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Legacy Planning for Families: How to Prepare Future Generations for Success
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You’ve built wealth. Maybe a lot of wealth. And maybe you have kids who will inherit that wealth one day.
So, how do you get them ready for that day? How do you even start the conversation? Particularly if your kids have no idea how much you’re worth, and you harbor a fear that a substantial inheritance may squash your kids’ work ethic or make them feel entitled. (Did that hit a little too close to home?)
The answer: legacy planning.
Dave Armstrong and I sat down with Dr. Richard Orlando, Founder of Legacy Capitals, on our Off the Wall podcast to discuss the ins and outs of legacy planning. Here are some of the highlights of our conversation about how to make an inheritance an asset rather than a liability for future generations.
Establishing Values and Purpose
Start by defining the purpose of your wealth. In other words: What’s the money for? What are you trying to do with your wealth, and why does this matter to you or future generations?
Reframe the language surrounding your wealth by identifying your family values.
What do you believe is the most valuable way to use your wealth? Building family unity? Providing a level of comfort? Education, either formal or informal? Community service and charitable giving? Starting a business or retaining the family business? Growing assets? Faith? Travel and experiential opportunities?
Bucket your assets (real estate, stocks, cash, cars) and then identify how you want those assets to be used. For example, you may value quality family time and want a vacation house to be a shared place for future generations to make new memories, rather than viewed as an investment property or income-generator.
A “legacy message” refers to the shared values, purpose and expectations of the family, and it’s what you and your kids can stick to when evaluating if a money decision meets your priorities. That way, when your child inevitably asks you to buy them an overly-expensive item, you can answer more than just “no”; you can instead offer an explanation on why such a purchase doesn’t align with the opportunities you see your money providing.
This is also a key way to avoid the hedonic treadmill. The hedonic treadmill is the constant pursuit of more money and items in order to satisfy your desires. The more you have, the more that you need to achieve the same sort of high that you got the first time you made a purchase.
The hedonic treadmill is a never-ending cycle that won’t set your family up for long-term happiness or financial success. Getting to the root purpose of your wealth can help you define your values and where your wealth can lead to genuine fulfillment.
Legacy Planning Starts Early
You can have age-appropriate conversations about family wealth when your kids are any age. It can be as simple as teaching young kids about piggy banks and teens about compound interest. You can also leverage milestones for young adults, such as marriage or starting their first job or a business, to open the door to deeper conversations about the family wealth.
As children grow up, distinguish between conversations about money versus THE money. (In other words, the difference between everyday spending decisions versus inherited wealth.)
When kids are young, you don’t have to talk about dollar values on the family balance sheet. Instead, talk about the responsibilities, opportunities, and expectations that come with wealth. This helps your children establish vision, values, and purpose even before the actual legacy planning discussion takes place.
Nurture both Life IQ and Financial IQ in your children. Financial IQ ensures they understand the basic concepts of personal finance, investing, taxes, and estate planning to be good stewards of what you leave behind for them. Life IQ will help them recognize their family’s desired legacy and values, along with how to leverage that Financial IQ to achieve happiness and stability.
As your children age, you can slowly start to become more transparent about your wealth. Generally speaking, college-age is about the time when children are able to fully comprehend the financial legacy that they will be left with, so it’s advisable to wait until your child’s early or mid-twenties to reveal more details about your net worth.
Family Meetings
Many parents use family meetings to get everyone in the house on the same page. The same venue can be used for conversations about legacy planning.
Family meetings don’t need to be a big production; you can start simple by just initiating a conversation with your kids at the dinner table. If your kids are still living at home, pick a meal once a month to talk about your shared values and money in an age-appropriate approach. Talk about concepts like saving, investing, giving back, or the value of education/travel/owning a business (whatever it is you value).
If your kids are grown with their own families and busy lives, plan a dedicated get-together for the entire extended family with an agenda that is shared ahead of time. Agenda items can include:
- Values and vision
- Holiday or vacation planning
- Philanthropy and charitable giving (particularly if through a family Donor Advised Fund or charitable trust)
- Volunteer work
- Financial IQ and Life IQ
For these larger, more formal family meetings, it may be helpful to have an outside facilitator. They can manage the questions that each member of the family has without derailing the agenda or purpose of the meeting. A group facilitator allows you to talk and make decisions together with less heated discussion.
