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Multi-generational planning today, for tomorrow

Why do more than half of all wealthy families fail to sustain their wealth over multiple generations?

The best-known ancient proverb classifies the difficulty as “shirtsleeves to shirtsleeves in three generations.” The first generation builds the wealth, the second generation expands the wealth, and the third generation spends the wealth. That leaves the fourth generation to start all over again with no wealth. In Japan it would be a return to the rice paddies as if prominence had never existed.

So there is real concern that the reason younger generations are not prepared for this huge wealth transfer isn’t related to legal or accounting reasons, but the failure of older generations to adequately prepare them for the consequences of inherited wealth. As reported,  “Professional advisors generally do a credible job in the traditional areas of wealth preservation, governance and tax avoidance – the money often transitions well ­– but the families themselves don’t.”

Perhaps the adage: “Families spend a great deal of time preparing the money for the family, but very little time preparing the family for the money,” advocates for better collaboration.

The pressure is on

Billionaires come in all ages these days. Let’s turn our multigenerational, inherited wealth attention over to someone who knows. In this insightful excerpt entitled, “What Does It Feel Like to Grow Up Wealthy?” at, years of frustration exude from this anonymous billionaire every word:

– “You are raised with the highest of expectations. Being a child born into such extravagant wealth definitely puts a lot of pressure on succeeding.”

– “You are reminded constantly to NOT RUIN YOUR FAMILY’S REPUTATION [sic]. Anything that you succeed at goes back to your family, not you. You are constantly reminded how successful and great your parents are.

– “Your parents did this! Your grandparents accomplished this! Now, what are YOU [sic] going to do? Is it going to be as great as what they did?”

Helping families to flourish with their “quiet” wealth and vision

Facebook co-founder Mark Zuckerberg, 35, graduated from millionaire to billionaire after one year. He represents the first generation of “shirtsleeves.” Many wealthy people started out by building a business, working hard and then selling the business while quietly saving and investing. Whether in professional practices or entrepreneurs, these busy folks were good at what they did, which of course, didn’t necessarily translate into having any financial planning skill for when they’re no longer involved in their business.

Financial advisors, like the trusted professionals at Hefren-Tillotson, understand family dynamics, sometimes wearing many hats of psychologist, mediator, interpreter and peacemaker. But he or she can only take a deeper and more personal interest by first getting to know all the parties involved. How each person perceives money, and their own family’s wealth, helps determine estate planning needs, cash flow forecasts and future investment recommendations.

Getting to know everyone individually can be an undertaking that is not about goal setting, asset allocation, investing, or tax efficient ways to distribute wealth, but more about gaining an understanding of the first generation’s original vision – what they wanted to accomplish, how it was to be passed on, and how the next generation would perceive it.

Undeniably, advisors know that wealth transfer discussions are only fruitful when everyone faces the realities of howwhen and in what quantities their parents’ money will change hands.

Baby Boomers: the second generation

As the wealthiest generation in American history, the Baby Boomers, born between 1946 and 1964, have already modeled the status quo to the third generation, their kids – who know nice cars, plenty of cash flow, and bring virtually no knowledge or interest in the work ethic that created the family fortune for all to enjoy.

Individually, most Baby Boomers have benefitted from a 10-year bull market. It is reported that they control 82% of the financial affairs and financial advice in America today. However, as a result, they are branded as having the “you only live once” mindset.  They spend more money than younger generations – up to $400 billion annually on consumer goods and $120 billion on leisure travel – according to CNBC’s Investor Toolkit.

When advisors devise wealth transfer strategies to minimize the tax implications and protect how assets and other property are passed to the next generation, planning and gifting typically appears more real world. Then, add in a taxpayer-friendly federal gift and estate tax environment – at least for a few more years anyway – and Boomers listen even more closely.

How the next generation can benefit

You know that appreciating assets – real estate and stocks – are going to eventually appreciate, so your advisor may suggest giving them away now because there will be no gift or estate tax on the appreciation, and it goes to your heirs tax-free.

Transferring your wealth to your children and grandchildren eliminates your kids getting hit with any gift and estate taxes. But what about the generation skipping transfer tax? Your advisor might suggest using trusts to transfer appreciating assets to grandchildren before the assets appreciate any further. He or she will also suggest the benefits to donating to worthwhile charities that especially need financial help, too.

Family philanthropy offers prudent options in Private Foundations and Donor Advised Funds, and even a third option: a combination of the DAF and Private Foundation. Ask your advisor for more information about these and other smart strategies to help navigate your family’s wealth transfer.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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