Generational Wealth Management - The Importance of Financial Literacy for the Next Generation

A critical part of wealth planning is involving the next generation

Shirtsleeves to shirtsleeves in three generations–or so the saying goes. Believe it or not though, there’s actually truth to substantiate the claim.

Almost 70% of second generation families have exhausted the accumulated wealth of their parents, and nearly all families have squandered the wealth by the time it gets through the third generation.

Significant wealth brings with it amazing capability and flexibility: the freedom to live a comfortable life, to provide limitless educational opportunities for your children, and to enjoy the moments and experiences in life that you cherish most (hobbies, travel, etc.). However, over time, no amount of money is endless if spending is left unchecked. Vacation homes, luxury cars; they all add up. With luck, a good estate attorney and financial advisor will help you manage your lifestyle to a reasonable level. As you can imagine, “reasonable” is deliberately vague, but should be interpreted to mean that you will still have substantial assets to pass on to your children, grandchildren, or other relatives.

Through the estate planning process, you and your advisors may come up with a fantastic plan to transition assets in a number of ways, but all of that planning goes to waste if your children have no understanding of what they’re receiving. They’ve enjoyed the advantages of a generous upbringing, and in most cases, they’d like to keep up that very same lifestyle indefinitely. Perhaps it’s possible for this to happen, but only if they work through the same level of planning that you completed, and the earlier they do this, the better. The plan will inevitably change, but the logic and the building blocks remain the same. To be successful, the second generation needs to have a firm handle on the basics of personal finance, an area that often gets overlooked when money is no object.

You started out from the bottom and worked your way up, eventually reaching a point where financial decisions became easy. Remember, you have flexibility and capability. The second generation knows they have flexibility, but do they have the capability?

• Do they know what credit is?
• Do they know how to build credit?
• Do they know how to damage credit?
• Do they know how to leverage credit?
• Are they competent and focused enough to get a job?
• Are they able to learn and grow in a given field?
• Have they realized the importance of following a budget and understanding their needs versus their wants?

The questions are endless, but the answers are critical to success.

Communication is Key When it Comes to Next Generation Wealth Management

In a recent post, we explained that a little education goes a long way. Conversations around money have always been awkward, no matter the level of wealth. For the ultra-wealthy, their reasoning for hiding inheritance figures from their children is often two-fold. They feel that divulging the information would be inappropriate, or would alter the behavior of their child(ren) (for the worse), and they often don’t even know how to go about addressing the topic. The tough part is, ignorance is bliss, and leaving children out of the conversation could set them up to “win the lottery” when the inheritance is passed on to them. Bear in mind, we all know how lottery winners tend to spend their money!

Remember, start with the basics, as these are the areas that will help limit risks for your children when it comes to the transfer of wealth.

• Budgeting:

  • Although you may not adhere to a strict budget, chances are you have a general sense of your spending, and you know your bounds. Be sure to transfer that same understanding to your children. It’s okay to let them splurge, but don’t make it an everyday occurrence. There’s something to be said for earning and appreciating items that fall outside your traditional spending needs. It’s also critical to understand that there are limits. Subsidizing unrealistic spending is the same as having no budget at all.

• Credit:

  • While you may not utilize much debt service beyond a traditional credit card, it’s entirely possible that your children may need to take out mortgages, car loans, and the like. That said, learning about these instruments early on is key to understanding how homes and cars play into budgets over the long term. Debt is a tool, and if used correctly, can assist you throughout your life. While it does allow for leverage and flexibility, it should never be seen as an avenue to stretch far beyond your means. The humiliation of losing everything is far greater than the disappointment of not having more.

• Career Planning:

  • Private schools and a 4-year degree seem like they would be a recipe for success, yet now more than ever, graduates are struggling to make ends meet. Some of this struggle can be attributed to crushing debt, but some is also reflective of the degrees our students are receiving. Are there jobs in those fields? Is there opportunity for growth? We want our children to have the opportunity to do anything, but is that going to get them a job that pays the bills? I’m not suggesting that parents control their child’s career path, but I am suggesting that your children do the research before you spend the money! On top of that, help them write a quality resume, do mock interviews with them–make them work for what they want.

• Basic Estate Planning:

  • Estate planning can be complicated, especially for the ultra-wealthy. Setting up trusts, designating trustees, overseeing investments–it’s a challenge to stay on top of it all, and unfortunately, that can mean that some of the simple things fall through the cracks. You’ve set up some great trusts for your children, but if they’re over 18, do they have a will, a durable power of attorney (DPOA), or a healthcare power of attorney? Do they even know the significance of these documents, or the consequences of not having them?

While generational wealth can be a blessing, it can also be a curse. Diligence and education are your best bet at maintaining the status quo, or improving chances of greater success over the long term. History has shown us families who did it well, but the list of those who made and lost fortunes is far longer. Regardless of your level of wealth, the livelihood and financial future of your children depends on their capabilities. Some have more flexibility than others, but those who are more capable have the greatest advantage.