Preparing the next generation for wealth

Financial education and clear communication of your goals can help you leave a positive legacy.

For many affluent parents, few things are more satisfying than knowing their wealth can give those they love a financial head start in life, the freedom to pursue education or a dream career, and possibly, a measure of security for later.

Yet, when children come into money before they’re ready, temptations may be overwhelming. Without proper financial education or controls, money that was intended to be used for education or housing might go for a fancy car or to friends seeking investors for unsound deals. Other heirs, out of generosity, may simply give away more than they can afford.

In fact, The Ohio State University’s Center for Human Resource Research reports that heirs researched as part of a long-term study spend, lose, or give away nearly half of what they inherit^†.

Even if the money survives from one generation to the next, a family’s wealth transfer may not yield the positive results envisioned. Unfortunately, there are countless real-life scenarios wherein wealth that is meant to last generations with good planning is still subject to younger family members who are prone to reckless spending and poor life decisions. Preserving the values that enabled the founders to create the wealth is a critical component for long-term planning success.

This scenario may play out more frequently as aging Baby Boomers pass on, leaving an estimated $84 trillion to heirs through 2025^‡. The following considerations could help ensure that the wealth you’ve created not only survives, but also inspires the best in future generations.

Start to educate about money and values early

Parents are children’s first teachers, and with money, children often learn best when starting young. By first grade, when they're learning basic math, start teaching them about spending and saving.

One teaching method is to provide each child with three piggy banks: one for charity, one for personal savings, and the third to spend. It’s a good lesson that you can’t spend everything you have. During adolescence, progressively larger allowances can be tied to jobs around the house or volunteering. A good way to communicate is by example. If your kids see you making careful, deliberate spending decisions, they’ll be more likely to adopt that behavior.

Philanthropy can be an excellent teaching mechanism, especially when practiced as a family. For families with private foundations, involving the children and even letting them choose some causes to support can instill a sense that wealth involves responsibility for others.

And consider donating time as well as money. Volunteering together can help develop a sense of shared purpose, and it communicates the importance of living according to your values.

Another valuable lesson involves learning from mistakes—especially as children enter high school and college and begin to control more of their own money. Some parents shelter children from any sort of failure. Letting them deal with their own excessive smartphone bills or running out of cash after overspending could offer long-term rewards. Children who understand the consequences of financial mistakes may be less likely to make them on a larger scale later on, when recovery could be difficult or impossible.

Establish your own legacy goals

As you teach your children financial responsibility, think about your own legacy, the amount and how you’re planning your wealth transfer, both during your lifetime and in your estate. The more specific you can be, the better. For some parents, a legacy means entrusting the next generation with significant funds from the time they reach adulthood. For others, it may mean help with education, buying a house or starting a business and delaying outright inheritance.

A lot of clients struggle with the questions of how much is too much and what beneficiaries will do with an inheritance. Well-meaning gifts or bequests can backfire emotionally, dulling a recipient’s ambition and drive, or even engendering feelings of guilt or failure when the money runs out. They don’t want their child to be a ‘trust fund baby’ who never develops a work ethic. On the other hand, they want them to have something to fall back on.

For some, the answer lies in tying gifts or bequests to positive behaviors. I’ve seen situations where, by age 25, the child has to have graduated from college or a vocational school, started a business or held full-time employment for a specified time period. In addition, not every beneficiary may be ready to handle an inheritance at the same age as their siblings. It’s not unusual for planning to be tailored to the needs of individual beneficiaries. Once you’ve defined your goals, you can look for strategies to help accomplish them.

For example, you might consider a trust that would kick in only when a child reaches one of these milestones. Of course, attempts to oversteer children into certain careers or lifestyles can also backfire when your vision of their future conflicts with theirs. It’s a delicate balance. The key may be to emphasize core financial values such as education and financial responsibility, while still giving your children the flexibility to follow their own paths.

Communicate your intentions

Once your goals are in place, don’t keep them to yourself, though exactly how much you share about the specifics of your wealth depends on what you’re comfortable with and the age of your children. According to a CNBC Survey, 31% of surveyed parents never speak with their children about finances^¶. While such conversations can be difficult, silence may lead to greater problems down the road.

I see a lot of conflict among siblings after parents have passed away. Once you’re gone, you’re gone–nobody can ask you your motivations or your philosophy around finances and wealth planning. They may end up in arguments that can permanently damage relationships. Formal family meetings can be an excellent way to share your plans, especially after your children have grown up and moved away. I would suggest meeting at least biannually, since life, health, and financial conditions continually evolve. Some families choose a time when they’re gathered together, like a holiday to hold a meeting while others like to keep it separate from family gatherings to focus only on the task at hand.

Your Huntington Private Bank advisor can help you organize and even facilitate meetings. Open dialogue is the key to success. They can be the financial moderator, and when things start to go off course or get emotional, they can help keep the conversation focused.

Your advisor can also help you assemble a team of professionals, including financial planning and wealth management specialists, an attorney, a tax specialist, and others, to help ensure that your legacy plans work smoothly with your other financial needs. In the end, it’s not about controlling your children’s future or denying their desire to make their own choices. Rather, it’s about instilling a sense of responsibility that they are part of a larger tradition. It means understanding that they should stay true to the values they’ve inherited and pass them on to future generational wealth transfers, so the legacy continues.

Getting the advice you may need

Knowing that the next generation will responsibly manage a significant wealth transfer can give you peace of mind. But to get to that point, you may need a team of professionals to help better ensure your legacy is wisely handled. To learn more, please contact your Huntington Private Bank team to see how we can help or find a Huntington Private Bank Office near you.