In conversation with clients we sometimes hear worries about how their children would deal with the legacy left to them. There is an old saying about dissipating inherited wealth: The first generation earns the wealth, the second generation builds it, and the third generation spends it. This is specifically the case in families of business owners. There are only 3 percent of all family businesses operating at the fourth-generation level and beyond. This does not have to be your family story. There are steps to take to inform and impower your beneficiaries.
Talk to children early about money. Start with the concept of $1. Most children and even young adults have difficulty distinguishing between $100 and $1,000 especially if they don’t understand what it takes to earn $100 versus $1,000. Start by having kids earn their allowance through chores or a part time job. Some concepts to teach them:
- money comes from work and it is finite: the Value of Money. There is a limited amount and wealth can diminish faster than they might think. They need to understand the minimum cost of living from their family’s perspective and how quickly spending without earning can deplete wealth.
- the ability to buy larger things comes from savings (not from credit cards)
- how to track and plan their spending.
Give children responsibilities. this provides insight into what it takes to manage wealth.
The money they make from their chores will teach them how many days it takes to buy an iPhone or other “needed” item, i.e., designer clothes, sneakers, concert tickets, etc. They will have to make choices and get to understand on what values the choices are based.
- Teach them how to use their money earned from doing chores. A good rule of thumb is 1/3 to spend, 1/3 to save and 1/3 to doing something positive and productive for the world. This could be donating to charity, helping someone in need or even putting their 1/3 towards a positive business idea.
Starting at any age is better than leaving it up to chance and “shirtsleeves to shirtsleeves”.
Have financial planning conversations with your children, instill a goal-oriented and planning mindset at an early age. Speak to them about why the family has wealth and works so hard to maintain it. Discuss the true purpose of your family’s wealth. Continue the conversation by asking “what do we as a family want in life? Do we want to take more family vacations, buy a second home, donate to a worthy cause? What makes us happy and fulfilled in life?
Make sure your children/young adults know who is managing the family assets and how to reach them should the worst happens. They should know where your current will is kept (hopefully not in a safe deposit box) and who your estate attorney is and their contact information. A family meeting spelling out how your estate is divided, numbers are not important, just who inherits what and why and what goes to charity, can prevent family rifts down the road.
Anja & Clare
