Rice Paddies to Rice Paddies


It’s never too early to start educating the next generation about the responsibilities of wealth.

Key Takeaways

  • Three keys to understanding intergenerational wealth transfer are the importance of the balance sheet, cash flow, and taxes.
  • Eighty percent of families are not able to transfer their wealth successfully to the third generation.
  • Educating the next generation about the responsibilities of wealth must start very young—just don’t expect the next generation to handle wealth the same way you do.

Isn’t it the American dream to have a better life for our children and our grandchildren than we had for ourselves? But, one of the things that’s happened in the country over the last century is that businesses and wealth go from rice paddies to rice paddies—i.e. shirtsleeves to shirtsleeves– in three generations. And that’s a worldwide phenomenon.

That’s right. Eighty percent of the time, families can’t make their wealth hold up through three generations. Nobody who’s worked so hard to build a business wants to see the next generation burn through that wealth Paris Hilton-style.

To prevent that from happening, start a long-term transition plan with children or grandchildren early on. Back in 1920, one of America’s wealthiest men, John Rockefeller, Jr., wrote a 14-paragraph letter to his son, John Rockefeller III, in which he had very intentional rules about accountability and adherence to handling money, wealth, and the responsibility that goes along with it. It’s interesting because the Rockefeller family has continued to transfer wealth successfully to future generations, defying the three-generation failure rate of 80 percent.

What you can learn from the Rockefellers

How do they do it? First they are very aware of the challenges of intergenerational wealth transfer. Second, they know how they are you going to address the issue of wealth and the issues related to it. One of the very first things you find out is that the education has to start young as I wrote in my blog post, Teach your children well, back in March. But, we’re looking at transitioning businesses or a lot of wealth to adult children—even those in their 50s and 60s–by the time they actually take over these assets. So we’re looking for a very, very long transition over several generations.

Three keys to teaching children about wealth

It really comes down to teaching children about three things: The balance sheet, the cash flow, and taxes. How do you do that? Get the next generation involved in your wealth decisions early on.

As soon as you’re comfortable, have members of the next generation come to meetings with your advisors about various things in the financial, estate or tax arena. Get the next generation copies of financial statements. Add them to the board of directors or have a little family company meeting. The family company could be just your wealth; it doesn’t mean you have a company per se. But it’s very important to get the next generation involved, because over time they will start to pick these things up.

You’re trying to pass the leadership torch on to the next generation. And, in the process, they’re going to take that wealth and do something different with it than you did. That’s why we have this big wealth transfer failure rate because many times the first generation is trying to get the second generation to do things the same way they did. Just look at the changes over the last 30 years. Technology and culture has changed so much, there’s no way the next generation is going to see the world the same way you did. So it’s more of an educational process to provide the next generation with information, on-the-job training, on everything else you have learned about wealth.

Conclusion

Now if you’re wondering how to do this, then talk to your most trusted advisor and ask him or her how you might be able to bring the next generation into meetings that you have periodically. Ask how you might get the next generation copied on financial statements or how you might get them onto boards of directors or anything else that might be somewhat related to your family wealth or your company. Again, this very long transition starts early on and continues for multiple generations. Hopefully, the result will be a better life for our children and grandchildren along with the wealth that comes with it. That’s why we want our money to be passed along and it’s important for all of us that prudence takes place with money and the responsibility that comes with it.

So, until next time, enjoy. Gary

By the way, my book Changing the Conversation, has more on the topic of teaching children the value of money.

coyle@coylefinancial.com  | 1-800-480-7913