Money is an uncomfortable topic for many wealthy families. Parents may delay speaking about finances with their children for a multitude of reasons including, keeping control of their personal information and not wanting their kids to brag about their success.
But keeping your finances a secret can have detrimental effects on your children and grandchildren – especially when it comes to estate planning. There are several types of issues that may arise by not sharingand educating the next generation.
Firstly, your children may not understand how to deal with their sudden fortune. If unprepared they may find themselves not knowing the difference between stocks and bonds or safe versus high-risk investments. This may leave them reliant on financial advisors or wealth managers who may not have aligned interests or fully understand their goals.
Secondly, your child may become vulnerable to someone determined to get his or her hands on their inheritance. It could be an old friend with a “can’t lose” investment idea or a new boyfriend / girlfriend whose primary interest is the dollars, not them.
But the biggest risk may be negatively changing your child’s outlook on life. After inheriting a fortune, they may lose his or her drive to study or work towards a professional or business goal. Imagine if they are the next Steve Jobs and the wealth put out that fire of creating something new. It could also result in a change of lifestyle such as partying which could lead to issues of alcohol or substance abuse.
To avoid these problems, we recommend that you should sit down with your children and grandchildren. A well prepared discussion around your financial status and estate plans can help reduce many of these risks. Slowly let them understand how much wealth they will inherit, the implications and talk about the issues they may face in the future. This should not be a one-and-done conversation, but rather the start of an ongoing dialogue, which should continue in family meetings. You may decide that your children need to learn about the different types of assets in your portfolio, or concepts like diversification, volatility and liquidity. We believe there is benefit from their getting to know the professionals in your family office as well as any outside advisors related to your wealth.
A discussion around how you plan to distribute your fortune is an important factor to help reduce the risk of a divisive family feud or sibling rivalry in the future. One example could be the creation of a trust for one or more of your heirs, enabling those assets to provide income on a monthly, quarterly or annual basis. As we can’t forsee how our children will develop and how external influences may impact them, this approach might be a manner to avoid some of the issues highlighted above.
In some cases you could discuss the power of philanthropy when discussing your inheritance. Rather than a life of leisure, your heirs could use the fortune to make a difference in the lives of those less fortunate. This may provide them with a new personal goal and motivate them to think of others, as well as themselves.
In summary, having an open discussion about inheriting wealth can go a long way toward leaving your family fortune in good hands with future generations.