Financial Planning: How to Build Generational Wealth That Lasts

Post Written by: Kyle B. Beissel, CFP®

There is nothing easy about building significant net worth from the ground up; it can take decades of hard work, sacrifice, and discipline. But there may be one thing that can seem harder: ensuring your family holds on to that wealth after you’re gone to create generational wealth.

Research does not paint an optimistic picture. A 20-year study by The Williams Group found that most family fortunes don’t last. The data revealed only about one-third of families succeeded in retaining wealth into the next generation.[i] Of course, that leaves two-thirds regrettably eroding that family fortune rather quickly.

If your goal is to keep the legacy you’ve built in the family to help positively impact future generations through generational wealth, you should set up a strategic plan and proactively avoid the pitfalls that commonly cause this rapid loss.

Below are our recommendations to help protect the wealth you have worked so hard to build so it continues to benefit your family for many years.

Open up the lines of communication 

An excellent place to start is by looking at communications about the wealth you’ve accumulated and how your family tends to approach conversations about income and assets. In many families,  it can be a bit taboo to talk about the accumulated wealth. That silence can be a prime breeding ground for lack of awareness or understanding on how to approach and manage assets. Worse, not addressing it can lead to a lack of developing the skills necessary to keep that wealth intact down the line.

If that sounds familiar, you’re not alone. Research suggests that many parents are aware of the need to openly discuss their wealth, but few actually follow through. According to a North Carolina State University study, parents discuss general concepts like saving and spending but are keeping quiet about specifics of how they are managing and protecting their own funds. [ii] Those specifics include the status of family finances, income, investments, and debt. They also include things family members should be aware of, such as trustees of the funds, how taxes might affect them, and parameters around them.Not addressing these topics leaves family members to draw their own conclusions, which may be highly inaccurate.

So while it may feel awkward, it is wise to start these discussions as soon as possible to help solidify generational wealth. This way, your family’s money can be demystified and managed well. Most importantly, as children or other close family members age, they can start begin to develop a  sense of what it takes to build, protect, and maintain wealth.

Here are a few tips to get started:

  • Create a plan to have a conversation about assets at regular intervals (annually or more often as needed), so family members are informed and aware. Use these opportunities to explain family finances and bring the next generation into the decision-making process early.
  • Include discussions about the realities of wealth; address both the opportunities and the responsibilities that come with a significant inheritance.
  • Introduce your professional advisor team (wealth advisor, CPA, and lawyer)into family conversations to help develop the habit of making well-advised decisions from trusted sources.

Of course, many of these topics can be challenging to address with your close family members, especially if you’ve put it off. Still, it is critical for the preservation of the family’s assets in the future.

This is where the right financial advisory team can help. Professionals with deep experience, who focus first on listening to you and understanding your goals can help navigate these conversations. In the process, the conversations might become more comfortable for you.

Create a meaningful plan and vision

Along with opening up the lines of communication, it’s also best to begin communicating your vision and values about money.

Consider creating a family mission statement. Ideally, propose your own vision but engage the family in developing it further. This can help start integrating family members into the process of philanthropy and service early on. By letting heirs participate, they can become engaged in the process.

Then, look for additional opportunities to teach about stewardship and using family resources to make a difference, whether in your community, for educational or other future opportunities, and to protect your legacy to create generational wealth.

Once you’ve created a plan and vision and written it down, don’t just let it sit on the shelf. Integrate that family mission statement in other ways. Some families may choose to meet about their progress periodically, such as on holidays, to ensure that the family members stay engaged in their efforts to fulfill the mission.

Prioritize comprehensive financial planning

More planning, not less, is also an inherent part of making sure your wealth lasts.  Here are the areas you’ll want to be sure are covered:

  • Comprehensive financial planning is necessary to help appropriately manage risk.
  • Regular tax planning can help save taxes now and later, which is a critical part of wealth preservation.
  • Estate planning can provide you more control later by putting structures in place now.

