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Preparing the money for the children — doing the planning — is an important step.
However, families that stop there overlook the importance of preparing the children for the money, through education and appropriate transparency and involvement in family wealth planning. Helping younger generation family members understand financial concepts and how they fit into the family wealth picture can be a formidable task in a world where investments and wealth planning are ever more complex concepts.
In talking with our clients about the use and enjoyment of family wealth, we’ve seen our discussions with them change over time. What sometimes begins as an exercise to minimize taxes and maximize the wealth available for future generations often evolves into discussions regarding how to prepare younger generations for the wealth they will receive. In working with clients, we have learned that this preparation involves a number of elements and can be very different for each family.
Families who embrace the principle of developing the rising generations into their overall wealth plan consider some important questions about family wealth. What are the risks of giving money “too soon”? (And how soon is “too soon”?) How and when should you tell the children about the wealth transition plan? Will trusts make them feel less empowered and more dependent on others’ decisions? Will they understand what affording the “real” cost of something is? In answering these questions, these families engage in certain best practices.
Best practice #1: Provide age-appropriate transparency
“What do we tell the children?” is at the heart of the best practice on age-appropriate transparency. But it isn’t just what to tell the children — it’s also when and how.
We’ve often heard from clients that they have a fear of letting children, even adult children, know about money set aside for them. There’s the fear that wealth-in-the-wings can be a de-motivator in preparing for adulthood and that money will result in the child being unproductive. The problem with giving in to these fears, though, is that children will know about the wealth someday. So then, the question becomes: How are they going to learn about it? Rather than just letting that happen, the best approach is to have conversations that frame the wealth with the family’s values, sharing reasons for why the plan was created as it was.
“Transparency” covers a wide spectrum, from providing complete disclosure on all details to sharing the bigger-picture framework of the entire estate plan but without sharing numbers. This may be done using an abridged wealth plan review — a version of the client’s overall wealth plan review, edited per the client’s wishes, and gradually filled out over time. Disclosing information really does depend on the culture within the family. Some families are very open in discussing wealth, sharing with younger family members how the family’s wealth was made and gradually shifting to more extensive conversations as children and grandchildren get older. One of the definitions of ‘transparent’ is ‘readily understood,’ something to be very aware of when thinking about how much to share at what age.
The answer to “when” is very personal and specific to each family. Many parents pick an age or a milestone — such as graduating from college — and begin including the children in family meetings and discussions about the family’s wealth. A very general rule of thumb is that in their early 20s, as young adult children are beginning to understand how to live on their own and within a budget, the concepts of money, our financial system and the use of debt become less abstract and more of a reality. This can be a good time to share information about a trust for the child. Through a trust fundamentals session, the child can begin to understand what it means to be a trust beneficiary and how to optimize a trust relationship, and incorporate the knowledge of the trust’s existence into their own thinking and plans for the future.
If sharing the family wealth transition plan earlier, rather than later, is appropriate for your family, it can show that you’re genuinely interested in feedback and it gets all generations invested in the plan. It’s important to remember that the ‘what to tell the children’ discussion really should not be a one-time event, but a series of conversations that build on one another.
Best practice #2: Create a learning environment
We live in a complicated world, and wealthy families have complex financial lives. It can sometimes be difficult to understand one’s own total investment, financial and planning picture, much less teach that to a young adult child. Nevertheless, financial education of the rising generations is critical to helping them be well prepared for their roles in the family, their career and their community.
People learn in many different ways. For this reason, we have developed a series of ways to present important financial concepts in engaging ways, however one best learns. That may mean hands-on, through conversations with a member of the relationship team, visually, through an engagingly designed class setting or digitally, through a financial education webinar series.
Regardless of the medium, our education materials on financial planning essentials, investment fundamentals and estate planning basics are designed to help the members of future generations prepare intentionally for management of their own wealth. Further, these materials are also designed to bring families together to have meaningful discussions about family wealth and to allow each generation a voice in shaping family legacy. By developing their financial competency, a family’s young adults will be able to gain insights into local and global investment opportunities and understand strategies for philanthropy.
Best practice #3: Encourage opportunities for involvement
To go further into a learning environment that engages and empowers future generations, engaging in family philanthropy can help create a story of the future for a family that involves, inspires and empowers younger generation family members. Sometimes, a family will have a unified passion. Often, it will have many passions. Working together in an exercise to identify big-picture causes, like education, the environment, faith or human rights can be a far-reaching philosophical exercise uncovering numerous opinions within the family circle. Digging further into those opinions, and finding where seemingly distinct causes intersect, can provide a space for all voices to be heard, and common ground to be found. Our Effective Philanthropy Venture is designed to facilitate these discussions.
And then, once common ground is identified, a plan for action can begin — and future generations can take an active role. For example, a sound plan for effective philanthropy suggests that the family research what is already being done and what organizations may have programs in place that the family can leverage. Assigning that research to the younger adults can give them a feeling of ownership in what the family wants to do. The family should also be sure to talk about what they’d like your charitable ‘project’ to look like when the senior generation is no longer able to be involved, so that future generations see the opportunity for continuing the commitment and taking it to the next level.
Strategic philanthropy is not a priority for everyone. For those families, there are other avenues for involving younger generation family members in the overall wealth plan. For example, creating a family limited liability company (LLC), in which younger family members share ownership, may allow for a hands-on vehicle that provides investment education as well as a sense of stewardship in growing and managing family wealth. LLCs also allow older generation family members seeking to shed some of the administrative responsibilities of managing wealth, a process for younger family members to assume those responsibilities under their guidance. ESG (Environmental, Social and Governance) investing is another way to involve younger family members. Younger generations often realize that they can make a difference in the world through their investing and may desire to align their investment decisions with their values. Our materials on LLC planning basics and ESG fundamentals allow families to further explore these avenues for involving future generations.
Develop the rising generations: It’s a process, a journey, a way of thinking in a long-term way about what “family wealth” really means. Taken together, all of the principles and the best practices that support them are ways to put the younger generations on the right course, put them in the best position to succeed once they do become stewards of the family wealth.
