Building and preserving wealth for children and grandchildren is more difficult than one would think. There is a famous saying that “the first generation makes the money, the second stays even, and the third loses it all.”
Statistics show this is true: 70% of wealthy families lose their wealth by the second generation, and 90% by the third.
The secret to generational wealth is about more than picking the right investments – it is about using the right succession framework and structures and equally important, ensuring the family is aligned to the common goal.
In this article we focus on the human element, the family dynamics, and will highlight it as one of the crucial elements when doing succession planning. The following three pillars can form a strong foundation to ensure your family’s wealth is truly geared for successful wealth preservation and transfer over multiple generations.
Pillar 1: Prepare the people (human capital)
One of the biggest threats to family wealth is an heir who doesn’t know how to manage money. Children must be taught how money works, how to save and invest, but amidst the challenges of parenthood, financial education often falls by the wayside – many assuming it will happen automatically or that it is only important to the super-wealthy.
The harsh reality is often seen when parents are deceased, leaving their children some assets, like property and large life insurance payouts. Without the necessary skills to manage and grow those assets, an opportunity is lost to build generational wealth. The difference between the family that receives the inheritance and builds on it, and the family that loses it, is most often linked to financial know-how. As with all important life skills, being financially wise is learnt and not an inherent skill.
Making children part of the process from a young age, understand concepts like capital growth vs income generation, time value of money, and the importance of compounded interest/growth, will go a long way in ensuring they understand and respect how much effort it takes to build and retain wealth. It should be instilled in them that as the next generation, they are the guardians of the family wealth, enjoying the fruits of their parents’ labour while bestowing the same privilege on their children and the future generations.
Pillar 2: Create sustainable structures (governance)
Like a business has a board of directors and a constitution, family wealth should also be governed and protected. The risk of losing generational wealth reduces considerably if the right structures are used, where decision-making is a family affair rather than left to one person.
Tools like a trust, a written family constitution and/or a Will providing clear, written guidelines on who receives what, when and how can be very useful when doing intergenerational succession planning. The use of professional trustees and executors bring the added benefit of being an independent, educated voice of reason when family members might become overwhelmed with decision and the pull between wants and needs.
Without clear legal documents to determine how the family wealth must be divided upon the death of a parent, families often end up in court. As legal battles can be very costly, it easily erode the savings you worked so hard to leave behind.
To keep family financial affairs fair and organised, engaging with a financial adviser as an impartial referee upfront is a good starting point, allowing the entire family to build a long-term relationship with the adviser, to see them through the best and worst of times.
Pillar 3: Find a shared why (purpose)
Without a plan, money can be spent on anything and everything. However, to preserve wealth for multiple generations, it is necessary that a family shares a common goal and vision. Short term goals can include preserving funds to educate first generation graduates in a family, financing a business idea that can create employment for multiple family members and others alike, supporting a common cause. Long- term goals and strategies become more important as wealth is created, to ensure the next generation grows up with the same goal and purpose in mind, having respect for the wishes of the wealth creator and the sense to retain the wealth for themselves and who follows in their footsteps.
When the family agrees on what the money is intended for, and what their ‘financial culture’ is, the conversation changes from “How much do I get?” to “How can we grow and preserve our wealth together?” This culture shift acts as the glue that retains the family’s wealth and keeps the family from drifting apart.
Lasting wealth does not happen by chance, but by choice. While a healthy bank balance certainly helps, a family’s financial strength comes from good communication, sensible rules, a similar mindset and a plan for the future.
Sustainable wealth isn’t just about the numbers – it’s the strong foundation you build today to support the decision-makers of tomorrow.
By Sharon Hamman, Senior Legal Adviser at Momentum Distribution Services
