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Making a Family Fortune Last

Individuals who’ve amassed significant assets are often concerned about the longevity of their wealth—and for good reason. Only 30% of affluent families are able to maintain their wealth through the second generation, and only 10% have anything left after the third (see “Easy come, easy go,” below).

“Anxieties about successfully passing down assets or a family business aren’t new,” says John Pettee, a Phoenix-based Schwab wealth strategist, “but they’re increasingly common”—for the simple reason that some $30 trillion is poised to pass from the Baby Boomers to their heirs over the next several decades, the largest intergenerational transfer of wealth in history.1

Despite the range of assets and circumstances, there are three areas on which every family should focus when creating an enduring wealth strategy.

1. Communication

Many clients struggle with how much to tell their descendants, especially when heirs are teens or young adults. “It’s not uncommon for clients to worry about creating so-called trust-fund babies who treat an inheritance as an excuse to blow off school or work,” says Nancy Murphy, a Schwab senior financial planner in Indianapolis.

But John and Nancy both believe disclosing some, if not all, information is the best path forward in most cases, regarding not only the sums at stake but also the structure of an inheritance. Will it be an outright gift? A conditional gift? An irrevocable trust? (See “Passing it on,” below.)

“Wealth preservation takes discipline on the part of the next generation,” John says. “By communicating the details of an inheritance up front, you give heirs the time they need to fully understand the implications of the gift. Without that information, heirs could unwittingly make costly financial decisions from which it can be difficult to recover.”

One client Nancy worked with decided to share the details of her estate plan when her granddaughter was about to get married. “The granddaughter didn’t fully realize the extent of her inheritance until her grandmother sat her down and said, ‘Look, you need to protect yourself,’” Nancy says.

As a result, the granddaughter decided to draw up a prenuptial agreement. “Had the client not had that conversation with her granddaughter, the family’s wealth would have been on the line,” Nancy says.

2. Education

There’s nothing like an inheritance to burn a hole in one’s pocket, which is why educating heirs about responsible money management is so crucial. Without it, young beneficiaries might be tempted to spend frivolously or risk the funds on questionable investment opportunities.

“Unfortunately, there are any number of predatory financial managers and consultants just itching to take advantage of people,” Nancy says. “The more knowledgeable heirs are about financial matters, the more prepared they’ll be to walk away from ‘can’t-miss’ opportunities.”

John adds that education should include not only the fundamentals of investing and saving, but also estate planning and taxes. “There are tax and legal ramifications of different types of trusts—and the more the younger generation understands, the more likely they are to make wise choices,” he says.

Another critical component of education is to introduce heirs to the people managing their future assets, including financial advisors, estate planners and trustees. “These people should know each other long before any money changes hands,” Nancy says. “That way, they have trusted consultants they can turn to when it’s their time to take control of the family wealth.”

3. Purpose

Finally, both John and Nancy say it’s imperative for older generations to establish a sense of purpose for their family wealth. “You want your heirs to see themselves as stewards of an enduring family legacy, not as the sole beneficiaries of your hard work,” Nancy says.

One way to accomplish this is through charitable giving, John says. “Families that establish a charitable mission tend to view their assets differently from those who don’t,” he says. “Creating a charitable legacy—whether formally through a private foundation or a donor-advised fund, or informally by talking openly about your values—can help your heirs look beyond their immediate desires to something impactful.”

Whatever your values, Nancy says, establishing a common mission—and discussing it regularly—can help ensure your family wealth endures for many generations to come.

1The “Greater” Wealth Transfer: Capitalizing on the Intergenerational Shift in Wealth, Accenture, 2015.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

Schwab wealth strategists are employees of Schwab Private Client Investment Advisory, Inc., a registered investment advisor and an affiliate of Charles Schwab & Co., Inc.


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