While passing wealth along to children and grandchildren may be a common goal for high earners, accomplishing it is far more cumbersome and complex than you might initially imagine.
There’s a common saying, “Shirtsleeves to shirtsleeves in three generations.” The idea is that grandparents start out with little wealth before working hard, saving diligently, and amassing a great amount. But by the third generation (their grandkids), the wealth has diminished. This idea is supported by a recent study that found 70% of families lose their wealth by the second generation and 90% by the third.1
Today we’ll talk about the problems with current approaches to generational wealth and what you can do differently to avoid these common pitfalls.
Why Generational Wealth Is So Hard To Maintain
As a society, we don’t tend to talk about money with loved ones or prioritize financial literacy. It’s rarely taught in schools, and parents often don’t feel comfortable talking with their children about money or the family business. They may even chastise children for asking questions about the family’s financial health.
But in reality, the secrecy and taboo nature of the topic is where most of the issues regarding generational wealth come from.
In fact, the lack of communication can create something resembling a vicious cycle. Older generations who worked hard to build a sizable estate are very directly involved in growing and preserving their family’s wealth. But because the third generation isn’t involved in these conversations or educated on the family’s financial standings, the older generation may feel as though they’re uninterested, irresponsible, or entitled.
If you don’t teach your children or grandchildren about money and the responsibility of managing it, these preconceived ideas are likely to come to fruition. Let’s not make this a Brothers Grimm haunted tale of woes. Instead, take the time now to start teaching your children about essential money basics like:
- How taxes work
- The importance of goal setting
- Charitable giving
You may find it helpful to begin these conversations by sharing your own philosophy about money while encouraging them to find their own. By understanding the true value of money, the next generation can become better stewards of it.
How Generational Wealth Actually Lasts
There are a few key “ingredients” to making sure your family’s generational wealth lasts three generations and beyond.
The fact is, money won’t last if no one knows what to do with it! A lack of information and knowledge can lead your heirs to inadvertently dwindle the family wealth by mismanaging it.
Encourage your loved ones to get more involved in the family’s finances by participating in annual charitable giving or joining the conversation about the future of the family business. Help your heirs see the family’s wealth in action, and encourage them to ask questions or join in on the conversation.
Eventually, these are things that the next generation must make decisions about on their own, so giving them a “sneak peek” now can help improve their decision-making skills and financial literacy in a low-stakes way.
Setting expectations without openly communicating them with loved ones only leads to disappointment and frustration. You need the next generation to understand the consequences of how they handle their money. But unless you communicate these important lessons, they’ll never know.
Delegate to a Professional
One of the greatest actions you can take to set your heirs up for success is to work with a professional who understands the nuances of generational wealth and the tax strategies available to protect it
As you’re working with your own advisor to create a financial plan, be sure to include your children in the planning process where possible. While you don’t have to invite them to every meeting, try having them join conversations regarding estate planning or future planning. This will help give them more “buy-in.”
Unique Financial Vehicles To Protect Wealth Long-Term
What tools can you use to bring your generational wealth goals to life? Here are a few common vehicles we recommend to our clients.
Dynasty 529 Plans
529 plans are tax-free investment accounts families can use to pay for qualified educational expenses like college or K-12 tuition. Because it’s easy to change the owner and beneficiary of a 529 plan, they can serve as a tax-advantaged tool for preserving generational wealth.
Here’s how it would work: The older generation funds a 529 plan to pay for a child’s college expenses. Anything leftover in the account can then be passed down and used to pay for a grandchild’s college tuition — and so on. By “overfunding” the account, families can help pay for the educational expenses of future generations to come.
Trusts can be established in many different ways, allowing you to set stipulations and guidelines that control when money or assets may be passed down to the beneficiary. For example, you may put a grandchild’s inheritance into a trust, which will release 25% of the funds when they turn 18, another 10% when they turn 21, and the remaining amount when they turn 25.
There are many different types of trusts used to preserve generational wealth. We can help determine the right option for you and your loved ones.
Preserving Family Wealth for Your Loved Ones in St. Louis and Beyond
As a fee-only financial advisory practice, we are here to help you design a meaningful estate and legacy plan that insulates your wealth for generations. If you have questions or wish to begin a conversation with your kids about your family’s estate, please don’t hesitate to reach out.
Craig Toberman is the Founder of Toberman Wealth – a fee-only, fiduciary financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.
Craig received a Bachelor of Science (B.S.) degree in Agricultural and Consumer Economics from the University of Illinois and a Master of Business Administration (M.B.A.) degree in Finance from Saint Louis University. He is a Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) charterholder, and Certified Public Accountant (CPA).
Craig is a member of the National Association of Personal Financial Advisors (NAPFA), Fee-Only Network, and XY Planning Network.
Craig lives in the greater St. Louis area with his wife, Ally and son, Hank.