Two Powerful Solutions for Family Money Transfer Problems

Two Powerful Solutions for Family Money Transfer Problems

Did you know that over 70% of family money is lost between the first and second generations? Will your financial legacy that you worked so hard to build continue to the next generation or simply not last? This is a hard reality that many wealthy families will face as the generational wealth transfer issue is a big one. As the baby boomer generation looks to pass their wealth on to the next generation, beware of the pitfalls that lead to the loss of family money that was hard-earned. As a Certified Private Wealth Advisor® trained in such issues, at RHS Financial we help families avoid the conflicts and interpersonal dynamics that cause the generational wealth transfer problems that lead to the destruction of family money. In this blog post, I will attempt to shed some light on why so many wealthy families fail at generational wealth transfer and outline the two most important things that they can do today to help them avoid problems in the future.

Merrill Lynch’s Private Bank says that over two-thirds of family fortunes are squandered between the first and second generations.  Worse still, in 90% of cases the family money is gone by the 3rd generation. What wealthy families and entrepreneurs don’t know about wealth transfer is why these sad statistics have not changed for generations. In fact, Rod Zeeb, CEO of The Heritage Institute says, “there are 2000-year-old Chinese proverbs that say wealth never survives three generations.” According to BNY Mellon who surveyed numerous high-net-worth families in a white paper called the “Parent Trap” says the main reason (80%) why family money is lost between generations is due to lack of communication and trust. But when these same high net-worth families were asked what the problem was, only 7% said the loss was due to poor communication and trust. That means there is a solid disconnect between what families “Think” the problem is and what it really is!

Source: BNY Mellon

No wonder why so many families get the process of generational wealth transfer wrong. BNY Mellon’s report shows that most of the wealth is lost due to conflicts and interpersonal dynamics, however, the majority of families, (nearly 80%) with between $ 5 million and $ 25 million in investable assets believe things like the economy, family wealth planning or investment strategy are to blame for the loss.

Many of the families thought the problem was due to poor family wealth planning and/or financial planning, but that just isn’t true. Think about this in your own life, you can do all the planning you want, but if you don’t communicate those plans and the reasons for those plans to others, you will not build trust, nor will those plans be executed properly. One of the main findings of the report is that the further removed from the generation that built the wealth, the more difficult it is to manage the transfer.

So now that we know why family wealth does not pass three generations and this is a commonplace occurrence, I ask you to ask yourself, Is there solid communication and trust between generations in your family? Have you sat down and really showed and talked to the next generation about your family money and helped them develop a roadmap for success? Odds are you haven’t. If you want to know what to do, read on.

Develop a system of Governance for family money.

Develop a system of Governance for the family. This will guide the decision-making and problem-solving in a family unit. This can include a family council and regular family meetings to work on the roadmap and provide structure and perhaps even develop documentation relating to family goals and shared vision. The difficult part of this is giving up total control and becoming more transparent. Many family matriarchs and patriarchs grew up in times when family money simply wasn’t discussed. Times have changed and in order to share your vision and values of your wealth, you need to be transparent, communicate well, and develop trust.

Developing a system of family governance can be one of the best ways to imbue the next generation with your values. Dr. James Grubman in his book “Strangers in Paradise” talks about how the generation that built the wealth who may have started with nothing adapted to becoming wealthy as their wealth grew need to help the inheriting generation “discover life purpose and build a personal identity in the presence of wealth.” Developing a system of family governance and having regular family meetings to discuss the integration of the original generations’ values in generational wealth transfer is critical. The report alludes to the elder generation shifting roles from a leadership role to one of a coach or a mentor to the next generation. A family system of governance allows that shift to take place and offers a framework for the next generation to guide them and helps avoid inter-family conflicts. A more recent study by BNY Mellon titled The Next Generation of Wealth Holders in the United States” shows that 66% of next-gen inheritors are more in tune with ongoing communication and governance tools which is a bright spot in an otherwise dismal generational wealth transfer track record of previous generations. Baby Boomers concerned with this problem should understand that the next generation is at least open to developing good lines of communication and that’s a good start.

At a minimum, at least discuss the will or trust ahead of time with all family members.

Building a family system of governance and having family meetings is very, very difficult and sadly is not often done. At a minimum, at least discuss the will or trust ahead of time with all family members. The BNY Mellon “Parent Trap” report states that the primary cause of distrust in wealthy families is that the next generation doesn’t know what is in the will. The first generation must be transparent and share the will/trust in a group setting with all the children present. When the matriarch or the patriarch is not around any longer, the siblings will likely find out who got what. Without good communication, this can not only destroy wealth, but it can also destroy the family too.

Family wealth transfers are a sore subject for many wealthy families as outlined in this post. It seems that in order to avoid inter-family conflict, families do not address the important generational wealth transfer issues. Family wealth planning techniques like developing a system of family governance and regular family meetings can greatly increase the probability of successful generational wealth transfer. At a bare minimum, at least discuss the will and be transparent. There is a lot riding on how you communicate with your family members about your wealth and please reach out to us if you think you need help. The more everyone knows, the more likely you will succeed.

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Risley Sams

Risley Sams

Risley Sams, CFP®, MBA, CPWA®, is the Founder and President of RHS Financial. He is responsible for the future of the firm and the strategic services that we deliver.