Nurturing Responsible Wealth Inheritors

One of the great challenges that all parents face is how to raise independent, self-sufficient, motivated kids. This concern can be exacerbated among families of affluence, as inherited wealth comes with its own opportunities, challenges, and pitfalls. For individuals who have created wealth through entrepreneurial endeavours, hard work, and risk taking, the fear of how that wealth could negatively impact their children is front of mind. For multi-generational families who have inherited wealth themselves, their own personal experiences around wealth transition will impact the way they treat the next generations.

Every family is unique, but, undoubtedly, most parents want to impart on their children a solid understanding of their wealth situation, creating opportunities for younger generations to continue growing the family’s resources while embracing the responsibilities associated with acting as stewards of intergenerational legacy. At the same time, they want to ensure that their children continue to lead enriching lives that include personal challenge and growth, self-sufficiency, and community involvement! But talking about wealth is difficult and can be downright uncomfortable. Not to mention, many families with significant wealth worry about the impact of “too much, too soon” and the risk that they inadvertently create adults who are lazy, wasteful, and spoiled. These concerns are reasonable, as wealth inherited without the appropriate foundational education can foster isolation, addiction, delayed emotional development, and lack of motivation.

Many are familiar with the old adage, “shirtsleeves to shirtsleeves in three generations,” which suggests that the wealth accumulated in the first generation is lost by the third. This concept, which is rooted in research done in the 1980s by John Ward, does have some important lessons. However, as the field of family enterprise advising matures, so does the thought leadership around how to best support wealth transition.

Instead of a fear-based approach, the family advisory community is starting to embrace a more holistic understanding of wealth that goes beyond solely financial assets. It focuses on preparing the family for the wealth and the recognition of other forms of capital, including human, social, intellectual, and financial. A recent book co-authored by three renowned experts in the field, entitled Wealth 3.0, further outlines this new form of engagement.

This shift in thinking could not be more timely, as the “Great Wealth Transfer” is upon us. It is estimated that $1 trillion in assets will transition to the next generation over the next five to seven years in Canada alone. There are already many examples of family enterprises that have successfully transitioned wealth, and the two key success factors that are repeatedly cited are focusing on communication and adequate preparation of heirs.

For families who don’t know where to start, there are an abundance of resources available, as well as Family Enterprise Advisors who specialize in this area. Here are a few suggestions from our team that may help you think about next steps for your family:

• Parents can start by documenting the key principles that help define their own philosophy around wealth, wealth transition, and their decision-making around inheritances. This could include a discussion of values and/or family history that informs the origin of the family wealth. Entrusted: Building a Legacy That Lasts is an excellent resource book to support this thinking.
• Sharing this information with the next generation provides an opportunity for sharing and feedback. In the book Wealth of Wisdom, authors Tom McCullough and Keith Whittaker have devoted a chapter to this topic and have enlisted various advisors to provide suggestions around how to start these conversations.
• Use philanthropy as an opportunity to support initiatives that align with the family’s values and interests. Emphasizing the importance of stewardship of financial capital for the benefit of society (not just the family) can lead to impactful conversations.
• Education, financial literacy, and preparing the next generation to be responsible inheritors is a key part of this process. Getting young adults to be actively engaged can be challenging, particularly when they are focused on careers, young families, and building their own lives. Use regular family meetings as an opportunity to start these conversations and explore these topics. Engaging an outside facilitator can be helpful to support this process. Organizations such as Tamarind Learning or Crysalia have specific programs that can be tailored to meet your family’s specific needs.
• Once there is alignment, or at least an understanding, of each family member’s wishes, continuity planning – the preparation of wills, tax and insurance planning, unanimous shareholder agreements, business succession planning, etc. – can continue. A clear understanding of the expectations around wealth transition should support the legal documents.

“Inheriting substantial wealth is neither an unadulterated good nor a catastrophe. Problems do come with it, but an awareness of these problems…can go very far towards ameliorating them and making it possible for inheritors to live lives that are full, creative, and satisfying, and in which the money can truly enrich its recipients.” ~ John L. Levy