What are you passing on to the next generation?

Will it be the proverbial fruits of your labors?

Or are you passing on the seeds of destruction?

In too many families, the inheritance contains those seeds. Heirs who receive a sudden infusion of wealth have an unfortunate tendency to blow their windfall, spending their inheritance on possessions and pleasures of little lasting significance.

Worse, the easy availability of money tends to derail the pursuit of higher purpose. As Andrew Carnegie said, “The parent who leaves his son enormous wealth generally deadens his talents … and tempts him to lead a less worthy life.”

The lack of a higher purpose often leads to negative character qualities – the demand for instant gratification …  a sense of entitlement … intolerance or frustration … arrogance … and an inability to form relationships. In other words, the kind of spoiled, selfish and self-indulgent behavior nobody wants to see in anyone – much less an heir.

Because most heirs simply don’t understand the hard work and sacrifice that have been invested in accumulating the wealth that is their inheritance, they lack the motivation to develop the diligence, the thrift and the ability to delay gratification necessary to build and maintain that wealth.

Shirtsleeves to

The result? The loss of wealth. The old saying is “shirtsleeves to shirtsleeves in three generations,” but frequently the loss of wealth happens much faster than that. The results of a lifetime of hard work and sacrifice can be squandered in just a few years.

No wonder fewer than 30% of family-owned businesses remain in the family for more than one generation.

Part of the problem is that parents who have had a hard life want to make sure their kids have a better one. Too often, this means granting their children’s every wish.  

In other cases, the parents may be so busy with their careers that they have little time to spend with their children. Feelings of guilt set in and the kids are overcompensated with expensive gifts and indulgent behavior.

As a result, the offspring never learn the value of money. Nor do they acquire appreciation for the virtues of hard work, thrift and delayed gratification.

In other words, money is being passed along but not values.

A matter of character

What can a parent do to instill a set of positive values into the children who will eventually inherit everything?  For starters, it’s important to remember that a child’s character is formed at an early age. Indulging every wish, assuaging feelings of guilt with expensive gifts and yielding to tantrums does little to build character.

It’s key that the next generation understands the value of money and its relation to work. Research has shown that there is a stronger relationship between happiness and wealth when that wealth has been earned. From a more practical perspective, this can help avoid the unintended consequences that result from adult children who cannot match the standard of living that they enjoyed growing up.

The best way for a young person to understand this value is by actually working. A part-time job at a basic position at the parents’ company would be an ideal way for him or her to gain work experience. This is also a good starting point to teach children the importance of saving a portion of their income. This is a habit that must be acquired early in life if children are to learn the complementary values of delayed gratification and living within one’s means.

Deciding what and how much to leave your children is a decision that can have a profound influence, either positive or negative, on their wellbeing. And helping your children acquire the values needed to responsibly handle their inheritance requires time, hard work and planning. The process can’t start too early.

The right advisor

While no financial advisor can ensure that your heirs inherit your values, it’s important to find one who shares them. A firm whose clientele consists primarily of those who have created their own wealth rather than inheriting it would be ideal. (Such firms do exist.)

Another potential step is to begin involving your adult children in the management of your assets. Bringing them to meetings with your advisor and involving them in the decision-making process will not only provide them with a financial education; it will also allow them to view first hand what is involved in being a good steward of the family assets.

A good advisor will work with your estate attorney to structure a wealth transfer plan that will shield your assets from excessive taxation, maximize wealth for future generations and even protect it from being squandered by spendthrift heirs.

Trusts, which give you control as to how your money can be spent after your death, are generally an important part of this plan. These can be structured so that your heirs control wealth but do not legally own it.  That protects that wealth against claims of creditors, spouses of failed marriages and from their own avarice.

Other types of trusts can allow for money to be released to your heirs as certain life events occur. Still others let you donate to your favorite charity and get a tax write-off and income in return.

While the mechanisms for passing wealth are important, it is even more important to understand that they are tools, not solutions unto themselves. In the wrong hands, these tools can have negative and unintended consequences. Working with an estate attorney, your advisor can help you define your goals in passing on wealth to the next generation and ensure that your wishes are carried out.  

All to help you prevent an inheritance from becoming an encumbrance.