What You Need to Know
- Many children within UHNW families don’t receive a solid financial education about the impact, expectations and responsibilities of wealth.
- Clients need to start early in educating children the value of money. They also should be included in financial planning meetings.
- Make sure your client's books are in order and children are aware of the financial set-up.
Growing wealth is one thing. Preserving and passing it down to the next generation while confidently knowing it will be maintained is something else entirely.
While many think that financial literacy is directly correlated to the size of a person’s bank account, I’ve found this not always to be the case. For more than three decades I’ve worked with hundreds of ultra-high net worth families and family offices across the country to help take care of clients’ personal financial administration needs and establish financial habits that they can share with their children.
I’ve found that many children within these families don’t always receive a solid financial education about the impact, expectations and responsibilities of wealth. As a result, they are not equipped to manage their inherited estate when the time comes.
Wealth is a wonderful privilege, and it can amplify both the joys and the problems of life, meaning that financial clarity and good communication are even more important. By having a better view into these financial habits, I’ve also found that advisors are much better equipped to provide counsel that is tailored to what these clients need.
Based on my experience helping manage these families’ cashflow and actively maintaining generational wealth, here are what I view as five key tips for passing on wealth to the next generation.
1. Encourage your clients to talk to their kids early about money.
Encourage clients to start conversations early, starting with the concept of a dollar. To a young child (or even many young adults these days), the difference between $150 and $1,500 may mean little if they are not familiar with what it takes to earn $150 versus $1,500.
If clients want their children to ultimately understand the value of their family’s wealth (and thus preserve it) they must first understand the value of a dollar.
Whether it be earning money through a chore system, or a part time job at a local store, a child will quickly come to understand that money comes from work, and time — one of our most precious resources.
So next time your client’s child wants the latest iPhone, they should be told just how many days of work and chores are required to earn that privilege. This will in time provide them with a solid foundation and respect for their wealth, and thus how to nurture it.
2. Provide a clear picture of what your client’s estate entails — and why it’s important to take daily actions to maintain it.
It’s important your clients understand that there is a real value in ensuring everyone in the family has a clear view of their wealth — as it can diminish faster than they might think.
Something as simple as understanding a minimum cost of living is important to explain to children. While the minimum cost of living for an UHNW individual may look very different from the average American, if that figure is not discussed, you’d be surprised how quickly unnecessary and skyrocketing expenses can make it difficult to meet those financial obligations.
This is even more important when you look at the “inverse compounding” effect of wealth transfer. While $100 million is a very generous amount to pass on to a child, that wealth can quickly fragment and diminish.
Once that child has a child of their own (or multiple), which then have grandchildren, that wealth can be quickly spread thinner and thinner. Coupled, often, with spending without earning, wealth can be rapidly depleted.