- 5-Minute Article
- May 14, 2019
5 Ways to Help Protect Your Finances for the Next Generation and Beyond
Teaching your family good money habits can help preserve the assets you leave behind.
- What conversations can help my beneficiaries prepare to take over my financial legacy?
- What are the financial tools that could help my loved ones save money and build for future generations?
- Who can I connect my family with for additional financial support?
The financial legacy you’ll someday pass down, whether it’s a modest savings and investment portfolio or a multimillion-dollar inheritance, will impact the lives of those who matter to you most. You can help ensure that this impact is a positive one by giving your beneficiaries the support they need. Although studies have shown that as much as 70% of family money disappears by the second generation,1 this doesn’t have to be the case for yours. Teaching younger generations healthy financial habits now can help protect your finances and sustain your legacy for years to come.
Here are five strategies to use:
1. Paint Your Big Picture
It’s never too late – or too early – to paint a clear picture of how your finances could help your loved ones prosper beyond your lifetime. Knowing that you want to pass down your assets as a financial legacy is a start. Next, you’ll want to crystallize what you’d like it to accomplish for your loved ones. Who do you want to help and how? See where your answers fit in with your other financial goals – from short- to long-term – so you can start strategically saving and investing toward the legacy plan you envision. A prioritized plan for retirement can feed your legacy by helping grow the wealth that funds it. It can also provide extra inspiration.
“Aligning your legacy with your overall financial plan gives you context around why you’re working so hard and saving – including what you save for the next generations,” says David Staples, a Virginia-based CFP®. “It’s peace of mind, a road map, so that one day all your hard work will pay off for you and those you love.”
2. Open the Lines of Communication
Speaking with loved ones openly about being beneficiaries can position them to confidently take the reins of the legacy you’ve built. “If you’re not yet comfortable talking dollar amounts, you’ll want to at least make sure your family knows where your plan documents and the assets they cover are located and managed,” David says. “This makes it easier for them to gain their bearings before needing to coordinate and make decisions about the legacy they receive.”
Next, find out if your loved ones have goals that could influence how you transfer your legacy to them. For example, are they seeking higher education for themselves or their children? Are they eager to catch up on their retirement savings? Do they wish to donate to causes they’re passionate about? This could influence how much money you leave to your loved ones and the timeline for passing it down, as well as the type of financial account you use to save for, or transfer, the gift.
“You need to help them realize that your transfer of wealth is a truly meaningful gift,” says David. “It’s important for them to form a deep understanding of what it can mean to their lives."
Here are some potential conversation starters:
- What are your financial goals?
- What does wealth mean to you?
- What are you passionate about?
- Which money tasks or topics would you like to understand better?
- Are there family traditions you’d like to see financially supported in an estate plan – like an annual trip or reunion?
3. Provide the Right Tools
Whether you’ll be leaving your loved ones a large inheritance or a small portfolio, they’ll need tools to help protect and grow it. You can help. Start by passing down the values that you relied on to build and sustain your finances – things like hard work, discipline, and resilience. Show your loved ones how responsible planning and saving can increase the value of what they have and preserve it for future generations.
This doesn’t have to be all talk. Real experiences can help your loved ones develop interest and confidence in their money skills. Try inviting them into your decision-making process for budgeting, saving, and spending choices, sharing your thinking along the way and giving them opportunities to weigh in. And just as you may have used an allowance to instill fundamentals of earning and saving when your children were young, you can use financial accounts to help your adult children or even grandchildren, nieces, and nephews learn ways to save and grow net worth. For example, you could open an investment account with them and let them experience the results of withdrawing money versus leaving it invested to earn compounding returns.
4. Give While You Live
Does someone important to you have a pressing financial need? Maybe it’s buying a first home, starting a business, or paying for college or medical bills. Whatever the situation, your money could have a more significant impact on that person’s life now, rather than decades later as an inheritance.
With the confidence gained from working with a financial professional, as well as recent tax policies that encourage giving, more people are beginning to transfer their wealth over several years or decades. For example, the IRS increased the annual gift-tax exclusion for 2022, allowing you to make as many gifts of cash or property (up to $16,000 each)2 as you’d like each year – without you or your beneficiaries having to pay any taxes.
“It’s rewarding to see the joy clients experience when they can still fund their lifestyle while helping loved ones in need,” says David.
Through lump sums, securities, a trust, or a tax-advantaged 529 college savings plan, you can help your loved ones feel comfortable accepting and managing what you give them. The best part is getting to witness your legacy’s direct impact on their lives.
5. Set Them Up With Support
As you help your loved ones create a strategy to pursue their financial goals while you nurture your legacy plan, it’s helpful to consider what kind of outside support they might need to be successful stewards of your wealth. Consider connecting them with financial mentors who can provide a wide array of professional perspectives, not to mention a safe space where beneficiaries can feel comfortable asking questions they might be embarrassed to ask you (or even friends and other family members).
“For those who need help navigating an inheritance,” says David, “finding someone they trust who has their back and answers questions with their best interests in mind – that can be the difference between losing or preserving what you leave them.”