Keeping Wealth in Your Family's Future
(August, 2014)

According to a new study by Merrill Lynch's Private Banking and Investment Group, family wealth fails to outlive the generation following the one that created that wealth in more than two out of three instances; 90% of the time, "assets are exhausted before the end of the third generation." This report focuses on investors with more than $5 million, but the principles apply just as well to those with $500,000 or even $50,000 to invest. If you are concerned about the financial security of your children and grandchildren, you should set a good example and discuss money matters regularly with your descendants.

Savvy spending
One reason that family wealth may not last very long is simple: people spend too much. In the Merrill Lynch study, more than half of the respondents either expressed confidence that a 6% distribution rate could sustain an investment portfolio indefinitely or did not have any idea of how much could be withdrawn prudently. To put this in perspective, research indicates that a sustainable distribution rate might be as low as 2% of portfolio value a year.

Obviously, the less you spend the more that can pass to a surviving spouse and to your descendants. "Spending moderately wflTsignaTro your loved ones that this is how one builds and maintains net worth. In addition, you can make sure that yout heirs know that your spending habits are designed to minimize the chance of depleting the family's coffers.

Continuing the conversation
Indeed, perhaps the most important thing you can do to preserve wealth in your family is to regularly talk to your children about finances. Remember to keep the discussions age appropriate. With very young children, you might talk about how money is earned by working, how some money goes to taxes to pay for schools and other services, and how what's left might be either saved or spent. Avoid getting into too much detail with youngsters, who probably will be overwhelmed and, therefore, intimidated rather than educated.

Once your children are ready for college, you can have practical conversations aboutTheir choice of study and eventual career path. A student who knows a substantial inheritance lies in the future, or who can play a possible role in a thriving family business, might be inclined to consider a course of study that relates to a personal passion; another student, one who understands that his or her lifestyle will depend on his or her earnings, could go in another direction.

Similar conversations might take place when children are about to become parents or are shopping for a home. The more they know about your finances, and about their own prospects for an inheritance, the greater the likelihood they'll make informed decisions.

On the flip side, holding these ongoing conversations with your children can educate you, too. You might discover a need for gifts or loans that you hadn't known about. Conversely, you might realize that your children are uninterested in financial matters and may make poor decisions if they inherit money outright. If so, you may have the opportunity to build safeguards into your estate plan, such as giving or leaving money to a trust for a child's benefit.

Hitting the highlights
Of course, some parents will not want to reveal all the details of their financial affairs to their children. In truth, that's not really necessary. You might give your children an overview, with enough information to impart what you are willing and able to provide during your life and a general idea of what they might inherit someday. In addition, you can tell your children where to find key documents and also provide contact information for your professional advisors.

Once you bring your advisors into the inheritance conversation, keep in mind that some studies show that both parents and children may be more comfortable discussing their circumstances with a financial professional (CPA, attorney, financial planner) than with each other. If that's the case in your situation, you might ask a professional with whom you work to suggest and even host a meeting of the generations. Our office would be pleased to help you get the conversation started.

Source: August 2014 AICPA Client Bulletin


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Larry Ardito CPA, ABV

George Toscano CPA, MST

Roberta McCollum CPA, MBA, MST