Just as every parent is happy to see their kids take on greater responsibilities, there comes a time when those same kids also crave more independence. The catch, of course, is that the kids may not be learning what they need to be accountable as fast as their parents would like due to competing priorities and life stages.
This scenario plays out in every household, but the stakes are higher for high – or ultra high net-worth families. It’s not just worrying whether kids can build independent lives, but whether they’re financially equipped and mentally prepared to handle generational wealth.
That’s the sort of challenge Shelley Forsythe, Director of Family Enterprise Planning at BMO Private Wealth, and Rebecca Clark, BMO Wealth Management’s Director of Wealth Planning, help families work through. Typically, the process is a mix of educating different members of the family to learn what questions to ask, finding their voice to share perspectives, and ensuring everyone understands the purpose and vision for the wealth.
Here are some of the ways they support the next generation to protect their family’s wealth and keep it growing.
Establish a shared vision
There is a better chance for success when there is the opportunity for co-creation of a shared vision. Forsythe often sits down with generations of a family in the same room to talk about how they can share and preserve the wealth that’s been built up over generations. The financial piece is only one component, she explains; human capital, intellectual capital, social capital, and spiritual capital are other aspects she considers.
Human capital is building relationship skills and communication, alongside values, while intellectual capital involves sharing knowledge and fostering the life skills and personal development of family members, she says. Social capital, on the other hand, is ideally focused on the family working together in their community and through charitable endeavours, while spiritual capital zeros in on the deeper sense of purpose and vision, along with beliefs and cultural considerations shared by the family.
Forsythe’s point is that there’s more to wealth than money, it’s about promoting a sense of belonging in the family and working together, enterprise wide, as a cohesive unit. Often, families hesitate to bring the next generation into the conversation because they don’t know where to start and worry about creating entitled children, she says.
“I help them take a step back and get very clear on what their relationship is with money,” she says. As part of her approach, she’ll ask parents to create a script of key messages to explain what they see as the purpose for the family wealth, which will help determine the roles and responsibilities, as well as skill sets required to steward it forward.
But the onus isn’t only on the parents – it’s a shared responsibility. Their children may need to reset their expectations and demonstrate a willingness to step up, listen and learn.
Communication is critical
Actively listening to different perspectives is critical to communication, says Forsythe. “You can never have enough communication and it’s a continual process,” she says. For example, if you’re creating a trust for kids so they can share in the wealth earlier, this can be another opportunity to help educate them about the responsibilities of managing wealth.
It’s not optimal to be in a situation where a family member is shocked when details are shared about the family wealth, says Forsythe. Secrecy can lead to disharmony, creation of assumptions or perceptions which can impact your ability to educate family members on how to manage, maintain and grow the family wealth.
It’s important to invite family into the conversation, she notes, explaining that giving others a voice doesn’t mean they have a vote. By engaging them in the process, this can assist with empowerment and ultimately leadership. Still, getting buy-in from the kids can help build long-term trust, which is important if the goal is to make the wealth last generationally, she says.
Watch your spending
Ensuring the next generation has financial knowledge is a passion of Clark’s. If there is one thing potential beneficiaries should learn it’s that an inheritance shouldn’t be seen as a free ride. Not only because it creates a better relationship with money, but also because an inheritance doesn’t always go as far as some might expect.
“Kids often think the parents have more than they do,” she says. “They may not realize how much their parents are spending in the last decade or two of their life.”
Clark says that when she meets with the next generation, they often come with a laundry list of wants. She then presents them with a plan that takes these wishes into account and shows them they are at risk of running out of money when they’re older. “They think the money will go much further,” she says. “They need to be educated that while this money is going to provide you with ‘X’ in extra dollars per year of spending, there is a limit.”
In Clark’s view, overspending is one of the biggest threats to generational wealth. For instance, she’s met people who stand to inherit $2 million, expect to buy a $2 million home and think they’ll have money left over for things like travel. There’s also still a tax bill that has to be paid. “They’re spending the same dollars over and over,” says Clark. “There’s a little bit of a disconnect; they don’t realize how far it will go, or that it won’t go as far as they’re hoping.”
Watch out for common pitfalls
One way to build skills and competencies to protect the family wealth is to give kids a small amount of money so they can learn and practice managing it on their own. Establishing a relationship with a financial or investment advisor early on is integral to provide guidance and advice throughout this learning journey. A knowledgeable friend or family member with financial acumen can also serve as a useful sounding board, says Forsythe.
It’s not just about managing money or concerns about overspending, it’s also about planning ahead in case things go sideways. There’s budgeting and taxes. But in some cases, there’s also family law. For instance, if an adult child gets divorced, the agreements (or lack of an agreement) in place could impact whether those funds can stay within the family or be lost to a settlement.
For instance, say the adult child uses an inheritance to pay off a mortgage but then parts ways with their partner. In the blink of an eye, you could lose half your inheritance, notes Clark. It’s important to discuss the fundamentals of prenuptial agreements as one risk management option to protect the family’s assets. These agreements can even be put in place after marriage.
At the end of the day, it’s about ensuring everyone is in a good place to share and/or sustain the family’s wealth. “Parents typically want their kids to be financially responsible and independent before they consider tapping into an inheritance, especially if there are wealth continuity plans,” says Forsythe.
