Parents share a lot of private things with their children in the hope that the information will help them grow into successful adults, and even as adults, there is information that seems too private to share. There is one topic in particular that most parents try to avoid talking about at all costs. And no, it is not what you are thinking.
For many parents, the idea of having the "money talk" with their children is a terrifying thought, and even more so, talking about the wealth that will be passed on when you passway. The biggest reason parents avoid the topic is they don't believe they know enough about money themselves and fear they will give their children the wrong information or that their children will chastise them for things they have done in the past or even become greedy.
Although discussing the topic of money with your children can be uncomfortable, it is a necessary step in their development as youth and as adults to help them learn how you have approached it when building the wealth you will pass on. The latter is vital for your children to learn from your successes and missteps. It will also allow you to begin the discussion of what you are planning to do with your finances when you pass on. While estate planning is a piece of this, we want to discuss the value of speaking to your children about what your plan is for the future when passing your wealth to the next generation in hopes of building generational wealth.
Myths About Generational Wealth
We have all heard about families like the Rockefellers, Vanderbilts, and Gettys in their ability to build generational wealth, but there are some myths that surround generational wealth that need to be dispelled so you can understand the value of speaking with the next generation about investing and how to carry on in the building and preserving the wealth you have worked hard to build.
- Wealth Lasts Many Generations: it's essential to understand that having family wealth and preserving family wealth are two very different things, and the latter often requires careful and considerate planning. The reality is that around 70 percent of wealthy families lose their wealth by the second generation, and about 90 percent of families lose wealth by the third generation.1
- All Family Members Are Smart About Money: Inheriting or obtaining a large amount of wealth does not mean one suddenly gains total financial literacy. It can actually lead to the destruction of wealth, as the lack of financial knowledge can lead to decisions with a greater impact. And for those who are not financially savvy, the burden of caring for and protecting the family's wealth can be a great source of stress. For those who find themselves in this position, working with a trusted financial professional should be a top priority. Your financial advisor isn't there to judge or scoff at your lack of financial knowledge. Instead, he or she is there to educate, guide and strategize on your behalf.
- Parents Talk to Their Kids About Money: Despite parents beginning to talk about budgeting and personal finance in recent years, how to build generational wealth is not discussed. Further, it is easily assumed money and wealth is a common topics of conversation in a wealthy family. In reality, it's possible children may receive an inheritance with very little understanding of how much they have or what to do with it. Another pitfall in this is that the parents can see their kids as lazy, arrogant, and privileged. Rather than talking to them, they ignore the issue. This is a missed opportunity to allow for the building of financial literacy in efforts to preserve wealth over generations. As we mentioned before, only 10% of wealthy families keep their generational wealth, and if parents ignore talking with their children about their plans and how they have been working to maintain this over their lifetime, the family will likely lose the wealth over the next two generations.
To read more about the myths of generational wealth, follow the link here: 5 Myths About Generational Wealth You've Likely Heard.
How To Build Investment Literacy
Knowing how to save, invest, and spend money is important, but one of the best things you can do for your children is to instill a good work ethic in them by letting them earn money on their own. Whether your teen works part-time at the movie theater or you help your little ones start a lemonade stand, the willingness to work hard and be rewarded is one of the best financial lessons you can pass on to them.
One effective way to help younger kids learn about money is by making budgets and giving them a chance to make mistakes on their own, as kids can be quite impulsive. It is better for them to learn these lessons with $10 dollars than $10000 later in life. As they progress into their teenage years, introducing them to investments will allow them to understand the concept of passive income and options for the future outside of savings accounts. There are free investment tools that can help teens evaluate and build portfolios that will serve as a good resource. It will also make the process of introducing them to your investment portfolios and begin to discuss financial topics with them at an early age. These conversations early on will allow you to talk more about your wealth structure when the time is right.
How To Deal With The Future
Much of what we have talked about until now has been the early stages of how to build financial literacy from a young age on. But what can be done with generations already in adulthood? It is important to keep in mind that you should know your children and consider who they are and what approach to take when speaking on the topic of your wealth.
One way to start with your children is to discuss the structure--or structures--you are holding your wealth with. As an example, you may have investment accounts and other assets held in your name, IRAs, a trust, an LLC, or an offshore trust. Talking to your children about why you have used these structures is an important piece of the process. While some structures can be fairly straightforward and easily understood, it is not always the case. By discussing how you have structured your assets with your children, you can begin to build their financial literacy even as adults because you can talk about your thoughts about how the assets have been allocated to each structure and the reasons you set it up this way. This is a good place to start before talking about the numbers and value of the assets being held.
As trust is built between you and your children, you can begin to go deeper into what you may hold for assets, should you wish to disclose this information to them.
During this phase, it can be a good idea to introduce the professional team you work with; these can be the lawyers and financial advisors who you are working with. This will allow your children to see the team you have used and built to help you in your efforts to grow and maintain your wealth. It also will allow your children to build their own relationships with either these trusted partners who you know can help educate them in financial literacy. It is a good opportunity for you to explain why you chose these professionals and what you have learned from them over your time with them.
While these tips are only the start of a long process that can span years and a lifetime, it is important to use the opportunity of teaching your kids about financial literacy to learn more about it yourself and reflect on how you approach building, maintaining, and passing on your wealth. Communication is important not only between you and your children but your financial advisor as well. If you are unsure of how or if you should involve your children, it is never a bad conversation to start with your financial advisor, as it can increase your understanding of the process. Building generational wealth is something that is a hard-fought process, and if the value and task of communication are lost, the chances that the next generations will lose what you have built is high. Because of this, it is important to start early. However, it is better to start communication with the next generations late rather than not at all.
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