In this edition of our series on “Generational Wealth Planning”, we will further our discussions around the “7 Ages of High Networth Individuals (HNW) and Family” and our focus would be on Age 2: School Child. If you missed our previous edition, you can access it here. (Include link to Age 1 newsletter here)

The history of most families of wealth usually begins with the wealth acquirer, who is the settlor, founder, entrepreneur, owner/manager of the family business and assets. This is the individual whose personal vision and hard work initiates and propels wealth creation for the family. These are the Generation One (Gen 1), that is Patriarchs and Matriarchs, who have children who automatically are born into wealth and wealthy households.

The children are not usually wealth creators like the Gen 1, rather they are wealth inheritors and may become stewards of wealth depending on how the wealth is held or passed on. Holding and managing family assets and wealth via Trusts is invaluable when the expectations are that the children become stewards of wealth, that is intergenerational wealth.

Given the digital and information age we live in where most information can be accessed over the internet, conversations with children about the wealth and assets of the family should commence at the age where children can appreciate the value of working hard and the benefits of earnings that hard work provides. It is important to align the learnings and understanding about the family’s assets with the family’s values and the purpose of the wealth to the family.

Some principles that could be adopted to introduce and discuss family wealth and estate planning structure (Trusts etc.) have been articulated by Beth Mayfield, Caroline Mckay in their article as follows:

Principle 1: Provide Age-Appropriate Transparency

Your children may know more about your wealth than you think. Many items that indicate wealth—for example, the value of your home, your job title/position, the company you work for, the gifts you give or vacations you take—can often be valued or monetized online. Even younger children can recognize their relative wealth based on the size of their home, the schools they attend or the benefits available to them. Accordingly, providing age-appropriate transparency can help put your wealth into perspective and begin conversations about what it means to earn and maintain wealth.

Age-appropriate transparency does not necessarily mean sharing financial statements with your children—unless you want to. Instead, transparency is more about providing guidance around how to think about wealth and how wealth is earned and maintained. When the time is right, it is also about educating the family on your estate plan and your expectations and wishes for how the money will be used.

Some steps to provide age-appropriate transparency include:

• Discuss the type of work and discipline that that is required to support the family and the family’s lifestyle. This can be a great primer, even for younger children, to understand what it might require to sustain or build a child’s own wealth.

• Explain what you expect to provide in terms of financial support as your children start to gain more independence, and what you expect your children to contribute themselves. This type of discussion can provide important insights as to future expectations. For example:
• Is an allowance contingent on helping around the house?
• Is your child expected to work in high school or college?
• Are there any expectations for grades or other contributions if you are paying school tuition?
• Will any support be provided once the child is no longer living at home and, if so, are there any requirements to receive this support?

When the time is right, provide transparency and education around your estate plan to offer additional opportunities to discuss values about wealth preservation and vocalize your expectations for how the wealth should be used. If you also plan to name a child as an executor or trustee (or co-fiduciary), these conversations can be critical to helping a child make important decisions related to these positions.

Principle 2: Create A Learning Environment

To help better prepare your children for wealth, create a learning environment where financial planning essentials and investment fundamentals are modeled, discussed and taught. There are lots of ways to do this, but consider some of the following ideas:

• For younger children: Having money in hand is a good way for children to begin a financial education, whether it’s received through gifts, an allowance or the neighborhood lemonade stand. Talk to them about what they can do with this money, and introduce the idea of savings.
• Encourage your children to save a regular amount of their money in their piggy bank, because it helps children develop financial discipline.
• Incorporate the “rule of three” by asking your child to divide money into three categories: saving (for longer-term goals, like a new bicycle), spending (for short-term wants, like a toy) and giving (for someone in need or a contribution to a local cause).

• For middle and high school-aged children: At this stage, your children will have interests that become more expensive. Whether it’s electronics, musical instruments, movies or concerts, your children will likely be spending more and looking for financial support.
• Begin talking about the ways you will (and will not) support their spending and introduce tools, such as a budgeting app, to help them learn responsible spending and money management.
• Introduce the basics of investing and finding real-world opportunities. For example, have them set up their own brokerage accounts and pick investments to get a jump-start on their financial literacy.

• For college-aged children and young adults: As young adults, your children will likely have many financial questions that arise as they navigate living independently, starting internships or jobs, paying taxes, and so on. This is a great time to introduce your child to advisors who can help them navigate the often-confusing world of mortgages and investments.

• For adult children: No matter how old your children are, there are always opportunities for learning and growth.
• Consider sharing lessons about your own financial successes and failures. What do you wish you had done differently? What were your biggest financial successes and failures? These discussions might prove very helpful to children who have more life experience and can appreciate these insights.
• As children marry and have families of their own, they may need more assistance thinking about their own long-term financial planning and support of their families. This is where transparency to your wealth and plans for that wealth can help your children devise their own financial and estate plans.

Reference:

“Talking to Children About Wealth”, Financial Advisor, accessed 23^rd July 2022.