Challenges of Generational Wealth - And How To Overcome Them - Private Wealth Asset Management (2024)

• Article

When it comes to managing generational wealth, the path is often less straightforward than one might imagine. In our experience, these are some of the top challenges wealthy families often run into when it comes to passing on their wealth to future generations.

1. Lack of Transparency and Communication

A survey of high-net-worth individuals ($3 million+ in investable assets) by U.S. Trust found that 64% have disclosed little to nothing about their wealth to their children.

Unfortunately, in the absence of open communication and a solid understanding of financial matters, adult children may find themselves overwhelmed by the complexities associated with managing wealth later in life. Real challenges often surface when children and grandchildren are kept in the dark about the previous generation’s estate.

• Shock and Unpreparedness: Inheritors might find themselves suddenly handling wealth they don’t know how to manage.
• Family Disputes: Without clear guidance, disputes can arise over asset distribution, leading to disharmony and conflicts between family members
• Legal Complications: Uninformed inheritors may face additional legal hurdles and unanticipated tax burdens if the estate plan is outdated or are unaware of their rights and responsibilities.

The Power of Clear Communication

The key to navigating these challenges is effective communication. It’s about more than just talking; it’s about creating an environment where every voice is heard and respected. Here’s how clear communication can make a difference:

• Creating Understanding: Open dialogues help family members understand each other’s viewpoints. This understanding is the first step towards finding common ground.
• Setting Clear Expectations: Transparent discussions about inheritance and roles help set clear expectations. This can prevent misunderstandings and disputes down the line.
• Building Trust: When family members feel their opinions are valued, it fosters trust. This trust is crucial for collaborative decision-making.
• Planning for the Future: Regular family meetings to discuss wealth management can help keep everyone aligned with the family’s financial goals and strategies.

2. Family Conflict

The complex web of family dynamics is at the heart of many generational wealth challenges. Substantial wealth can sometimes amplify underlying tensions or create new ones. Here are a few points to consider:

• Diverse Perspectives: Each family member may have a vision for the wealth’s future. This diversity of thought, while valuable, can lead to disagreements.
• Inheritance Expectations: Lack of communication and misunderstandings about what will happen may foster distrust or incorrect assumptions regarding a future inheritance. Yet, discussions around death and the financial impact of a family member’s passing can be emotionally charged and family history may impact how each person receives the information.
• Role of Control: Deciding who controls or makes decisions in the future regarding the family’s financial resources can be a contentious issue, especially in larger families.

Involving Children in Planning Discussions

It can be beneficial for older generations to share information about their estate and wealth transfer plans with family members. This does not mean you have to reveal all your financial information at once.Instead, it may start with general, broader financial topics that are geared toward the age and stage of your family and that become more detailed over time. In our experience, many of these conversations do not include dollar amounts. The reasons to take numbers out of the conversation are numerous, but the top ones we hear include:

1. That you cannot “unhear” a specific dollar, and those numbers may change over time, and
2. The desired focal point of the older generation is usually more qualitative in nature, i.e. communicating family history and goals for the future.

Opening a dialogue that creates transparency and allows for questions about the decisions and the planning process is critical in these discussions. This approach helps prepare beneficiaries to handle their future responsibilities, informs the older generation about what is on the minds of their descendants, and may also lead to the rising generation making more informed decisions about their own plans. This can all go a long way to setting a strong foundation for managing the family wealth effectively.

Read: Preparing the Rising Generation for Inherited Wealth

Regarding the topic of estate planning specifically, putting together the necessary documents and structures is not just a legal necessity; it’s an opportunity to plan for your family’s future and security. Including adult children in discussions about the legal plans you have put in place can be beneficial and may:

• Promote Financial Stewardship: It helps the next generation understand the value and responsibilities of family wealth.
• Clarify Expectations: Open conversations about estate plans set clear expectations and reduce potential conflicts among siblings.
• Prepare Them for the Future: Being part of estate planning helps younger generations develop the skills and knowledge needed to manage their wealth over time.

Remember, this does not need to be an all-or-nothing proposition about the level of detail you communicate, nor would we suggest a one-and-done approach to such a conversation. Instead, consider (and seek advice from your advisory team) what you wish to communicate and what makes sense for your family to know and understand at the time before disclosing details.

3. Lack of Financial Education

As we navigate the complexities of generational wealth, a critical and often overlooked aspect is the varying levels of financial knowledge, education, and experience (sometimes referred to as financial literacy) among younger generations. Effectively managing new assets largely depends on one’s financial know-how.

Each generation brings its own perspectives and challenges in terms of financial literacy. Generation Z, for example, by virtue of their relatively young age, faces the challenges of inexperience and possibly being burdened with student loan debt. Millennials may struggle with the rising cost of living and salaries that aren’t keeping pace with inflation. On the other hand, Generation X may face competing priorities of saving for their retirement, paying for their children’s education, and caring for aging parents.

Addressing the Financial Education Gap

Achieving financial competency is key to sustaining and growing multigenerational wealth over time. To ensure that family members across all generations are well-prepared, consider these steps:

• Fostering Open Communication: A common theme that we return to frequently with clients; create an environment where family members feel comfortable discussing financial questions and concerns, and can learn from each other’s experiences.
• Hands-on Learning: Encourage practical involvement in family wealth discussions and decision-making to provide real-life financial management experience.
• Tailored Education: Talk to your financial advisory team about financial education resources that cater to each generation’s specific needs and experiences. For example, tech-driven learning modules for Gen Z, debt management for millennials, and advanced investment strategies for Gen X.
• Internships for Practical Experience: Utilize your networks to identify internships for younger family members to pursue. These opportunities provide practical experience and a deeper understanding of financial dynamics.

Securing Your Generational Wealth: The Path Forward

Every family’s journey with wealth is unique. Crafting a financial plan that reflects your specific circ*mstances, values, and aspirations is key to successful wealth management.

The investment landscape can be complex and ever-changing. Professional guidance can help you avoid common pitfalls and capitalize on opportunities you might otherwise miss. It’s about adding clarity and confidence to your financial decisions. As you contemplate the next steps in securing and growing your generational wealth, remember that you don’t have to navigate this path alone. Our team of Private Wealth advisors is here to provide personalized advice and strategies tailored to your unique situation. We are committed to guiding you through the intricacies of wealth management, ensuring that your legacy not only endures but thrives.