Family wealth: How to engage the next generation

The amount of wealth being passed from one generation to the next has reached unprecedented levels in the United States. Within a generation, an estimated $3.2 trillion is expected to be passed down to inheritors.

One reason for this is The Tax Cuts and Jobs Act of 2017, which increased estate tax exemptions through the end of 2025. These exceptions have the potential to change the demographics of wealth in the U.S.

“Right now a couple can leave $22.8 million dollars to whomever they want without paying tax at the federal level," explains Bill Ringham, director of private wealth strategies at RBC Wealth Management-U.S. Under the old rules, he says, they might have had a significant tax liability.

But the tax changes and the sheer volume of wealth moving between generations has overshadowed the dynamics surrounding that transfer. Both statistics and anecdotes (like the many examples behind the shirtsleeves-to-shirtsleeves in three generations adage) have shown high-net-worth (HNW) families trying to pass on wealth can be plagued with trust issues and lack of communication.

According to New wealth rising, a survey by The Economist Intelligence Unit (EIU) commissioned by RBC Wealth Management, 75 percent of HNW respondents say it's more important than ever to future proof one's wealth.

The New wealth rising survey, which targets high-net-worth individuals (HNWIs), adult children of HNWIs and high-earning professionals across the U.S., Canada, UK, China, Hong Kong, Singapore and Taiwan, explores the future of wealth, including where and how it will be invested. With the largest transfer of wealth in history underway, major attitudinal shifts are emerging. Interests are swinging from local to global, smart philanthropy is taking hold, and impact and alternative investing are going mainstream. As wealth shifts—globally and from one generation to the next—the influence of affluence will change.

Around half (51 percent) of those surveyed say compared with a generation ago, wealth is less easily attained or preserved today. Lack of communication tends to inhibit wealth preservation.

“Sometimes kids just have no idea how much money their parents have — their parents have grown up leading a modest lifestyle, they don't live extravagantly," says Ringham. “The last thing we would want is a child to be surprised and unprepared for the amount of wealth they've just inherited."

Taking the time to prepare the next generation through communication and strategic transfer of responsibilities can help ensure they have a concrete understanding of the values underpinning the family legacy.

Involving the next generation

Focusing on financial education at an early age is a key part of setting younger generations up for success, says Liz Jacovino, a wealth strategist with RBC Wealth Management-U.S.

“A lot of our clients' children haven't had the opportunity to get a basic financial understanding," says Jacovino. “If their parents were to pass away earlier than expected, those children could find themselves the immediate beneficiaries of a trust, having a significant amount of assets they'll have some responsibility for."

The New wealth rising survey found 39 percent of younger HNWIs in the U.S. believe parents have an obligation to leave an inheritance for their children.

This is why Jacovino always advocates for working with a client's heirs to ensure they gain an understanding of how a trust works, what the responsibilities are that come with being a beneficiary, what a trustee's role is and where an investment advisor fits in.

“All of that can be done without specific numbers," she says. “So if the inevitable happens much sooner than expected, they know their children have some level of education around their finances and frankly know who to call and who's going to help them."

Practice with purpose

Ringham points to beginner portfolios as ways to really lay the foundation for financial literacy, while also letting the heir establish a sense of autonomy.

“A common one is where parents open an account with their advisor in the children's names and start to gift assets into that account," says Ringham. “The advisor can start working with their children on understanding investments (and) how to diversify your portfolio."

Charitable giving is another way to educate adult children and younger generations on the family's wealth journey.

“Many of our clients will establish a donor-advised fund, which is kind of a simplified family foundation," explains Jacovino. “They can involve their children and/or grandchildren in choosing some of the charities they give to on an annual basis."

Such examples can act as a platform, not just for bringing the family together but for discussing family values while allowing the younger generation to communicate their own values and put them into action. And in some cases it can help soften the growing generational divide.

A new generation brings new perspectives

As adult children begin overseeing more of the family wealth, their views on wealth can diverge from those of the previous generations. According to New wealth rising, 52 percent of HNW respondents say their beliefs about wealth are very different from their parents. This feeling is strongest in the younger generations* - 57 percent responded that they felt that way, compared to older generations* (48 percent).

Signs of the divergence between generations are often not known until after the transfer of wealth. According to a survey by InvestmentNews, two-thirds of children leave their parents' advisors after they inherit the family wealth.

“Sometimes there's just a difference of philosophies from an investment style," says Ringham. “The children might be focused on an investment that their advisor wouldn't endorse for as much of their portfolio as the child would like."

Rather than letting the divide deepen, Ringham suggests opening up the channels of communication with a family meeting to explore any differing viewpoints.

Creating dialogue within families

A family meeting, Ringham explains, is an open forum for discussing the underlying process of how the wealth will be transitioned. The meeting can involve attorneys and other advisors alongside the family, or just the parents, children, and their financial advisors.

When that open forum doesn't exist, there's potential for emotional strife.

As an example, Ringham points to a situation where an inheritance is put in a trust rather than given outright to an adult child.

“If the child isn't aware of the rationale behind the why, they may be surprised or sometimes even think 'I can't believe [my parents] don't trust me,'" Ringham says. But there are many great reasons why the parents might have done that.

It might be because that adult child is in a high-risk profession and the trust helps protect the assets from creditors, for example. Or perhaps the family is using a trust that skips a generation so the adult child can live off other assets or income while preserving the principal and keeping it out of their taxable estate.

The ultimate goal for all parties involved in the process is the protection of hard-earned wealth, and bringing everyone along on that journey to help secure a family legacy.