Just as importantly, make sure whomever is helping you plan is qualified to give you the best advice possible for you. Look for the CERTIFIED FINANCIAL PLANNER™ mark to ensure you’re working with a professional with the expertise and experience to help you accomplish your goals. A quality financial planner that listens to your goals and can develop a customized plan just for you can be the ‘quarterback’ to help you manage all aspects of your assets and investments, which can also help lead to generational wealth.

Don’t forget about asset protection

Of course, all the open communication and financial planning in the world won’t replace the need for defensive strategies. You’ve got to be proactive in protecting what you’ve built. In light of that, part of your wealth preservation strategy should include asset protection.

As your wealth grows, unfortunately, threats increase along with it. Poor management by advisors or family members, future divorces, and lack of security can all pose a threat to the sustainability of your assets.

That’s why it is critical to take time to put asset protection strategies in place to help protect against common threats:

  • Your estate plan might benefit from setting up a trust to help shield assets from future creditors and to control use by your heirs
  • Prenuptial agreements can help ensure that family wealth stays with your family in the case of future divorces
  • A periodic insurance review by an independent financial advisor can help you identify and correct any areas where you may have exposure (the independence here is key as they are not tied to recommending any specific products that may or may not be in your best interest)

Secure financial education for the next generation

Along with these other elements, financial knowledge is vital so the next generation understands the importance of making careful financial decisions.

You may need to bring some creativity as you develop a strategy to ensure all family members are fully equipped on financial matters.  For example, in a trust, you could tie such education into conditions for receiving the inheritance. You can ask your financial advisor if they can provide options as well.

Whether formal or informal, your educational efforts should also address the issues of privacy. In a world where cyber-attacks are increasingly common, it can help to give specific, concrete examples to family members who may not be well versed on how to respond to questions about the family’s wealth and the safest forms of communication.

Also, heirs should be trained to help identify those who may be trying to get close to them as a way to access the family’s wealth. Yes, these are awkward topics, but important to protect that wealth through generations.

Get the right professional support team in place to help lead to generational wealth

The right financial advisory team can make this entire effort more manageable and more effective. First, they can help you handle all these tasks using best practices, which is particularly useful as the more wealth you’ve accumulated, the more complex it is likely to manage. Then, they can act as critical guardrails for your family both for you and as wealth transfers to the next generation.

But bad advice can be as harmful as other mistakes, so be sure to choose your professionals carefully:

  • Be sure the firm is a Registered Investment Advisor that acts in a fiduciary capacity at all times; otherwise, you may be getting product recommendations instead of actual advice.
  • Look for fee-only firms to avoid the conflicts of interest that come with product sales.
  • You’ll probably want a team that you won’t outgrow, so look for a firm that includes multiple disciplines, including financial advisors, planners, tax, and estate planning specialists.
  • Because expertise is critical, look for those who have earned top credentials, including CERTIFIED FINANCIAL PLANNER™ professionals, CPAs, and Chartered Financial Analysts®.

Once you have your team in place, connect those advisors with your heirs, so the relationship is developed and there is a comfort level in working closely with the team. Families should understand the role these advisors play in helping to protect and safeguard wealth. You want your family to develop the habit of consulting with these hand-picked professionals for advice on any significant financial decision.

Bottom Line

Unfortunately, statistics show the odds are stacked against a family retaining wealth in the long run. However, these six steps can put the knowledge and systems in place to help prevent that from happening and retain generational wealth.  There’s another benefit, too: these steps can bring your family closer by improving communication and focusing on shared family history and values.

Are you looking for help securing your family’s wealth for the future? Domani Wealth is a fee-only, independent registered investment advisory firm with more than 25 years of experience providing family-office-style services to help safeguard your wealth. Relationships are our focus, and our highly credentialed team offers a wide array of expertise to help your family preserve your wealth. Working with our team, you and your family members have a reliable partner to help you safeguard your financial future.

Contact us today at 855-855-5545 or info@domaniwealth.com to start a conversation!

 

 

[i] https://www.thewilliamsgroup.org/our-history

[ii] https://news.ncsu.edu/2014/04/romo-kids-2014/

 

 

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