The transfer of wealth across generations has long been a complex and emotionally charged topic. Parents often struggle with balancing their desire to provide financial security for their children while ensuring this wealth does not diminish their drive, values or happiness. As an adviser specializing in wealth transfer and focused on the impact of wealth, I have observed the profound effects that money can have on individuals and families. Most parents I know emphasize the importance of passing on not just financial assets but also values, principles and a sense of purpose to ensure the well-being and happiness of future generations.
By now, you’ve probably heard of the Great Wealth Transfer, the estimated $45 trillion to $90 trillion that will change hands from the Baby Boomer generation to their heirs over the next 25 years. However, the term “Great Wealth Transfer” doesn't fully capture what happens when one generation passes the torch to the next. For most people, who you are and what your legacy will be extends far beyond monetary value. We want to ensure that our life's work, core values, family harmony and philanthropic passions continue to make a difference long after we’re gone.
Said simply, we want our children to be happy and healthy and to love one another. Everything beyond that is a bonus. Achieving this requires taking a holistic approach to estate planning. It's time we shift our perspective and recognize the full opportunity before us: Rather than just a wealth transfer, it’s a "Great Legacy Handoff."
The psychological impact of sudden wealth
Sudden wealth — whether through inheritance or winning the lottery — can be both a blessing and a curse. Numerous studies and anecdotal evidence highlight that lottery winners often face a host of psychological and financial challenges. For instance, the sudden influx of money can lead to stress, anxiety and strained relationships.
Many find that they quickly become an ATM to family and friends who value their access to newfound capital, questioning their self-worth and relationships and often medicating both with new purchases. Sadly, this leads to unhappiness and often poor financial outcomes. In fact, according to the Certified Financial Planner Board of Standards, nearly one-third of lottery winners file for bankruptcy within three to five years.
The role of values in wealth transfer
One of the key insights from the field of psychology is that happiness and well-being are not merely tied to financial resources but are deeply connected to a sense of purpose and meaningful relationships. Parents wishing to transfer their wealth successfully should focus on imparting values and principles that have guided their lives. A “letter of wishes,” often used in estate planning, can be an effective tool. This letter, while not legally binding, provides guidance to trustees on how a trustee should consider the grantor’s objectives in establishing the trust and can emphasize the importance of things such as health, education and meaningful achievements.
Years ago, I crafted a letter of wishes that has become a template from which many of our clients craft their wishes for their heirs, inciting the trustee to consider these wishes when fulfilling their fiduciary obligations. My letter is fairly prescriptive: Of primary importance is the health and happiness of my descendants. The letter clarifies that we hope the trust assets will enable our beneficiaries to pursue opportunities that foster self-esteem and personal growth without inhibiting their ambition or achievement. This aligns with the broader psychological understanding that self-worth and life satisfaction stem from personal accomplishments and the pursuit of individual goals.
Charitable goals and philanthropy
For many, another crucial aspect of wealth transfer is instilling a sense of social responsibility and philanthropy in heirs. Encouraging charitable giving can help beneficiaries develop empathy and a sense of community, essential components of a fulfilling life.
One path to consider is to underscore the importance of philanthropy in your letter or trust, suggesting that a portion of trust assets be used to support charitable causes reflecting the settlor’s pattern of giving during their lifetime. This approach benefits society and enriches the beneficiaries' lives by connecting them to causes greater than themselves. And by keeping the pattern of gifts similar to that of the wealth creator, arguments over which charities to support over the long term can be minimized since the family has a mission around which to unify.
Good parenting and setting an example
Ultimately the most effective way to ensure wealth transfer leads to happiness and well-being is through good parenting and leading by example. Parents who model hard work, integrity and compassion provide their children with the tools they need to navigate the challenges that come with wealth. Setting clear expectations and providing guidance on financial management and philanthropy can prepare heirs to handle their inheritance responsibly. In my case, I separated my heirs from the responsibility of managing trust assets and instead require professional advisers with strict rules about conflicts of interest.
Consider the story of Warren Buffett, who, despite his immense wealth, has pledged to give away most of his fortune to charity. He has consistently encouraged his children to find their own paths and contribute to society. His approach demonstrates that instilling strong values and a sense of purpose can be more valuable than any financial inheritance. And while I suspect all of his children will end up just fine as will their children, much is to be learned about Mr. Buffett’s lifestyle and his pursuit of meaning and intellectual curiosity. He has by all accounts spent far less than he can afford.
Embrace legacy-building strategies for enduring impact
Crafting an estate plan involves much more than simply determining how wealth will be transferred. As we have highlighted, the impact of sudden wealth can be mitigated through careful planning and a focus on the broader aspects of well-being, ultimately leading to a more fulfilling and balanced life for future generations. This process is not a one-size-fits-all formula. It requires deeper conversations between financial advisers and their clients — discussions that delve into the heart of what truly matters.
If you wish to implement these principles in your own estate plan, here are some key areas to consider discussing with your adviser:
1. Education
Emphasize to your adviser that funding for education, from primary school through college and potentially graduate studies, should be a top priority in the trust. Discuss the types of educational institutions and expenses you want to support and consider setting expectations around academic performance to maintain funding.
2. Housing
Share your philosophy on providing housing assistance, which could include options like fully funding a home purchase, contributing to a down payment or covering rent for a period of time. Clarify if there are any location constraints or price caps to consider. The trust could include provisions that housing funding is contingent on the beneficiary maintaining full-time employment or enrollment in school.
3. Stipends
If providing a stipend, work with your adviser to determine an appropriate amount and cadence, as well as any conditions under which the stipend should continue or cease. For example, you may only want to provide a stipend while the beneficiary is meeting certain conditions, such as working in a low-paying field, raising young children, providing care to a family member with a chronic illness or disability, or dedicating time to approved volunteer work and hobbies.
Make sure that your adviser captures the spirit and intent behind the plan. Wealth transfer is not just about passing on money; it is about passing on a legacy of values, purpose and responsibility.
We’re standing on the precipice of the largest intergenerational legacy handoff in history. By focusing on the health and happiness of heirs, encouraging philanthropy if you value giving back, and setting a strong personal example, parents can ensure that their wealth enriches their descendants’ lives meaningfully.
