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Financial Planning > College Planning

A Gameplan For Successful Transfers Between Generations

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As a financial services professional, you already know that the high net worth market is exploding. According to the 2006 Merrill/Cap Gemini World Wealth Report, households with a net worth of $30 million-plus are expected to be the fastest growing segment of wealth, rising 6% to 9% per year. Yet, there are fewer professionals in our industry today than ever before.

As a result, there is a tremendous opportunity to reach out to clients to ensure their assets are successfully passed on to children and grandchildren. This requires more than just looking at investment rates of return and generation-skipping issues and planning for the transition of estate and life insurance documents. To create a lasting legacy, you should be planning for a number of generations.

The first, and perhaps most important, question to ask any client is: What are you doing on a proactive basis to increase the likelihood that your children and grandchildren will be outstanding stewards of your wealth?

Paris Hilton syndrome

We have all seen examples of what can be called the “Paris Hilton syndrome”–young socialites from wealthy families who burn through their families’ wealth–in the tabloids and on television. In fact, our culture celebrates and rewards such behavior. Just look at the ad campaign for a 2003 TV documentary on Hilton, “Paris and (sister) Nicky … globetrot like CEOs, rage like rock stars and ooze cash like ATMs…”

This demonstrates that the apple can, indeed, fall far from the tree. It’s doubtful that Paris’ great-grandfather, Conrad Hilton, was hoping his heirs would be known for their lack of financial discretion when he built the Hilton hotel empire decades before. I would wager that it’s not the legacy he intended.

Ultimately, creating a legacy is more than passing on dollars and cents; it’s about passing on dollars and sense. It’s about passing one generation’s knowledge, wisdom, experience and values onto the next … and the next. It’s also about the difference between a transfer and a gift.

A transfer is a gift without context to it and brings with it the perils of entitlement. A gift, on the other hand, is a transfer that has meaning, vision and values attached to it. It can be a source of empowerment. Rather than just money, it is a potent combination of money, knowledge, wisdom and experience. As a result of these intangibles, the tangible (i.e. financial assets) are more likely to be around for generations to come.

Legacy planning also encourages and enables seniors to manufacture experiences for their children. As any good parent knows, providing children with the opportunity to fail is one of the greatest gifts that can be given. Failure gives children opportunity to learn for themselves about what works and what doesn’t.

A fictional family

To see how effective this approach can be, consider the fictional Smith family. This highly affluent clan consists of not only Mr. and Mrs. Smith, but also 3 children. The household has a net worth of $150 million.

Rather than just allow such a large amount of money to drop in the laps of the children, the elder Smiths hope they can increase the odds of their children gaining the tools needed to become outstanding stewards of wealth by providing them with an incredible opportunity to fail.

Each of the 3 children, upon their 30th birthday, is given $300,000 annually for 3 years with the following stipulations:

(1) They must interview and select a financial consultant with whom they are comfortable. After the consultant is hired, he or she would be introduced to the father.

(2) They must work with the consultant to develop financial recommendations. Once the child implements the plan, he or she would review with their parents to discuss their choices and the reasons behind them.

(3) The children are to give their parents yearly updates and share at an annual family meeting what they did well, where they failed, and what they learned. This allows each of the siblings to learn from the others’ experiences–good and bad.

In addition, the three siblings are to come together each year, with the parents in the room, to discuss how and where each would allocate $50,000 from a previously established family foundation.

Manufacturing an experience

What Mr. and Mrs. Smith have successfully done is manufacture an experience. And while $300,000 may sound like a lot to most Americans, it is a relatively small amount to someone with $150 million.

The lessons learned from the Smiths don’t apply only to the ultra-affluent. These are principles that can be taught regardless of financial status or age. For example, our children learned these lessons as youngsters–and continue to learn them to this day.

As children, they were given a monthly allowance of $4. However they weren’t allowed to blow it all on candy or toys. Instead, $1 was earmarked for a long-term savings goal of their choice, such as college; $1 was earmarked for a short-term savings goal, such as a new baseball cap; $1 was to be used for the charity of their choice; and $1 could be spent on anything they chose.

It’s a simple illustration to be sure. But then again, creating a long-lasting legacy isn’t as hard as we often make it out to be.


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