Legacy Planning: Raising Independent Children Amid Wealth

Dr. Keith Whitaker is the president of Wise Counsel Research Associates, a firm specializing in family legacy planning.

When it comes to creating a legacy of generational wealth in your family, one of the principal factors in a successful outcome is your children. Indeed, without raising independent children who can handle great wealth, your legacy may not turn out as you wished.

As parents, we never want to harm our children, grandchildren and others who come after us. It is for this reason we want to create generational wealth in the first place, and it is why we often worry about the impact our wealth will have on our heirs. Having worked with hundreds of family leaders over the course of my career, I often hear parents grappling with questions like these:

• Will transferring my wealth disincentivize my children from hard work and charting their own paths in life?
• Do my children have the financial literacy to effectively manage great wealth?
• Will my wealth be used as I intend it, or will it be squandered?
• Am I creating a burden, rather than a blessing, on future generations by transferring this wealth?

The biggest concern most parents have is that transferring wealth could ruin their children. These fears are entirely normal and natural for affluent parents. And the good news is there are strategies you can employ to help mitigate negative outcomes when passing on your wealth.

A Legacy Planning Tactic to Think About Twice

Before we get into what some of the most effective strategies for raising independent children amid great wealth are, it is also important to cover a legacy planning strategy that is often considered (if even only for a moment) by high-net-worth families that is less likely to create a positive outcome.

Disinheriting Your Children

After grappling with the fear of ruining your kids by sharing your wealth with them, you might think leaving most or all of your money to charity will create a better outcome. After all, if they don't have the money, it can't ruin them, right? While for some families this can be effective (more on that later), for most wealthy families this is a plan that is likely to backfire.

The danger in it is particularly acute if you are living a life of affluence and you have not set the expectation that the money will not be passed down. Think about it for a moment. Let's say you raised your children in an environment with household staff, sent them to the best boarding school money could buy and exclusively flew on your private jet for family vacations. Wouldn’t it be difficult for your children to adapt to a life without great wealth?

Even though you may not have explicitly communicated to your children that they will be inheriting your fortune, the way you raise them sets certain expectations. Indeed, these experiences shape your children’s habits, worldview and overall character; a sudden change in those expectations could cause great harm, something we work daily to avoid as parents.

Of course, there are always exceptions. In my career I have worked with families that have executed this strategy well. Whether raising their children amid an affluent lifestyle or not, these families have consistently communicated their intentions to their children from an early age. For instance, a family I worked with had their own aircraft. The father would make it clear to his children that the aircraft belonged to him and that he was graciously allowing his children to use it. What's more, he would leverage the aircraft and other elements of the lifestyle he created to help motivate his children. To achieve this, he would remind them that to continue a similar lifestyle in adulthood they would need to work hard and build their own wealth to enjoy such luxuries.

While this can still be a tough situation, setting expectations from an early age helps your children know what's to come and gives them time to adjust.

Legacy Planning Strategies That Create Independent Adult Children

While disinheriting your children is unlikely to be the best course of action, let's instead look at some effective strategies to help raise independent children amid wealth. By doing all you can to raise children who will not squander their inheritance, you can help keep your legacy alive for generations to come.

Prepare Your Children for the Money

Wealth creators often take great care in preparing money for the family. They may spend hours contemplating who should get what (and when) and work with attorneys, accountants and financial advisors to set up a comprehensive estate plan that transfers wealth efficiently. But all too often they are so focused on preparing the money for the family that they forget to prepare the family for the money. The truth is, you can prepare the money all you want, but if your heirs are not prepared to receive it, your legacy is unlikely to carry on as you imagine it.

So how do you prepare the family for the money? The key lies in planning with your heirs, not just for them. To do this, communication is essential. Start an ongoing conversation with your heirs that goes beyond the financial details of your estate plan by sharing the “why” behind your gifts. What are your wishes, hopes and aspirations for your heirs? What is the story behind your wealth? How was it created, and what are the core principles and/or family values that have guided you in creating your wealth? By sharing these intangible assets, or what I call qualitative wealth, alongside the details of your financial wealth, you will help give meaning to the financial wealth you are passing down.

And remember, these conversations should not be one-sided. You have as much to learn from your kids as they do from you, so be sure to foster an environment that encourages your heirs to ask questions and share their perspectives. As your conversations progress, it will give you the opportunity to calibrate your wealth transfer plans based on what you learn. And likewise, your heirs may decide to calibrate their financial planning based on what you share with them.

Give Your Children Room to Rise

Many professionals in the legacy planning business talk about the “next generation,” but I like to refer to this group as the “rising generation.” Every generation has room to rise, particularly younger family members. To rise, your heirs need the opportunity to face their own struggles, forge their own work, form their own healthy relationships, learn to communicate responsibly and even fail. As hard as it is, as parents who are wealth creators, it is your responsibility to get out of the way and make room for this to happen.

As an example, in my work at Wise Counsel, my colleagues and I conducted what we call the 100-Year Families Study. As a part of this study, we interviewed nearly 100 families from around the world who have successfully transitioned major family enterprises through at least three generations. Many of these families require children who want to work in the family business to first build a successful career outside the family enterprise. Then, should they decide they are ready to join the family business, they will hold them to the same standard a non-family member would need to attain the same position.

By taking actions like these, these families empower their heirs and give them room to rise on their own. This helps build their confidence and independence and helps foster what I call a “first-generation mindset.” Having a first-generation mindset is key to rising generation family members seeing their own value. When the rising generation does not see their own value and only worships the family wealth creator, they are more likely to deprioritize themselves and feel as though they do not really matter. This can lead to a depletion of both qualitative and quantitative wealth, causing the family to fail in stewarding wealth from one generation to the next.

Starting Your Legacy Plan

As you begin your legacy planning journey, it is easy to focus on your balance sheet. But over the course of my career, I have found that transferring qualitative wealth alongside financial assets is the key to legacies transcending generations. Parenting — raising independent children — is a core part of your family’s qualitative wealth. Without it, the chances of your hopes and dreams for the generations that come after you materializing are less likely.

As you begin legacy planning, your financial advisor should play a key role. Whatever the professional background, his or her experience working with families in similar situations brings value to the conversation that extends well beyond the numbers. What's more, financial advisors routinely work with third-party professionals (like accountants, estate planning attorneys and family wealth consultants) on their clients’ advisory teams. Whether you have a team in mind already or you don't know who to call, your financial advisor can help.

Keith Whitaker and Wise Counsel Research Associates are not affiliated with Northwestern Mutual and the views expressed by Keith Whitaker and Wise Counsel Research Associates do not necessarily represent those of Northwestern Mutual or its subsidiaries.