Some families will have to decide who to include in these larger family meetings. For example, will spouses attend? Especially if you are early in the legacy planning process, you might hesitate to be fully transparent with those who married into the family. At the same time, excluding them may strain family relationships.
A successful approach I’ve seen used by a large multi-generational family? Organize a trip or rent a vacation house with all family members. This will provide ample opportunity for the family to connect where everyone will feel included, even if you decide to keep parts of the family meeting agenda limited to certain family members. If you do exclude spouses from certain conversations, just specify which contents should be kept private and which aspects can be shared with spouses after the meeting.
Gifting
Gifting is a common method parents use to teach their kids about investing, taxes, and using wealth wisely. (Better for your child to make a mistake now under your watchful eye with an annual exclusion gift, than to make mistakes after you’re gone with a multi-million dollar inheritance.)
When you decide to make a gift to your child, establish the goal of the gift. (Remember our theme of defining the purpose of your wealth and values you want to instill in your children?) Make sure it’s clear to them why you are giving them this gift and what you hope it will be used for.
Gifts don’t just have to be direct transfers of cash or stock. Examples of other gifts include:
- College and education funds: This can include from kindergarten all the way up to and including college and graduate school. Paying for education can make it possible for your beneficiary to focus on the school work instead of working to put themselves through school. (And remember that tuition payments made directly to an educational organization are exempt from gift taxes and generation-skipping transfer tax, even if they exceed the annual gift exclusion amount!)
- Real estate: Children who may have a less stable career can benefit from having a place to call home, and parents can invest in real estate on their kids’ behalf. It’s not uncommon for parents to support artists, musicians, writers, and similar career paths as long as the child remains committed to their craft.
- Entrepreneurship: Financing a business can be done more easily through the family than through banks. For families that value an entrepreneurial spirit and don’t mind taking the risk, this can be a great investment.
The Role of Advisors
Legacy planning has two sides: preparing the family for the assets, and then also preparing the assets for the family. Both are required if you want to have a robust legacy plan in place for the generations to come. To this end, you may want to enlist the help of several financial professionals.
A family leadership coach, like Legacy Capitals, can help you to understand the purpose of the family’s wealth and facilitate the conversation between family members about the family’s future, the opportunities and responsibilities of wealth, and preparing the family for the assets. If you own a business that you plan to pass down, a coach can help you master the strategies and skills needed to work with family in business.
A trust and estate attorney can help you create and implement estate plans, private foundations, family limited partnerships, limited liability companies, and various other entities. They can also advise on asset protection and wealth preservation, business succession planning, and incapacity planning. A good trust and estate attorney will understand your family dynamics and concerns, and will help you craft an estate plan that aligns with your goals, wealth and family.
An accountant will help you with personal and trust tax filings, but should also help you think through the strategic timing of gifts to family members and large charitable donations. They will be integral in the event of a sale of a large complex asset, such as a business.
A wealth advisor should be the quarterback who sees your big picture, understands your goals, and coordinates the other advisors on your team (mentioned above) to make sure everyone is working in tandem. A wealth advisor can help you project how much your kids could potentially inherit and educate younger generations on financial planning and asset management, as well as manage your investment portfolio and help with tax and philanthropic planning.
Protect Your Legacy
You worked hard to build your legacy, and it’s more than the sum of your wealth. To protect what you’ve built and plan for your family’s future, you need more than just an investment portfolio or financial plan. You need a collaborative, creative, and customized approach that will provide you with an actionable and evolving roadmap to get you where you want to go. For our clients, we do this in the form of thoughtful, considered, and bespoke Private Wealth Design. Interested in how this approach might work for you and your family? We invite you to learn more and see if we’re a fit.
Looking for a good read on legacy planning? Check out Dr. Richard Orlando’s book Legacy: The Hidden Keys to Optimizing Your Family Wealth Decisions.
Want to Dive Deeper into Legacy Planning?
Listen to the 2-part series on Legacy Planning and Transferring Wealth with Richard Orlando.
Ready to take your wealth and legacy plan to the next level with Private Wealth Design?
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