Family Wealth: How to Engage the Next Generation?


The family wealth, which is transferred from one generation to another in the US, has reached unprecedented levels. It is estimated that each generation leaves about $3.2 trillion to its heirs. One of the reasons the size of inherited property is so large is the Tax Cuts and Labor Act, which was passed in the US a few years ago. This law increased the tax exemption. This exemption has the potential to change demographics on the overall wealth spread of this country.

Currently, you can bequeath $22.8 million to someone without having to pay any taxes at the federal level. However, under the old rules, such an inheritance would be associated with a relatively high tax burden. Tax changes and the huge amount of assets moving between generations have overshadowed the dynamics of this process. Both statistics and experience show that very wealthy families who try to hand over property to heirs can be plagued by problems related to family trust and lack of communication. According to a survey conducted by The Economist Intelligence Unit, 75% of very wealthy respondents say it is now more important than ever to secure their assets for the future. This survey focuses on very wealthy individuals, their adult children and high-income individuals living in the United States, Canada, the United Kingdom, China, Hong Kong, Singapore, and Taiwan.

The survey examines the future of these individuals' assets, including where and how the asset will be invested in the future. As the largest transfer of wealth in history is currently taking place, there are also major shifts in attitudes. Interests are shifting from local to global, philanthropy is being promoted, and impact and alternative investing are coming to the fore. As wealth shifts, so will its impact. About half of those surveyed say that compared to the past, it is now much easier to own property to acquire and maintain lack of communication in the family, however, tends to hinder the preservation of property. It is quite common for children to have no idea how much money their parents have, as they do not live an extravagant lifestyle. The worst thing that can happen if the child is not ready to inherit a larger amount of money. Therefore, it is necessary to set aside time to prepare for the next generation. Communication and strategic transfer of responsibility can help the younger generation understand the values underlying family assets.

Involvement of the next generation

Focusing on early-stage financial education is a key part of preparing younger generations for success. Many children of wealthy parents never had the opportunity to receive any financial education. If their parents died earlier than expected, these individuals could become owners of significant assets for which they are responsible from day to day. A survey titled "The Rise in New Wealth" found that 39% of younger, very wealthy individuals in the United States believe that parents have a certain obligation to leave a certain share of the inheritance for their children. Investment advisors are therefore increasingly pushing for early cooperation between the two parties and an understanding of each other's roles and responsibilities. All such preparation can be carried out even without specific numbers. If, by chance, children get to the property much earlier than originally expected, they already have some basic education about their money and know who to call.

Preparation

Beginner investment portfolios are a great way to truly learn the basics of financial literacy while leaving heirs feeling free. Quite often, very wealthy parents open investment accounts with their financial advisors on behalf of their children and contribute to them. The counselor can start working with their children and teach them how to diversify the portfolio wisely. Donating money to charity is another good way to educate adult children as well as younger family members about what to do with the money. Many very wealthy individuals set up simplified versions of foundations through which their children or grandchildren can choose the charities to which the family will contribute in a given year. Such examples can serve as a platform for discussing family values, allowing the younger generation to communicate their own values and put them into practice. In some cases, these acts may lead to a reduction in the generation gap.

The new generation also brings new
perspective

When the adult children of very wealthy individuals begin to oversee the greater part of the family property, it may happen that their opinions on the property will differ from those of previous generations. 52% of the very wealthy respondents to the survey said that their opinions and beliefs about property differed significantly from those of their parents. This feeling is much stronger in younger generations. Signs of differences of opinion between generations often show up only after the transfer of assets to younger generations. According to a survey by Investment News, two-thirds of children of very wealthy parents change financial advisors after inheriting a family fortune. Sometimes it's just differences in philosophy and investment style. Similar: The difference between private banking and wealth management. However, it often happens that financial advisors do not support an investment proposed by a younger family member to the extent of the portfolio as the child would like. The best way to avoid widening the generation gap is to open communication channels at a family meeting where members of different generations can present their views.

Creating a dialogue in the family

The family meeting should take place in the form of an open forum where the basic process of transferring assets will be discussed. Lawyers and other counsellors, as well as other family members, can also attend the family meeting. However, only parents, their children and their financial advisors can be on it. The absence of an open forum increases the potential for emotional disputes. These emotional disputes can occur especially in situations where parents put money into trusts and do not leave it directly to their children. If the child does not know why they did this, he can remain confused and get the impression that his parents do not believe him. However, there are many good reasons why parents may choose to put money into a trust rather than directly to their child. One of them is the fact that their adult child has a certain type of risky profession. In this case, the trust protects the property from creditors. The end goal of all parties involved in the transfer of property to the younger generation is to protect hard-earned property and to accompany all family members on this journey. As we have shown, it is necessary to start a dialogue with all family members as soon as possible.