Your good reasons to involve family in wealth management and legacy planning

One of the beliefs that most successful businesspeople and investors hold is that it is not the creation of wealth that is hard but its preservation. Adding weight to that belief is a well-documented finding that 70% of wealthy families lose their wealth by the second generation, and 90% lose it by the third. ⁽¹⁾ So, why do wealthy families sometimes fail to preserve the wealth created by their predecessors?

While there could be unique reasons specific to a family, even common issues can lead to the decline of generational wealth. Gaps in communication between successors and stakeholders and a lack of financial education, especially in formative years, are leading causes of the decline. Therefore, involving family members, especially children, in financial matters is key to preserving wealth and establishing a sound legacy. 

Bringing children into the financial fold

By listening attentively to children's questions and doubts, parents can seize the opportunity to impart financial education. Encouraging children to articulate their thoughts on money can foster a deeper understanding of its significance and implications. Parents can deepen the engagement by asking questions about what money means to them and how they envision its impact on their lives. Their answers can allow parents to further discuss the likelihood of financial problems due to irresponsible spending, a misguided sense of entitlement, and reckless monetary decisions. Such interactions can help children develop an understanding of ownership and responsibility towards family wealth. 

Research from Cambridge University⁽²⁾ revealed that a person's approach to money is shaped by the age of seven. That underscores the importance of early intervention in children's learning. Parents can foster children's financial confidence by providing hands-on experience managing money. For example, kids can be taught to save the "Eidiyah" they receive during festivals in "piggy banks" and use the proceeds to buy something of value. It instils the idea of saving first and spending later — which goes a long way in defining a person's financial future. 

Similarly, older children can be incentivized to earn by doing household chores like making their own bed. The proceeds, coupled with monthly allowances, can be parked in custodial savings accounts, which can be the source of great learning about interest rates, personal banking, budgeting, and delayed gratification. That exercise inspires kids to set financial goals like purchasing new sports equipment, save for them, and eventually achieve them, all while learning valuable lessons. Such kids grow up to be great custodians of family wealth, often making strategic decisions that yield remarkable financial outcomes and leaving a legacy more significant than their predecessors. 

Weaving a joint vision into the financial fabric of the family

The success of families that have preserved and grown their wealth for generations is often rooted in strong financial values. The members tend to place the family's legacy ahead of their individual interests, leading to concerted efforts, cohesive vision, and stellar results. It is possible to sustain such conditions only when decision-makers take a comprehensive approach to legacy and succession planning through transparent communications, legal mechanisms, and robust financial advice. That, in turn, requires effective cooperation from all stakeholders and successors. By bringing all perspectives, grievances, and doubts to the table, senior members can determine the right course of action that can lead to satisfactory outcomes for all beneficiaries. 

Unbiased and all-encompassing financial and legal advice from experts will help senior figures draw up wills, letters of wishes, trusts, and other pertinent documents in a timely and effective manner and leave no room for errors. Even slight discrepancies can snowball into a crisis at a later date and lead to protracted and ugly court battles that will erode finances and undermine the family's legacy. There are numerous examples of such legal cases stemming from intestacy (lack of an enforceable will) and discord between family members. A legacy planning underpinned by a robust legal framework will ensure a smooth succession and transfer of assets to the next generation. Seasoned advisors also leverage various insurance products and trusts to protect the family from exorbitant inheritance taxes and other financial liabilities. 

A family's legacy is inextricably tied to its financial future, but it is not limited to it. Senior members hoping to leave a legacy that outlives them tend to explore philanthropy and charity. By setting up appropriate charitable trusts and placing a shared responsibility on successors to ensure their sustenance, seniors can cement their non-financial legacy. The successors will accept and honour the responsibility only if they are bound by strong family values inculcated in childhood. In other words, a family's wealth management and legacy planning is a continuous and cyclical process of educating the next generation, getting sound financial advice, and aligning with shared values and vision. 

1. https://www.nasdaq.com/articles/generational-wealth%3A-why-do-70-of-families-lose-their-wealth-in-the-2nd-generation-2018-10
2. https://www.cambridge.org/core/journals/macroeconomic-dynamics/article/abs/habit-formation-and-government-spending-in-a-small-open-economy/D00B9CF41BE049542217DA07E1759AA3