5 keys to preparing the rising generation for family wealth 

Are the younger generations of your family prepared to steward the family’s wealth? An estimated $72.6 trillion in U.S. wealth is likely to be transferred from the Silent Generation and Baby Boomers to younger generations by 2045. Surveys and our own clients have made it clear that senior generations are concerned about issues such as how to promote personal achievement and prevent complacency in these rising generations, as well as how to help the family’s wealth last for generations to come. Yet, few high-net-worth families have a plan to prepare rising generations for this significant wealth transfer, leaving most families vulnerable to potential pitfalls.

There is no one-size-fits-all way to prepare rising generations for wealth. Each family will need to do things a bit differently. However, the most effective path to a smooth transition involves a clear, well-thought-out plan. This crucial, but often neglected, aspect of family governance can make the difference between wealth that diminishes within a few generations and wealth that leaves a lasting legacy.

Our experience has shown that, whatever a plan includes, honesty and communication play key roles in successful transitions. Most plans to prepare rising generations will include financial education, succession planning and communication of values. Here are a few key areas to address when preparing younger generations for family wealth.

1. Family and personal mission statements

A family mission statement defines the family’s values, purpose, investment philosophy, philanthropic goals and values. It may even explore the relationship between family wealth and individual achievement and initiative. Family mission statements work best when they have real meaning and are taken seriously, including incorporating them into the family wealth plan.

Personal mission statements are crafted by each family member, ideally with assistance from senior family members or advisors. Similar to a family mission statement, they define what’s important to the individual and how that relates to the family’s and their own wealth.

Some families take things a step further and establish a family wealth charter or constitution with formal policies and procedures. Around 13% of U.S. family offices, and 28% of international ones, have a family constitution.

Larger families may form a family council, with advisory councils, investment committees and other opportunities for family members to provide input and take responsibility for the family’s finances. Advisory councils, in particular, can be valuable ways to engage and educate family members, as well as give them a voice, even if they don’t have direct decision-making authority. Sometimes adding an independent, non-family member to a family’s advisory council can be helpful. This individual can provide objective advice and help balance the perspectives of family members, helping the family stay aligned with its long-term financial strategies and goals.

2. Financial literacy for younger generations

More than one in five family offices reported that they don’t fully share the extent of the family’s wealth with the rising generation. This can make it challenging to help them develop the financial literacy they will need. While parents should decide when and how much to tell their children based on each child’s maturity and development, children do need to gain financial literacy.

Keep in mind that it’s often not possible to hide or disguise the family’s level of wealth, and children are curious. This curiosity can be a wonderful opportunity to begin teaching financial literacy and connecting it to family values.

We recommend teaching children about budgeting, investing, shepherding personal wealth and other topics as early as makes sense. Open checking and savings accounts for each child, showing them those accounts (either online or in paper statements) and teaching them how to use them. Also, explain what a credit score is. If they have trusts, teach them what they are and how they work.

As children grow older, share how family members have made wealth decisions and be open to their perspectives on new ways of doing things. Consider starting a family investment club, in which each family member invests their own money as they choose, with the family sharing investment ideas and analysis.

Families can also ease younger generations into investment literacy through a “junior” investment committee that co-manages a small portion of the overall investment portfolio. And it might make sense to have a formal process for younger family members to become involved in family investment decisions. Additionally, there are many financial literacy books written for children of all ages, which can serve as helpful teaching tools to foster early understanding of financial concepts.

3. Personal achievement and initiative

Many high-net-worth parents worry that their children won’t develop a sense of personal achievement, and that family wealth could lead to complacency. They want to foster fiscal responsibility and sustainable lifestyles. There are a number of ways to do this.

One way to instill a sense of personal ambition in younger generations is to share with them how the family wealth was earned. This can serve as inspiration.

It’s also important to show and tell your children what, besides money, makes your own life rich. It might be a job you love, owning your own business, being a parent, or philanthropic work. Work with your children, or hire an expert, to help define what their own rich-beyond-money life might feel like. Similarly, understand their interests and help them develop and pursue goals from the time they’re young and into adulthood.

If a family business is part of the picture, it’s a good idea to have one set of rules that applies to younger generations. This should cover who is expected to work in the business, whether and how much outside experience family members need to obtain, how they’ll start in the business and more.

Finally, consider whether the family trust, or even the family business, will provide capital for business startups and/or direct investments. These investments can bolster individual hard work, and their availability can stoke initiative.

4. Philanthropic literacy and values

Consider ways to instill philanthropy in children and pass on related values. This may include family volunteer work or giving children funds each year to allocate to charities. As they get older, ask them to make recommendations for future family philanthropy initiatives or to help consider grant proposals.

If you have a family foundation, look for opportunities to involve younger generations. And, have a plan for when and how they can join its board.

5. Succession planning

Thoughtful succession planning can smooth the way for leadership transitions, help family members maintain positive relationships and increase the likelihood of the family’s wealth continuing for future young generations.

Effective succession planning begins by defining the various family roles – whether in the family office, business or philanthropy – and clearly establishing what’s expected in each role. With this in mind, look for opportunities to understand each family member’s strengths from the time they’re young. This is more effective than waiting until new leadership is needed to figure out who is best-qualified.

Also consider how younger family members can practice making decisions together in low-stakes situations. If you have them work together on small projects from the time they’re young, they’ll develop group decision-making skills with senior family members available to guide them. It’s best not to have the first major decision they make together be about settling an estate after someone’s death.

Make your own plan to prepare rising generations for family wealth

Remember, your plan doesn’t have to look like any other family’s. But you do need a plan. The good news is you don’t have to do it on your own. Kaufman Rossin’s Family Office Services and Private Clients team can provide guidance and assistance with everything from financial education to succession and estate planning. We can also facilitate and plan family meetings and educational sessions, including leading tough conversations about what the next generation can expect. Contact me or another member of our team to learn more.