Best Practices for Successful Transfer of Financial and Social-Emotional Wealth to the Next Generation

by Lilli Friedland, Ph.D.

Financial advisers and estate attorneys in the US are currently being deluged with HNW families who trying to gift family members rather than pay the government higher taxes – due to the uncertainty of the future of our existing tax law. Many families are confronting their fears of their children squandering the financial wealth they inherit, and/or wanting their children to develop themselves and succeed on their own, prior to receiving these gifts. They are realizing the transfer of financial wealth is often compromised by the conflict among the inheritors and/or the lack of maturity and development of the individual family member.

Initially, many people think only of the transfer of financial assets when they think of wealth transfer. Upon reflection, most HNW family leaders realize a critical aspect of wealth they wish to impart to future generations are their values, history, and traditions – their social-emotional legacy. The unsuccessful transfer of social-emotional wealth often dramatically impacts the asset transfer- for example, when family members are cut out of the family’s estate; when individuals are unsatisfied with non-equal distributions; or due to conflict among the inheritors.

What can financial and legal advisers do to facilitate the successful transfer of the family’s wealth? Trusted advisers, often with the assistance of a family dynamics psychologist, can include the concept of wealth transfer on multiple occasions and point out how financial and social-emotional wealth are intertwined. The various aspects of wealth transfer should be part of the ongoing conversation between adviser and family leaders over the years they work together.

The transfer of wealth between generations is a process, not an event. Most families use strategic planning to achieve financial goals. However, most family leaders don’t realize they need strategic planning to achieve social-emotional wealth goals to continue their legacy. In order to do so, the family members need to be accustomed to using the tools and processes that promote family relations.

Families are both distinctive and similar to one another in various ways. Advisers need to understand the distinctiveness of each family as a prerequisite for their building trust and confidence in their role. When advising a family, it is necessary to learn how the elder generation defines their unique “family” – who is part of their family (this is complicated because some families have multiple marriages, divorces, family members now excluded, inclusion of family-of-origin, adoptions, etc.). Family members have a much greater opportunity succeeding in an environment when they are familiar with their own strengths and desires, and the expectations of them by others. When family members learn about their responsibilities and roles, it is less likely they grow up ‘entitled.’ The earlier the family leaders clarify the family vision, the easier it is to integrate the goals into the lives of the family. If the family has routinely used conflict management strategies and collaborated on decisions, the members will likely use them at times of crisis or unexpected changes. Effective communication and decision-making among family members at times of transition require them to be accustomed to working together.

Though family leaders have multiple expectations for the next generation, these thoughts frequently have not been explained to their family members or integrated in their parenting practices. Frequently people experience disappointments, sadness, and upset with the actions and attitudes of other family members. Many families do not have the tools or strategies in place to manage conflict or build collaboration. Family wealth and investment advisors frequently introduce family dynamics experts to help clarify the family’s vision and integrate family’s legacy practices, build relationship skills, and develop each individual’s strengths. When the extended family members are secure and knowledgeable about their roles and obligations, and routinely use established processes to manage conflict and differences, the members are usually more aligned with one another and support the family’s legacy. Family systems advisors are typically brought in to help the family in the following areas:

Studies indicate that successful multi-generational families use these best practices routinely. In order to manage situations of transition or crisis, the family needs to familiar with ongoing communication and shared values.