Merrill Lynch Life Agency Inc. is a licensed insurance agency and wholly owned subsidiary of Bank of America Corporation.
© Bank of America Corporation. All rights reserved.
Defining clear goals and thoughtful strategies around making money last can also help maintain family unity and trust.
Communicating about family wealth can present a surprising paradox: A focus on investments and dollars may feel like the most productive path, but, in many cases, nothing could be further from the truth.
The families that succeed in sustaining wealth often take a step back from dollar amounts to ask key questions.
When considering a family’s balance sheet, the quantitative elements tend to have less to do with empowering families. In fact, empowerment often has much more to do with our feelings around, and our understanding of, wealth— the more qualitative aspects. The families that succeed in sustaining wealth often take a step back from dollar amounts to ask key questions about the purpose and meaning of family wealth. Families need to develop their own approaches, and there is no one right answer. So we have honed 10 practices to help build a framework by which to think about wealth in a purposeful way on your own terms. Developed through in-depth research, as well as insight from clients and our subject-matter experts, these strategies are meant to serve as a scaffolding to purposefully navigate wealth.1 When these ideas are transformed into action, our hope is that these practices may define the parameters to help make your family unity last and your money achieve your intended purpose.
Defining the purpose of wealth is crucial to empowering family members—but that isn’t as straightforward as it may seem.2
Think about your primary intent for your wealth. What is it—in your own words? Financial independence to allow freedom and choices? Providing educational or business opportunities? Leaving a philanthropic legacy? There’s no right or wrong answer to these questions. By identifying your intent or purpose, you can start to articulate what values you associate with your family’s wealth.
Defining the purpose of wealth is crucial to empowering family members— but it isn’t as straightforward as it may seem.
Consider a family whose primary purpose was to promote and sustain family unity with their wealth. In order to pursue this goal, the matriarch decided to purchase a vacation home for family members to enjoy for generations. She considered many homes, including luxurious ones with far more space than necessary. However, she decided to buy a less expensive home and used the extra capital to provide travel funds for family members. By centering her decision around the intent of the purchase—family unity—she ended up purchasing a different home from her original idea. By letting purpose guide her, the matriarch was able to decide far more easily on a home.3
In essence, decision-making processes such as this are usually the genesis of a written values statement that can help guide family decisions. Codifying values in a shared document can become a guide for all financial and investment decisions. A written statement doesn’t set values in stone, but it does set an intentional course for behavior and decision-making—one that can be revised as family dynamics and goals change over time.4
Your family’s statement doesn’t need to be extensive. Even a simple onepage document can be a good starting point.
Most wealth creators are motivated by an intrinsic drive to achieve. And to sustain this drive across generations, they support the rising generation’s desire to thrive on the internal satisfaction that comes with “making a difference” in their chosen path. That can stimulate more success than focusing on external rewards5
A written statement doesn’t set values in stone, but it does set an intentional course for behavior and decision-making.
However, according to Stanford researcher William Damon, only 20% of young people are “purposeful,” in that they have found something meaningful to which they want to dedicate their lives. The same research states that 25% are “disengaged”—meaning that they have expressed no particular wider purpose for their lives and are not involved in activities that might help them find one. And the remaining percentage? They are “dabblers” or “dreamers.”6 That’s partly why one of the most valuable gifts to bestow on children isn’t likely to be a tangible asset, but the hunger and drive to succeed in their own right.
When the next generation is given the freedom and support to develop their passions7, they’re more likely to grow their human capital—the experience, skills and strengths that will allow them to make an impact. This approach can be more powerful—and sustainable—than exerting external pressure to follow in a wealth creator’s footsteps.8
It can be tricky to draw the line between supporting the rising generation’s pursuit of purpose and enabling dependency. To begin to draw the line, families can find it helpful to discuss the following question: Is wealth empowering family members to pursue their passion and purpose? Or is it undercutting the ability of family members to stand on their own two feet?
Some wealth creators worry that restricting financial support may limit an heir’s opportunities. However, research suggests that the rising generation tends to want parameters around access to wealth, and they’re aware of the importance of using financial boundaries to hold themselves accountable.9 Clearly defined rules also help set the stage for the idea that, when it comes to money, what’s fair isn’t always equal.
