Archive for September, 2018

You’ve Successfully Managed Your Wealth–What Happens Next?

Posted by Rachael E. Bator, CFP®

Multi-Generational Wealth Planning for a Secure Family Legacy

The first generation of wealthy families can face an array of new challenges when learning how to navigate their lives with their wealth, regardless of how they came into that wealth.

Personal beliefs and biases are generated and reaffirmed throughout one’s life, especially when passed down from the prior generation, and many are forced to redefine their relationships with money when their financial situations drastically change. Some of these key challenges include:

These challenges can take considerable time and energy to resolve, which often deters people from tackling them at all. However, there’s a good argument to be made for resolving these challenges early and effectively, as another primary challenge that is typically presented is repeating a successful family wealth management process with the second generation.

A Little Education Goes a Long Way

No matter the level of wealth, parents’ conversations with their children about money can vary widely–some stick to the same lessons they were taught and lead by example, whether it’s saving as much as possible or living paycheck-to-paycheck, or somewhere in between; some have tried the save-spend-donate jars; some have avoided the conversation altogether.

For wealthy families, empowering the second generation by involving them in the planning process, and giving them the tools needed to make their own decisions, are crucial components to carrying out a legacy.

Estate plans for wealthy families are usually complex–but building knowledge with simple concepts can be a great way to start (or continue) conversations about wealth with the second generation. Budgeting, investment and estate planning basics are all important stepping stones leading to more significant discussions around the decisions the first generation has made. Furthermore, establishing their own estate planning documents and making decisions around their own legacies will feel less overwhelming for the second generation if they already have some experience with it from the first.

As no two children are the same, there is no right or wrong age to begin these discussions–the earlier, the better! If the idea of sharing your financial picture with your children is overwhelming, a trusted advisor may be able to help. Encouraging your children to share their goals, and to voice their opinions, questions, or concerns, will help them feel involved and empowered throughout the process. In fact, it may even help you to build your legacy together with them as you discover common objectives and priorities.

Creating a Philanthropic Legacy for Your Family

In a recent study conducted by Fidelity Charitable, 29% of millennials surveyed (those born between 1981-2000) stated they were “very optimistic” about philanthropy’s ability to solve the issues most important to them. This number is almost double compared with only 15% of Baby Boomers (those born between 1946-1964).

Of the groups donors view as having the most potential to develop solutions and create the changes necessary to solve problems in the future, nearly half of millennials surveyed identified non-profit organizations as having the most impact; more so than public-private partnerships, individuals, social enterprises, and even the government.

For many wealthy families, leaving a charitable legacy behind is a major component of their estate plan – and considering the priority millennials tend to place on charitable giving, it may be a great way to engage the second generation when planning a philanthropic legacy. It’s important to keep in mind that generations may prioritize different charitable causes–and, according to the Fidelity Charitable study, they may also follow different giving trends (such as technological advances, alternative forms of giving, and increased opportunities to connect with peers about giving) which may change how a philanthropic legacy is carried out.

The good news is that there are a number of different avenues a family can take when deciding to make gifts to charity. While private family foundations are popular with high net worth families, donor-advised funds are also gaining ground in the charitable giving space. Family foundations tend to operate according to a mutually agreed-upon mission statement created by the family that guides their charitable activities.

With a donor-advised fund, individuals can set up a charitable giving account with a public charity (like Fidelity Charitable or Schwab Charitable) and make grant “recommendations” to the custodian for organizations the individual supports, using funds in the account. For families with different charitable planning objectives, donor-advised funds can be an efficient solution allowing all family members to support causes they care about.

Investing for Their Future, and the Future of the World Around Them

Along with taking an active role in the first generation’s estate plan (as a trustee, an executor or durable power of attorney, or both) and charitable legacy, another tenet of the second generation’s responsibilities will likely involve investment decisions and asset management. In line with their desire to enact change in their communities and around the world through charitable giving, millennials (and corporations alike) have shifted their investment focus to incorporate impact-investing strategies. More families than ever are looking to incorporate their investment portfolios in their legacies.

Socially responsible investing (“SRI”) focuses primarily on negative screening (such as avoiding investments related to firearms, fossil fuels, or tobacco), while its newer counterpart, environmental, social, and governance (“ESG”) investing takes factors into account that aren’t traditionally included in financial analysis, but may have relevant financial qualities.

Said another way, more and more investors are using their portfolios to support companies that have solid corporate structures, but also conduct their businesses using responsible policies that positively impact employees, the environment, and even their communities.

Involving the Second Generation is a Big Step Toward a Secure Family Legacy

Having financial conversations with your children or other family members can be difficult, but it’s necessary for your heirs to understand your goals for your wealth and family, and for them to express their desires as well.

Ultimately, you will have more peace of mind knowing you and your heirs have an understanding of the direction of your wealth. Your financial advisor can help facilitate these types of conversations, and work with your estate attorney and tax advisor to maximize your wealth over generations through proper management.

Allowing the second generation to participate in the investment management process by incorporating their values and objectives can help them to begin feeling accountable and responsible for the family’s wealth, and that the potential impact of their decisions is a reality.