Many boomers who have been fortunate (or skilled) enough to build up a sizeable investment portfolio are concerned that their children are not prepared to manage it. “What will happen to our money when our children inherit it?” is a very important question.
The Investment News has reported that over the next 30 years, an epic $30 trillion will be passed down from baby boomers to their heirs. In their book “Preparing Heirs” Roy Williams and Vic Preisser describe their survey of 3250 wealthy families that transferred their wealth to their adult children. They discovered that 70% of those transfers failed. In other words 70% the heirs lost control of the assets ( spent it all, invested poorly or lost control of a business)
And why did this happen? Was it poor financial skills, lack of investment experience or business savvy that caused the failure? From their study Williams and Preisser concluded that “The origins of the 70% failure rate in estate transitions lie within the family itself.” What does this mean?
In his brilliant little book, “Wealth in Families” Charles W. Collier, Harvard University’s very successful senior philanthropic adviser, explains this phenomenon in more detail. He reports that it is not the failure of training in financial skills that causes this breakdown in the transfer of wealth but the failure of the family itself. “”Money casts a spell-and it can be for good. It is important, indeed critical for families to think seriously about the meaning of their financial wealth, the messages they send to their children about money, and the example they set by their own uses of their resources”
“ To undertake effective succession planning, you may want to define a family vision and mission, create a structure for decision making appropriate to your family, foster open communication and encourage the growth and development of your family members”
Successful wealth transfer is not strictly about teaching good money management skills. It is about creating an environment in which children learn that they are listened to and have an important role in establishing the family’s mission, that money is a tool to express the family’s core values and principles.
Families need to discuss what is important to them. They need to share what they believe is the meaning and purpose of the family’s financial wealth.
This is certainly not an easy task for most families. It is much easier to enroll your children in a good investment or accounting class. But it is so much more valuable to create an environment in which the family can discuss how the family’s wealth was created, what is important to them and how money can be used to further that mission.