Is wealth empowering family members to pursue their passion and purpose?
Take education, for example. Many families are willing to support their children’s or grandchildren’s education through graduate school, as education empowers and equips them to pursue their passions. Within this framework, the child who chooses to stop the educational process with an undergraduate degree may receive less in monetary support than a child who gets a Ph.D. While not equal in terms of dollar amounts, many will perceive it as fair—as long as the rules of access to support are set up in advance.
Setting rules is a dynamic process that will evolve as values and goals evolve. And while flexibility is important, decisions that are murky or unspoken will earn resentment. When transparency is integrated into the family culture, children are more likely to understand the rationale behind decisions.
Wealth can sometimes be a complicated and emotionally charged subject to discuss, which is why many families avoid it altogether. Yet, a lack of communication about wealth perpetuates a cycle of negativity: Silence leads to uncertainty about money, which fosters a sense of shame, leading to more silence, which in turn threatens sustainability.10
When transparency is integrated into the family culture, children are more likely to understand the rationale behind the decisions.
That’s why it’s so important to break the taboo against talking about money early on. One way to jump-start conversations about money is by putting a “family meeting” agenda together and setting up committed time on a regular basis to talk. For young children, the regularity of a weekly or biweekly get-together—even if it’s just a 20-minute discussion of the relevant family learnings and decisions for that week—is a key to consistency. For older children and parents, aquarterly or annual meeting may be more practical.
Setting up a formal family meeting agenda—and having that face time scheduled—can ensure that conversations take place, make intentions real, and give all family members the forum to voice any concerns. What’s more, opening the lines of communication early in the rising generation’s life sets a precedent for proactive conversations around wealth.
When transparency defines conversations, the rising generation feels included, valued and empowered. When everyone feels free to ask questions, they feel a greater sense of ownership toward—and responsibility for—family wealth.
Members of the rising generation have told us that it can be disempowering to learn that a financial gift is merely a part of the family’s tax-optimization strategy. While distributions to family members can maximize tax breaks, being unclear about this approach often has costly long-term consequences. Again, feeling empowered has more to do with an understanding of the purpose of money than an amount on a balance sheet.
Members of the rising generation have told us that it can be disempowering to learn that a financial gift is merely a part of the family’s tax-optimization strategy.
When financial gifts are shared without intention or purpose, they can feel like mere transactions that lack meaning. This type of transactional giving can make the rising generation feel disconnected from the money, as if they’re simply another “collector” receiving a disbursement. Gifts that lack context can also be viewed as subsidies because sharing without intention can short-circuit heirs’ sense of financial ownership—and their search for purpose.11
Rather than just giving, allow a spirit of generosity and accountability to guide wealth sharing. For some families, this accountability might mean freezing disbursements if a child isn’t working toward a goal or acting as a productive member of the family. What it doesn’t mean is putting disbursements on autopilot. If a child is unmotivated to pursue their passion and purpose, disbursements may enable procrastination rather than promote personal development. Financial support can be empowering when it has a clearly communicated purpose and context, such as when one family agreed to fund a child’s ongoing career assessment and coaching to enable the child to pursue her goals.
Being born into significant wealth certainly has its advantages, but there are also drawbacks to growing up with a dynamic, successful wealth creator. One is that failure may not seem like an option. Ironically, many wealth creators were fueled by failure, and credit their success to the self-reliance and determination they developed from picking themselves up and dusting themselves off again and again.
By creating an atmosphere where failure is seen as part of the process, wealth creators can help the rising generation develop self-reliance. If they always provide a financial safety net, they may inadvertently undermine the rising generation’s process of building up perseverance and resilience—the very things that will make them self-sufficient in the long run. With sturdy bootstraps comes a sense of pride and authenticity that’s hard to replicate.
Take a child with entrepreneurial aspirations who started a business with substantial parental financial support. The business failed in the first year, but he wanted to try launching another startup. This time, his parents refused to provide financial assistance. