GENERATIONS

2019 Outlook: Preparing the Next Generation for Wealth

12.10.2018 - John M. Dowd

VIEW OUR FULL 2019 OUTLOOK

How to Build Bridges and Encourage Accomplishments

Baby boomers will pass down an estimated $30 trillion over the next several decades, and the lion’s share of that wealth will go to millennials. The question is: How can we prepare them to inherit this wealth? Fiduciary Trust CEO John M. Dowd and Franklin Templeton Investments former Chairman and CEO Charlie Johnson offer their best advice.

BUILD BRIDGES TO THE FUTURE

To prepare the next generation for the future, start by giving them a sense of your history. Then help them develop the discipline they’ll need to find their own path to success.

Document your journey

Put your story in writing for the next generation, including the benefits and limitations of what wealth could provide at various points in your life. Even a simple letter will provide your descendants with a unifying set of values to guide their decisions as they build and manage wealth in the future.

Demonstrate discipline

Inviting the next generation to attend a regularly scheduled meeting with your advisor will help them appreciate the value of a formal agenda and demonstrate smart financial habits, such as updating your financial plan to reflect life changes. It also reminds them that wealth serves them—not the other way around. Be sure to map out a plan for the most appropriate times to broach various topics, such as the specific terms of your trust.

Test their abilities

One coaching method I have seen work very successfully for families with private foundations is giving the next generation responsibility for evaluating grant opportunities, making site visits, and determining the potential impact a grant might have. Ask the next generation to provide a report explaining how the applicants were evaluated. This is the perfect opportunity to test drive their skills.

Encourage lifelong planning

Successfully managing family wealth requires many of the same skills as running a business: setting goals, building budgets and measuring progress. In addition, you need to consider the unknowns—such as market returns, costs and changing goals. Following a disciplined and flexible financial plan is a characteristic shared by successful businesses and families alike. It provides a playbook for navigating a changing environment.

Build a financial framework

Finally, ask the next generation and your wealth advisor to develop a framework for understanding how the markets and the economy move. Early in my career, I got some great advice on how to sort through the overwhelming amount of financial information that is available by starting with six key factors: interest rates, the US dollar, inflation, earnings, employment and GDP. Our educational resources are specifically designed to help the next generation understand these dynamics.

ENCOURAGE HARD WORK AND ACCOMPLISHMENTS

Charlie Johnson was named CEO of Franklin Templeton Investments in 1957, taking the reins of a company his father created ten years earlier. (Franklin Templeton is the parent company of Fiduciary Trust.) When Charlie retired in 2013, the next generation of his family stepped up. This is a brief glimpse into his views on family wealth.

Learning that financial rewards are earned

In the 1970s, when the mutual fund industry and Franklin Templeton were just getting started, earnings were slim. So, Charlie’s children worked summer jobs and learned important lessons about the value of a dollar.

In the early 1980s, when the company started to enjoy financial success, Charlie awarded 2,000 shares of company stock to each of his children, with some degree of hesitation.

"My father was a very practical man. When I was about 12 years old, he told me, ‘Too much money has ruined more lives than not enough money.’ I didn’t understand his comment at the time, but I’ve come to learn that it’s very true. Fortunately, my children were not spoiled by too much wealth early in life. They seem to have their feet on the ground.”

Motivating the next generation

Charlie also wants to prevent family wealth from distorting the views of his grandchildren, who are now between the ages of 12 and 25. So he set up a generation-skipping trust that encourages them to roll up their sleeves, work hard and lead a life of “endeavor and entrepreneurship.”

His grandchildren can use distributions to supplement their incomes, allowing them to pursue their passions in careers that make valuable contributions to society even if they offer only modest financial rewards, such as running a foundation.

"Inheriting too much wealth can distort a young person’s perception of money because it is often held in less regard than wealth they have earned on their own.”

Making fair and objective distributions

The trust document does not include specific benchmarks or incentives, and does not name a family member as trustee. Instead, the responsibility is assigned to a professional trustee who has enough discretion to allow distributions that encourage hard work, while preventing distributions that beneficiaries may use irresponsibly.

"Appointing a family member as trustee can put a lot of personal pressure on them. If they say no to a distribution request, feelings get hurt. That can influence their decisions.”

This analysis is provided for illustration and discussion purposes only and does not guarantee future results. Please speak to your Fiduciary Trust contact if you have questions or would like more information. This communication is intended solely to provide general information. The information and opinions stated are as of December 1, 2018, and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

CFA and Chartered Financial Analyst® are trademarks owned by CFA institute.

GENERATIONS

Fostering the Entrepreneurial Spirit

12.13.2018

NEXT POST

GENERATIONS

Saving for College

08.09.2018 Bryan Kirk

Tax-Smart Strategies to Give the Gift of Education

PREVIOUS POST