Independent Thinking^®

Educating the Next Generation

Children who grow up in an affluent household can encounter mixed feelings, mixed messages and mixed blessings.
 
Enchanted lifestyles and large inheritances can fuel dysfunction, paralyze and strip children of ambition and meaning. Some children suffer feelings of guilt over not having earned the wealth; others find themselves caught in a web of entitlement.
 
This price of privilege is a potential concern for growing numbers of American families. With more than $1 trillion expected to flow from one generation to the next on average over each of the next 50 years, it can give even the most confident parent or grandparent pause to consider that 70% of wealth transfers fail, with the heirs dissipating wealth.^1,2 About 60% of these failures result from a breakdown of communication and trust within the family unit, and another 25% of the failures are attributed to inadequately prepared heirs. Estate planning and investment management are key to successful transfers, but overlooking the softer elements can undermine even the best-laid technical plans.
 
Preparing heirs to be good stewards and thoughtful administrators of wealth significantly increases the odds of sustaining and growing wealth across generations. Unfortunately, these skills are not being taught at the prep school or college level. Nor, in many cases, are they being taught at home.
 
According to a Jump$tart Coalition for Financial Literacy survey, 80% of parents believe that their children learn everything they need to know about money in school, while 90% of students say whatever they know about money they learned from their parents. This disconnect underscores the need for heirs to gain competencies in personal money management, saving and investing, wealth preservation, and philanthropy.
 
While each situation is unique, we generally find that people wait too long and share too little, out of fear of doing harm. But children know more about their family’s wealth than parents may realize. Parents who communicate more, rather than less, and sooner, rather than later, are more effective at educating their children to be successful inheritors. Sharing information is also an opportunity for the parent to listen and to learn from the next generation.
 
Ideally, families will employ what has been described as a “drip, drip, drip” method of education. Constant communication between parents and other relatives with the children as they grow is the best way to provide a practical education and shared values.
 
We all know that our children learn best from example; bringing children to the office and sharing what the writer Alain de Botton describes as the sorrows and pleasures of work can be a formative and wonderful experience. In a similar vein, establishing an allowance can help children learn to differentiate between needs and wants. So too can early efforts at saving and giving to charities; many parents and grandparents report becoming absorbed in the children’s passions, even as the children absorb the family’s values. A shared commitment to saving elephants, to take one client example, brings the family together and teaches the youngest members a great deal about global economics and politics (and the oldest members a thing or two they might not have known about their children’s generation, or elephants, for that matter).
 
As the children grow, more formal educational programs and mentoring structures can ensure financial literacy and prepare young adults for the challenges, as well as the opportunities, of both work and wealth. Adult children who know who they are and what they want out of life should probably be full participants in family discussions about wealth.
 
It is unfortunate that wealth can become such a divisive force in many financially successful families, especially when the creators of the wealth worked so hard in large part to provide for their families. It doesn’t have to turn out that way, however. Communication, education, and, as necessary, intervention can help make wealth a force for good, across the generations, creating a positive, lasting legacy for the family.
 
At Evercore Wealth Management, we provide educational programs on wealth transfer that bring together like-minded individuals, couples and families to consider specific topics, including financial education, socially responsible investing, impact investing and special needs trusts. We also provide customized services, working directly with families to help prepare next- generation inheritors to manage their wealth in the broader context of their own accomplishments and goals.
 
Michael Cozene is a Partner and Wealth Advisor at Evercore Wealth Management. He can be contacted at [email protected].

¹ Boston College Center on Wealth and Philanthropy
² The Williams Group