to fail in safe ways. Find places in their lives where they can develop confidence, whether that’s academics, sports, or community volunteer efforts. Develop better communication skills as a parent by learning the best ways to engage your child. Learning to listen is an incredible gift that the best parents are able to master.

And you’ve got to be really vigilant and well paced when sharing information with your kids about money. Money is an accelerant that can take you the highest places, but it can take you down just as fast.

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