Preparing the Next Generation to Manage Wealth

by BOK Financial Private Wealth

Many parents and grandparents are reluctant to discuss their estate plans — particularly their plans for leaving behind an inheritance — with younger generations of the family. They may feel uneasy revealing too many specifics about their plans, fearing that their children or grandchildren will feel entitled and not become productive members of society.

However, failure to have conversations about the family’s wealth and educate younger members on financial management can lead to long-term problems, says David Sego, managing director of BOK Financial Private Wealth. It can lead to poor documentation and organization as well as financial mismanagement by adult children who were never taught to manage or value money. It can also cause a lack of participation among family members in the wealth-transfer process.

“I think there is a fear that once the future heirs know the size of the estate that they potentially will become less motivated to become a success themselves,” Sego adds. “But what families need to realize is that avoiding conversations about the family’s wealth creates many problems of its own.”

Sego says older generations can take some steps to improve communication and, in the process, ensure that younger family members are prepared to take the reins in the future.

Create a values statement
Before talking with younger generations about money, senior family members should thoroughly understand — and write down — the financial values and lessons they wish to impart. A values statement can be anywhere from one page to many pages, but the idea is to clarify your values around money and relay those values to younger family members who may feel disconnected from the family history and wealth-building process. The written values statement should be seen as a living document that can be built upon and adapted in the future; it lays out fundamental information to help younger family members better understand the importance of preserving the family’s wealth. “The values statement might explain, for example, how the family’s wealth was first created and stress the importance of hard work, saving and investing,” Sego says. “It might outline key principles about building and managing wealth.”

Engrain financial values through active involvement
One common issue among high-net-worth families is that younger generations never learn the skills and financial values they need to preserve the family’s wealth plans and legacy. As a result, they may end up investing money recklessly or, worse, spending it all. But there are key ways to teach younger generations to value the family’s wealth and learn to preserve it, Sego says. For example, parents should involve their adult children in annual reviews with the family’s financial advisor. This will give the children strong knowledge of how the family’s assets are invested and ensure they know where to turn for wealth-management questions or concerns in the future. Parents can encourage their children to take an even more hands-on role by asking them to research and report back on various types of investments, whether real-estate investment trusts (REITs), exchange-traded funds (ETFs), or master limited partnerships (MLPs). This process helps educate them about the workings of various investment types and provides them with a better understanding of the investing process, Sego adds. Some families with philanthropic goals set up charitable foundations and appoint their children to the governing boards. This gives the children an active role in helping the family determine how it selects and donates to various causes.

Explain and organize the estate-planning documents. Many people’s estate plans include various legal documents, including a will, a health-care directive, power of attorney and trusts. Younger family members may eventually be responsible for seeing that those legal arrangements are followed and enforced. It’s important that they are familiar with these documents and where they can find them, if need be. Keeping copies of the documents in a safe place — and explaining to the younger generation how they can be accessed — can help improve communication regarding your estate plans and ensure a smoother wealth transfer, Sego says.

Disclosure The opinions expressed herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of any sector, industry or security. The content in this document is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice.