The great wealth transfer is underway in America. Through 2045, Baby Boomers will pass down approximately $84 trillion to Gen Z, Millennials, and Gen X. But what constitutes a high-net-worth (HNW) inheritance? In the United States, that number averages nearly $750,000 per inheritor, but it can be much higher.
Owners of HNW estates typically monitor and amend their estate plans regularly. They understand that the responsibility of financial stewardship will ensure continued wealth for many generations. But what about preparing their adult children (inheritors) for this wealth transfer? How can parents help ensure the next generation stays on track?
Preparing the Next Generation
No matter what your family dynamic, relationships between generations can come with trust issues and a lack of communication. More than ever, high-net-worth individuals try to safeguard the assets their children will inherit through trusts. Often, they’ll collaborate with estate planning attorneys as well as investment or financial advisors to accomplish this. However, the next generation’s attitudes are shifting from local to global as alternative investing options become mainstream.
Learning Financial Responsibility
Many inheritors may lack a basic financial understanding, particularly if their parents pass away sooner than expected. In situations such as this, trusts may prove exceedingly beneficial. Instead of the inheritor coming into a sizable inheritance outright (and potentially subjecting it to poor spending and management), the trust, through its trustee(s), may limit spending and invest the funds in such a way to ensure long-term growth for the inheritor. Nevertheless, knowledge is power, and parents who are fortunate enough to proactively plan for the “great wealth transfer.”
Beginning the Process:
- Financial Education: Start by providing young adult children with the necessary financial education to understand basic concepts such as budgets, investment portfolios, risk tolerance, tax planning, and wealth management. Consider seminars, workshops, or personal discussions about handling money responsibly.
- Advisor Introductions: Connect your heirs with your legal representative and a certified financial planner before you are gone. Two-thirds of inheritors will leave their parent’s advisors upon receiving family wealth. However, understanding the HNW estate’s background and their parents’ financial situation, as well as their investment and legacy desires, may influence them as they identify their path forward.
- Strong Work Ethic: Encourage your adult children to pursue their careers passionately while emphasizing the value of hard work and accomplishment. Lead by example; help them understand that wealth is a tool that can enhance lives, not a substitute for ambition and purpose.
- Good Financial Habits: Help your adult children develop sound financial habits like saving, budgeting, and living within their means. Teach them about the consequences of reckless spending, credit card debt, and the importance of building long-term financial security. If you have an adult child who struggles with responsible behaviors or addiction issues, consider a plan to stagger their distributions rather than providing a lump sum inheritance.
- Involvement in Financial Planning: Encourage your adult children to participate in family financial planning discussions. They should understand the family’s values, goals, and strategies for wealth preservation, including any trusts designed to distribute funds at specific life stages. Invite them to create a financial plan of their own. Include discussions about the tax implications of inheritance to ensure your adult children understand the potential liabilities associated with estate or inheritance taxes and provide guidance on tax-efficient strategies for managing their wealth.
- Emotional Preparedness: Be prepared for pushback. No matter how much estate planning you accomplish, the experience of your children’s upbringing guides their reactions and future choices. Receiving a significant inheritance can be overwhelming, and the emotional challenges may require resources beyond standard financial education, such as counseling or support groups.
New Perspectives of the New Generations
Beliefs about wealth in younger generations are distinctly different from those of their parents. New financial goals and charitable aspirations between generations often don’t present themselves until after the transfer of wealth. This doesn’t mean HNW parents should stop trying to shape their children’s financial perspective. It may still provide the structure for making informed decisions to maintain financial success.
Consult With Your Estate Planning Attorney
The Elder Law attorneys at Mandelbaum Barrett PC are here to help if you have concerns about transferring wealth to the next generation. Generational differences are not inherently good or bad, and our team can offer an objective perspective to guide important family conversations. We can also identify numerous financial resources to prepare your heirs for their future responsibilities. With proper understanding, your heirs will be more likely to uphold your most closely held values and choices.