The Benefits and Drawbacks of Generational Wealth Planning

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Wealthy Americans are giving a lot of thought these days to how they should bestow their assets to their children and family when they pass on. Many even question whether leaving a large inheritance is a good idea.

The idea of creating a legacy spanning multiple generations certainly appeals to many millionaires and billionaires. Still, some, including Warren Buffett, Bill Gates, and Gordon Ramsay, eschew the idea of leaving a large inheritance to children, opting instead to forgo traditional generational wealth planning.

The decision of whether to leave a legacy to the family can drastically shape the lives of one’s descendants, for better or worse. We’ve all heard the horror stories about young, foolish millionaires squandering their inheritances on frivolities or bad investments. Yet, there are also countless stories of those who build more wealth with the resources left behind by their parents and grandparents. Consider these benefits and drawbacks before deciding on your ultimate legacy plan.

Drawback: Expecting an inheritance can demotivate people
A Wilmington Trust survey, conducted with Campden Research and the Institute for Private Investors, revealed two-thirds of polled multimillionaires did not want to share inheritance details with their families.

Why? Fear that knowing about an imminent inheritance would demotivate their heirs. While this is certainly a valid concern in many cases, it’s worth noting that the survey also showed that 63% of inheritors planned to continue working even after receiving their inheritance.  So while removing the endowment from the equation can ensure would-be heirs won’t rely on what’s to come and instead blaze their own trails, they may do this even if they know about the inheritance.

Benefit: An inheritance can offer much-needed resources when just starting out
Yes, forgoing an inheritance can teach your children or grandchildren how to be independent and resourceful, but a financial boost at the right time can also help remove some of the pressure that stunts innovation and distracts them from going after their dreams.

While you may have worked hard your entire life to grow your wealth, it is entirely feasible that your progeny has experienced greater hardship or less success. You may have found a high-paying job out of college and bought a house while your newly graduated son or daughter struggles to make ends meet, not for lack of trying, but simply because prices and wages are different now than they were decades ago.

The perspective that inheritance is a privilege is valid, but in many instances, it can act as a leg up for those who, through no fault of their own, fail to launch.

Drawback: An inheritance is no guarantee of continued prosperity
An inheritance may solve a few immediate financial concerns or open avenues once unexplored, but it cannot promise anything in the long term. It has been estimated that 70% of generational wealth will be lost by the second generation and 90% lost by the third. If an ongoing legacy is a priority, setting up trusts, educational funds, or charitable donations may be a better plan than passing wealth on to family members.

Benefit: Inheritance trusts can drive success
Instead of providing an inheritance outright, high-net-worth parents and grandparents can use the funds to create an incentive by establishing trusts through their financial advisers or estate planning specialists. This strategy allows them to choose the conditions under which their assets are passed onto the next generation. Heirs may be required to complete a degree program to receive a lump sum or use the trust only for specified purposes, such as to start a business. Individuals can then shape how the assets they leave behind actively benefit those who receive them.

Are your clients still struggling to decide on the right estate management strategy for their wealth? Contact a GFD Financial Services Manager today or visit our blog for more information on solutions for estate planning, life insurance, and wealth management.