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Are My Heirs Prepared To Handle Our Family Wealth One Day?

Plum Pointe Wealth Management President Brian Dunckley discusses some practical ways you can support the successful transfer of wealth across generations.

Watch the video or listen to the full audio episode here or on your favorite podcast app.

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THE CHALLENGE OF WEALTH TRANSFER

We have an enormous generational wealth problem growing larger by the day. By all estimates, we are on the precipice of the largest wealth transfer in history, with Bank of America estimating that $72 trillion of wealth will be passed down to heirs over the next two decades. At the same time, a survey of high-net-worth individuals by U.S. Trust found that 64% have disclosed little to nothing about their wealth to children.

Unfortunately, unprepared heirs of any age are at risk of losing wealth through mistakes, lack of knowledge and lack of preparedness. The adage “shirtsleeves to shirtsleeves in three generations” describes the inability of children and grandchildren to manage wealth passed down to them, threatening the continuation of family legacies.

The latest installment in the Plum Pointe Wealth Management video series explores the key reasons for the loss of family wealth across generations and offers crucial steps to ensure a smooth and successful wealth transfer, safeguarding not only financial assets but also family unity.

CHALLENGES OF GENERATIONAL WEALTH: TOP ISSUES FACING FAMILIES

The erosion of generational wealth can be caused by the following:

Lack of Preparation: Heirs who haven't been equipped with the knowledge and skills to manage wealth responsibly may make poor financial decisions, leading to significant losses. Without proper guidance, inherited assets can quickly dwindle.
Unrealistic expectations: Heirs who haven't been involved in discussions about the source and limitations of the wealth may have inflated expectations about their lifestyle and spending habits. This disconnect can lead to irresponsible financial behavior and ultimately, the depletion of resources.
Absence of financial literacy: Financial literacy is a crucial skill that empowers individuals to make informed financial decisions. Without an understanding of basic principles such as investing, saving, and responsible spending in addition to exposure to more advanced principles such as tax management and navigating legal structures, heirs may struggle to manage their inheritance effectively.

BEYOND MONEY: THE RIPPLE EFFECT OF BUSINESS LOSS

The consequences of unprepared heirs extend beyond the loss of financial assets. For families owning businesses, the stakes are even higher. Children who haven't been groomed to take over the reins of the family business may lack the necessary leadership skills and industry knowledge. This can lead to mismanagement, ultimately resulting in the decline or even closure of the business.

The repercussions of a failing family business go beyond the financial implications for the heirs; they can have a devastating impact on the entire community. Businesses often employ local residents and contribute significantly to the economic ecosystem. Their closure can lead to job losses, reduced tax revenue, and a weakened local economy.

FRACTURED FAMILIES: THE HIGH COST OF POOR COMMUNICATION

Perhaps the most tragic consequence of a poorly planned wealth transfer is the potential for family conflict. Unclear communication regarding inheritance plans and a lack of preparation among heirs can create a breeding ground for resentment and discord. When siblings or other family members have conflicting expectations or limited understanding of the inheritance process, disputes can erupt, fracturing family bonds.

Three E's of Wealth Transfer PDF

THE THREE E'S: ENGAGING, EDUCATING, AND EMPOWERING THE NEXT GENERATION

Wealthy families do not need to be susceptible to these challenges. By taking proactive steps and fostering open communication, families can navigate the wealth transfer process effectively, ensuring financial security for future generations while preserving family unity. The key to successfully navigating wealth transfer is clear communication. At Plum Pointe, we recommend that our clients focus on the three E’s — engaging, educating, and empowering heirs.

Engaging Your Heirs

Start early: It's never too early (or late) to begin conversations about money matters with your children.
Connect on their level: Tailor your communication to their age and interests.
Active participation: Encourage their involvement in the process as they mature.

Educating Your Heirs

Build a foundation: Provide a basic understanding of financial concepts like saving, investing, and the value of money.
Continuous learning: Adapt the complexity of financial topics as their knowledge grows.
Address challenges: Be prepared to answer their questions about trusts, investments, and your wealth management strategies.

Empowering Your Heirs

Age-appropriate responsibilities: Gradually assign tasks that allow them to practice financial decision-making.
Build confidence: Provide opportunities for them to learn from their experiences.
Transparency and communication: Openly discuss your family values and how wealth fits into your overall goals.

Actionable Steps Across Different Age Groups

Ages 7-8: Introduce basic money concepts like allowance, budgeting, and saving for future goals.
Teen Years: Discuss responsible spending habits, credit card use, and investment options like Roth IRAs.
Young Adults: Involve them in financial planning discussions, introduce them to your wealth advisor, and encourage them to take an active role in managing their finances.
Late 20s and 30s: Prepare them for inheriting wealth by discussing family wealth structure, trusts, and estate plans. Regularly communicate your wishes and expectations to minimize future conflict.

PREPARING YOUR FAMILY FOR WEALTH INHERITANCE

Honest and transparent conversations about wealth are essential. Parents should discuss their financial goals, estate plans, and expectations with their children early on. This ongoing dialogue helps heirs understand the source of the wealth, its limitations, and their potential roles in managing it. We recommend having annual family meetings for the purpose of reviewing family wealth plans.

For families owning businesses, a well-defined succession plan is crucial. Identifying and preparing potential heirs to take over the leadership roles ensures a smooth transition and minimizes the risk of closure upon the transfer of ownership.

Seeking professional advice from a financial advisor or wealth manager can be invaluable. These experienced professionals can provide personalized guidance on wealth management strategies, estate planning, and tax implications.

By following these steps, families can overcome the challenges associated with wealth transfer and create a legacy that extends beyond financial assets. Through open communication, proactive planning, and a commitment to financial education, families can ensure a smooth transition of wealth, fostering financial security and preserving family harmony for generations to come.

If you are thinking about how to best prepare your family for a successful transfer of wealth, Plum Pointe Wealth Management can help. Give us a call to set up a free consultation today at 401-228-8258.

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