According to a 20-year study of 3,200 high-net-worth families conducted by The Williams Group, 70 percent of families failed to successfully transfer assets from one generation to the next. It wasn’t complex legal and finance rules around estates that caused many of the problems, but instead family dynamics, lack of trust and poor communication, the report showed.
“The ability to transfer assets is cookie-cutter, so people have 98 percent success in just passing on their assets to their heirs,” said Roy Williams, president and founder of San Clemente, California–based The Williams Group, which provides research on family dynamics and wealth transition to professional advisors.
“The failure comes after the transfer occurs, when heirs are unable to keep the money or the family dissolves into fighting,” he said.
The most common reason financial stewardship fails is a breakdown of communication among family members (60 percent of cases). Other reasons include heirs being unprepared to manage money (25 percent) and the lack of an agreed-upon purpose or mission for the family (20 percent), the study found.
“The top concern of wealthy individuals is that they don’t want to destroy their children,” said Williams. “They see it happening in other families, and they don’t want that to be their kid frittering away the family fortune.”
But with a careful approach to fostering financial stewardship, families can beat the odds and nurture multiple generations of successful financial management. Williams said that begins by bringing children into the conversation early, when they’re mature enough to handle it, and being open.
“Many families don’t want to talk about how much they have because they’re afraid their kids will stop feeling the need to work, will fight with each other or their spouses, or that the money will be lost in a divorce,” said Williams. “But transparency is required to build trust and communication between family members.”
Preparing children for wealth
David Sieben, a financial advisor with The Upin Sieben Group at RBC Wealth Management in Minneapolis, recommends parents set the stage by talking with their children about money early in their lives, beginning with simple money lessons when they are toddlers.
“Kids who are taught basic money management skills at a young age tend to be more responsible when they become adults,” said Sieben.
Then, when they reach older adolescence and demonstrate some maturity, he recommends parents bring children along to meet with their wealth advisor.
“We let the parents set the parameters of the discussion and sometimes it’s as basic as establishing a budget and a wealth management plan and explaining how to be responsible with the money,” he said.
In one recent example, Sieben said a client asked him to set up an investment account and a checking account for her adult child. They also had a discussion about credit card debt and spending.
Sieben suggests parents have an open discussion with their children about their financial and family goals, which can bring to the forefront how well their kids are prepared to handle a future inheritance. Establishing transparency and open dialogue allows parents to make recommendations such as encouraging a young adult to get a job and learn to budget or to open a direct investing account to learn the language of money.
Teaching family values
In addition to teaching children how to handle money, parents must also define what family values, education and experience they want to pass on to their children, said Williams.
“Establishing common values among multiple generations in a family works to create a team approach instead of fostering suspicion and resentment,” he said.
Philanthropy can be a great way to involve children in family decisions, according to Williams, particularly if the young adults follow up and make sure donated funds are being spent appropriately.
“That teaches the lesson that, if the charity is being held accountable, then they should be accountable for their finances, too,” he said.
Families can use philanthropy to promote family values and teach their kids about responsibility. Williams said he has seen families give all of their children US$1,000 to donate to their charity of their choice.
“One 13-year-old gave the money to a children’s home and then volunteered there to see how they used the money,” said Williams. “She went on to raise more money for the home once she learned more about what they did.”
Fostering family values can lead to better financial stewardship over the long term. After all, Williams said, “Money doesn’t determine who your kids are; their values do.”
This article first appeared on Forbes WealthVoice.