It is common for high-net-worth individuals and couples to worry about the impact their wealth will have on their families. Wealth provides security and opportunities, but it can also overwhelm your children if they have never before had to be responsible for their own finances. For this reason, it is important that you mindfully build and preserve your wealth and that you take care when passing it down to the next generation.
Even if you are financially responsible, your children might struggle with their inheritance and make detrimental financial mistakes. The following are three steps you can take to prepare your heirs for the gift you will leave behind.
Instill financial responsibility at a young age
Teaching financial responsibility to your heirs as soon as possible could help curb irresponsible spending in the future. It has been found that individuals who struggle with budgets and expenses were likely not exposed at an early age, whereas individuals who do grow up learning about money management and other financial concepts tend to be more confident and responsible with their finances. If you have the opportunity, you can begin teaching your heirs about money as early as three-years-old.
Teaching money management is important even if your children are adults, although it will require a different approach. In addition to discussing the basics of saving and budgeting, you should also talk about the factors that led to your wealth, your own money habits and the work you’ve put into building your legacy. This will help them better understand the value of the gift they are receiving, making them less likely to use it irresponsibly.
Have frequent talks about money and financial values
In addition to talking about wealth early, talk about it often. This will give your heirs more time to understand the responsibility that will come along with their gift. These conversations should happen periodically and should introduce your heirs to more advanced concepts as they mature. You might start by exposing them to the family business then eventually work up to the various assets that make up your estate, including any real estate or stocks. A qualified financial advisor could help lay out a plan for approaching these conversations.
Make sure your heirs are aware of your financial values and wishes for their financial future. Whether it be to build generational wealth or help pay for education, explaining your estate decisions could potentially influence your heirs to make responsible decisions in the future. You can take legal steps to ensure your wishes are followed by including specific documentation in your trust, but you could also look to create a letter of wishes—a document that is not legally binding but allows you to express your goals for the gifts you leave behind.
Communicate your decisions
Talking about the distribution of wealth amongst multiple children can be hard, especially if the distributions will not be equal, but no one will benefit from keeping this information hidden. Once you have laid out your plan, schedule a family meeting and allow your children to ask questions. If one child has been left more or if distribution restraints have been placed on the money that another will receive, explain your thought process behind those decisions.
You should also be transparent about who you have named as your trustee and why they have been chosen. Your trustee could have a huge impact on your heirs in the future, and it is important for them to know who has been tasked with managing their assets should you be unable to do so—especially if that person is a family member. While these could potentially be uncomfortable conversations, avoiding them could create controversy within your family or even resentment from your heirs down the line.
The gift of financial security provides a great opportunity to your heirs, but it is important that you take steps to maintain harmony and ensure your children can manage their wealth. For assistance with creating a wealth-transfer plan and communicating your wishes with your heirs, connect with a member of the NNP team today.