Showing Grandchildren the Way of Sound Estate Planning

I find that no matter the value of a person’s estate, almost everyone would like to leave something for the grandchildren (or the children). But they don’t want whatever they leave to be wasted. Therefore, demonstrating sound Estate Planning is important.

Almost everyone knows the unfortunate statistics of poor estate planning. About 70% of family money is gone by the end of the second generation, and 90% is gone by the end of the third generation. These numbers deter people from giving, and many people assume these results are the way it has to be. They think there’s something about families and money that prevent wealth from lasting, except in a few situations.

It doesn’t have to be that way. There’s a simple reason most of this wealth disappears, and there are fairly easy estate planning steps to avoid this happening to your family.

In most cases, people who inherit or are given some money have no experience with that amount of money. They don’t know what to do, and as a result they do the wrong things. If you’re planning or hoping to leave some money to a younger generation, be sure thta your estate planning includes a learning process for the next generation. For example, they can begin with smaller amounts of money and manage it under someone’s watchful eye and guidance.

An approach that’s gaining supporters is to give early and give a share of some existing wealth. There are different ways to execute the strategy. When you have a family business or real estate, give a minority interest in it. You might have to set up a limited liability company, partnership, or other vehicle. Then, actually transfer an ownership share. You’ll still be majority owner by a wide margin, but the youngster also will own some of it.

You have to do more. One mistake people make is not telling the younger generations about the family’s wealth. Instead, you should let them know generally what you own and that they now own a share. Presumably, owning a piece of the operation will increase the youngster’s interest in it.

Then, you need to take the time at least several times a year to explain the business, show the youngsters around, and go over some decisions you’re making. Explain the history, why you started or bought the operation, and how it generates income.

You can take a similar approach with a small investment portfolio. Set it up and let the youngster make decisions or help make them.

There are several lessons you should try to get across in this process. One is that there is a difference between a lump sum or wealth and a stream of income. Many people learn the difference the hard way. They don’t realize that if they spend all the money inherited, they won’t have any next year. They also won’t even have the income to support all the things they purchased with the money. Instead, the youngsters need to learn that principal should be used to create income and only the income should be spent.

Another lesson this approaches can teach is patience. When people have a certain amount of wealth, they often think they immediately should have a certain lifestyle. They don’t realize that people with that lifestyle usually spend decades building it. They also don’t know that there are many people who aren’t able to support their visible lifestyles. They’re heavily in debt or otherwise struggling. It’s important for youngsters to understand time, compound interest, and patience. Telling them often isn’t good enough. But giving them an interest in wealth and helping them build it over time can be effective.

Some people set up these arrangements so that the youngsters can’t take income out or sell the property for some time. They learn patience by being forced to. This also teaches the difference between wealth and income.

Another approach is to give youngsters a little money and a project. For example, give the kids a budget, some parameters, and have them plan a family vacation. Or they can decide which charitable donations the family will make for the year. If siblings are told to work together, these types of projects also teach teamwork and compromise.

The point is that even the basics of wealth management, budgeting, and income planning aren’t taught in school. Parents and grandparents have to teach these lessons to the following generations. You can’t be silent on the subjects and expect the following generations to suddenly know how to manage wealth of any amount successfully.

RW July 2013.