While parents from all walks of life may want to make sure their children make smart financial decisions to maximize their future inheritance, passing the torch often raises additional concerns for high-net-worth (HNW) families. One of their greatest concerns about transferring wealth to the next generation is that they have little practical experience or understanding of what it takes to manage significant wealth responsibly.
Before wealth changes hands, some high-net-worth families are turning to philanthropy to help the next generation learn how to manage it. These families see charitable giving as a natural avenue to start those conversations, while also providing a structured way to prepare heirs for the responsibility of managing significant assets.
Whether through a donor-advised fund (DAF) or family foundation, hands-on involvement in philanthropy allows the next generation to develop governance, financial oversight, strategic planning and decision-making skills in a real-world setting.
“Philanthropy can be one of the most effective and meaningful ways to help the next generation develop the skills and mindset required to steward wealth responsibly,” notes Danielle Robinson and Karen Sparks, National Directors of Philanthropic Advisory Services with BMO Private Wealth.
Here are four tips to help families take this next step.
Give the next generation actual responsibility
It’s best to learn by doing, or so the saying goes. But that means giving younger family members a real, rather than symbolic, seat at the table. For example, if the plan is to give them a certain amount of money from the foundation or DAF to disburse, don’t limit their choice to a list of your preferred organizations.
“The way I phrase it is, when you take the family to a restaurant, you don’t tell the kids what to order for dinner,” says Karen Sparks, National Director of Philanthropic Advisory Services with BMO Private Wealth. “You let them choose. If they can only choose what mom and dad want, there’s no agency.”
Of course, using philanthropy as a training ground shouldn’t mean younger family members are free from accountability. Asking them to explain why they want to give to a particular organization and what societal problem it helps solve can help them learn to evaluate their choices thoroughly and make well-informed decisions with large sums of money.
When getting family involved, Robinson stresses the importance of finding opportunities that make sense for them in terms of where they are in life. She explains that asking a 20-year-old with no experience to head up a foundation or manage a grants committee with 200 proposals coming in likely isn’t a great fit.
Let values evolve
Sometimes, as many as three or even four generations may be sitting around the table, which can lead to wildly different opinions about which organization to support. The goal shouldn’t be to pass down the older generation’s philanthropic priorities. Successful family philanthropy makes room for the family’s values and areas of charitable interest to evolve.
“One of the biggest mistakes families make is assuming the next generation will care about the same causes they do,” says Sparks. “The goal is not to replicate family values perfectly but to create a process that allows future generations to express their values in their own way.”
Robinson notes that each generation’s priorities often reflect the era in which they grew up. What appeals to older family members, such as cultural institutions, higher education and healthcare, may not carry as much meaning for younger members, who may see climate change or access to affordable housing as more pressing.
Regardless of the cause, she says, it’s crucial to let them make their own decisions. That means giving them a real voice in how some of the family’s giving is directed, while still asking them to explain their choices and the impact they hope to have. “If you really want generational wealth transfer and stewardship, you have to give a voice to that evolution,” she adds. “Meet folks within the family where they’re at.”
Choose the philanthropic structure that fits your family
It’s also important to be realistic about how involved the next generation can be when it comes to governance. A private family foundation requires more operational oversight, board administration, annual tax filings and investment decisions.
The earlier you can get family involved in a private foundation, the sooner they can learn to chair meetings, put agendas together and manage conflict, explains Robinson.
“There are families that specifically go the foundation route because they want to hold their kids’ feet to the fire,” adds Sparks. “You can’t just ignore a foundation. It must be administered.”
By contrast, DAFs offer a simpler starting point because the sponsoring organization handles much of the administration, allowing families to focus on grantmaking. Robinson and Sparks recommend that families using a DAF approach it with the same discipline as a foundation.
“When a donor advised fund reaches a meaningful size, families should approach it with the same discipline as a foundation,” says Sparks. “Purposeful family meetings, a shared mission and strategic granting priorities help create accountability across generations.” Robinson adds that this approach also ensures all family members have a voice in decision-making.
Conflict is normal
Philanthropy can provide a useful setting for learning and getting the next generation engaged in wealth decisions, but it’s not a fix for family conflict. Asking family to be involved in giving decisions works best when the family genuinely wants to be philanthropic and is willing to work together.
“Everybody talks about philanthropy as a tool to bring the family together,” says Sparks. “But if family’s not together in the beginning, philanthropy isn’t going to fill the gap.”
Like most family affairs, it’s possible not everyone will be on the same page when it comes to family philanthropy or that everyone will want to be involved – and that’s OK. In that case, Robinson and Sparks advise parents to engage those who are interested and leave the door open for others to join at a later time, rather than forcing everyone to participate.
If decisions become a source of conflict and division between generations, it may be worth exploring other arrangements rather than forcing a solution. Sparks recalls a private foundation set up by two brothers. While the brothers agreed on the purpose for those funds, after one of the brothers passed away, the surviving family wanted to go in different directions.
“In that case, the foundation’s assets were divided into two separate philanthropic structures, allowing each family to pursue its own granting priorities independently from each other, ultimately preserving family harmony,” she says.
Engage your financial advisor
If younger family members are not yet part of these conversations, your advisor can help you get started. Robinson recommends discussing their role in the family’s charitable giving during annual reviews. Philanthropy offers a practical “sandbox” for developing financial literacy and decision-making skills. It can be a more comfortable introduction to family wealth.
“Philanthropy gives wealth a purpose beyond itself,” she adds. “It turns family values into action and prepares the next generation not simply to inherit wealth, but to steward it with intention.”