Recent data suggests that 70% of generational transfers of wealth fail. What does that mean? That means that most of the time the wealth that you spend your entire life creating, growing, and preserving will be gone to the wind a few short years after your death.
Why? There are a multitude of contributing factors resulting in the loss of wealth after an inheritance. Failure to properly plan for the orderly transfer of your estate is a big one. You’d be surprised to know how many people never bother to write a will or create a trust. A result of this is can be an avalanche of estate taxes, fighting among heirs, and legal fees out the wazzoo.
Uncontrolled spending is almost a cliche, but it’s still incredibly common. The concept of living off the dividend income of a lump sum just never occurs to people, much less simply not touching the principal or interest and letting it grow.
The bottom line is that the potholes people hit when they inherit assets or cash seem to be as numerous as unique as each person on the planet, but in reality they tend to be recognizable and predictable.
So the question is: how do you avoid them? I have 5 suggestions to help you do what very few families seem to be able to do, namely, pass on wealth to the next generation successfully and productively. Remember, only 30% of families master this task, and even fewer hand off substantially the same amount of money or assets to the third generation. That’s the real hat trick, and that’s where Old Money really begins.
But you’re ready to be an OMG (Old Money Guy or Old Money Gal). Half of getting there is preparation. Here’s the short list of concepts to get your pretty little head around:
- The Importance of Financial Literacy. You must have a fundamental understanding of how money works. You have to understand why credit card debt is a bad idea. You should have a budget and a savings plan. You should consider your insurance needs and plan for the future. Furthermore, you must educate your children so they understand these same fundamentals. Why? Because you’re going to hand the (money) ball off to them at a certain point in time in the future. It needs to be in competent hands. Planning is not just for the very rich: planning often makes one very rich. Note: you may have advisers, but you never simply hand off your financial affairs to an “expert”. It’s your money; it’s your business. You can never know everything about investments, but you should have a grasp on the fundamentals.
- The Role of Money. You and your children need to understand the role of money. You need to know what it can and cannot do. Money is not something to show off with or brag about. It is not something to use as you try to control others. It is something that, used properly, can provide you and your family a certain measure of security. More importantly, it is possible that money can provide you with options: do you want to get an education? Travel? Pursue something creative? Live abroad? Money, properly managed and intelligently used, can help you do that. Notice I have not said, nor will I ever say, Money can help you buy that. You don’t want to buy things; you want options and opportunities to do things.
- The Nobility of Work. No matter how rich you are, you work. Your children go to school, graduate, and go to work. There’s no living off the fat of the land. There’s only honoring your ancestors with effort and vision. Work does several important things: it contributes to self esteem, independent of money; it gives meaning to life; it teaches the life lesson that work is what creates wealth; and, most pragmatically, it preserves existing capital and assets by encouraging heirs to live off of what they earn, not what they’ve been given.
- The Power of Unity. The family unit is the most important element in upward mobility and in preserving what you’ve accumulated and accomplished. The members of your family need to understand that you have goals and dreams for the future, and that includes their dreams and their future. When everybody gets on the same page, it’s amazing what can be accomplished. Make plans, take action, be supportive, and celebrate when you reach your goals.
- The Necessity of Values. You have to articulate and adopt certain Core Values for yourself and your family. You have to communicate those values to your children. (I talk about these Core Values in The Old Money Book.) The bad news is that your children will probably ignore most of what you say. The good news is that your children will probably watch everything you do. This should give you an idea of how to communicate your values, i.e., walk the walk before you talk the talk. If you properly instill these common-sense values in your children by setting a good example, you have a chance that they will be good steward of whatever legacy you leave them. If you don’t, they probably won’t.