The adage “from shirtsleeves to shirtsleeves in three generations” describes the failure to preserve family wealth for future generations. The cycle begins with the first generation receiving no formal financial training, yet working hard to provide financial resources for their children. The second generation benefits from their parents’ hard work and experiences some of the luxuries of wealth, but also has the knowledge to invest in the future for their own children. The grandchildren inherit the fortune and spend with little regard to the work that created the family wealth. The fourth generation is inevitably left with little to nothing, and again, is forced to work to make ends meet for their family.
Regardless of whether you inherit third-generation wealth or if you suddenly come into money via an unexpected windfall, you should do a cash flow analysis before you decide to quit your job, move to an exotic island or spend it on a yacht that will hold 100 of your closest friends. You must consider your long-term goals if you want your wealth to last.
Sudden wealth can greatly affect your tax liability, especially if your inherited assets generate substantial income. You should seek out a tax adviser to review your withholding or estimated payments. You may also consider transferring income assets to other family members or setting up educational trusts for your children and grandchildren. You may consider establishing a charitable foundation to gift assets that are tax deductible.
A substantial amount of wealth may also change your attitude toward investing. With more money, your risk tolerance may change. The ultra-wealthy are also given investment opportunities that may not be available to the average investor. If you are unfamiliar with sophisticated investment products, you should consult a financial professional that specializes in high-net worth families. The fundamental principles of preserving and growing your wealth for future generations shouldn’t change, but the diversity of your investments may.
With increased affluence, you should also examine your insurance coverage. You may be able to self-insure for disability or long-term care coverage. On the other hand, you may need to protect your wealth from lawsuits or insure expensive possessions. Jewelry or artwork may require separate policies.
Considerable wealth will also fundamentally affect your estate plan and how you share your fortune. The successful transfer of family wealth should begin during your lifetime if you intend to create a legacy. Bringing your children or grandchildren into the decision-making process with your financial adviser should ensure proper stewardship of a family’s wealth.
These concepts seem obvious to those who have an understanding of financial matters. However, you would be surprised how many people do not have the basics in place. Please add the needed basics to ensure your wealth is durable and long-lasting.
William G. Lako Jr., CFP, is an executive in residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Lako is a certified financial planner.The Marietta Daily Journal will periodically publish columns from KSU business faculty.