Wonderful as it may be to pass along wealth to your children, it's at least as important to share your financial know-how, philosophy and values with the next generation.
Whether your children are in preschool, high school or beyond, it's likely neither too early nor too late to teach your kids about money, financial management, saving, investing and giving.
Many high-net-worth parents, however, don't prepare their children for large inheritances, neglecting to provide guidance or to arrange the wealth transfer in ways that will protect both offspring and nest egg.
“Generally there's an inverse relationship between wealth and passing on knowledge and values. It's the reverse of what everyone would think,” says Alan Wolberg, a senior wealth planner at City National Bank.
Families of modest means, motivated by fear of not having enough money, often do pass along financial knowledge, he says. That fear “teaches you how to save, how to invest, how not to be taken advantage of ... how to squirrel away every nut.”
In contrast, Wolberg says, many multi-millionaires -- uneasy about discussing money -- haven't taught their offspring about finances or given them an “inheritance education” in interacting with portfolio managers, wealth advisers and lawyers. The children may inherit wealth in their 50s or 60s with little clue about how to handle it.
“They're rather ill-equipped to go out in the real world when they're called upon to manage and house those monies,” Wolberg adds, noting financial advisers often see families implode after wealth transfers to the next generation.
In his experience working with family wealth transfer, the average inheritance life span is about 18 months, he says. “You're looking at a massive loss of wealth immediately after the inheritance occurs.”
Money conversations are important, as U.S. heirs are expected to inherit more than $3.2 trillion within a generation, according to RBC Wealth Management's Wealth Transfer Report, which was based on a survey of more than 1,200 Americans with average investable assets of $4.3 million.
Among other points, RBC Wealth Management found:
- Structured financial guidance typically doesn't start until age 28.
- People inherit wealth from grandparents at age 29 and from parents at age 44, on average.
- Most high-net-worth heirs who talked with their benefactors about the funds before inheriting knew little more than how much they would receive.
“Most inheritors say they were largely unprepared, unsupported and uninformed about the inheritance process,” RBC Wealth Management reports.
Most people haven't developed a full plan to transfer wealth to their heirs
While wealthy parents may shy away from discussing finances with their children, the silence can backfire. A $20 million bequest for someone who has never made a budget can become a personal catastrophe, leading to dangerous lifestyles, bad marriages and other wrong turns, Wolberg says.
“What if the wealth itself is what destroys them emotionally?” he says. Wolberg asks clients whether they want to leave money or a healthy person -- power and peace of mind, or a time bomb.
“You have to prepare these children long before your passing,” Wolberg says.
Dean Deutz, a private wealth consultant with RBC Wealth Management, says he's seen family financial education done “in very different ways” and at different ages.
Working with professionals
Financial advisers, private bankers and wealth managers often are the best teachers, especially since they're the ones heirs may turn to later, Wolberg says. “It truly takes a financial village and learning those skill sets early on,” he says.
Indeed, Deutz recalls, there have been times when parents have asked him to join family meetings so that he could share some financial knowledge with their children.
Families that successfully transfer wealth often set up children's trust accounts with third-party trustees, Wolberg says. Beneficiaries need to learn about the trusts — including budgeting and living within their means -- at an early age, Wolberg says.
Work and allowance
Financial education can start years earlier, as soon as a child is old enough for an allowance.
Business owners often excel at passing along financial know-how and values, as they tend to involve even their young children in the business, Deutz says. The youngsters may start by taking out the trash or otherwise getting their hands dirty.
Putting a child on the payroll can also help them learn to put money aside, he says. An allowance for younger children, often with chores as part of the arrangement, is another way to teach kids about money, spending, saving and charitable giving.
“We also see parents who are aware of the power of compounding, and so they will encourage their children to save, and a lot of parents will match dollar for dollar,” Deutz says.
Well-thought-out charitable giving is another way to pass along family values. Deutz describes a woman who started a fund she named Grandma's Foundation.
“All the grandchildren are on the board of the foundation and they all make contributions to the foundation,” he says. At Saturday morning meetings at Grandma's house, the young board members get together, look at investment results and present grant proposals to the other grandchildren.
“You can't go on the board until you're seven years old, but once you're seven you're on the board,” Deutz says. “And they get lunch at Grandma's house, too.”
RBC Wealth Management, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC.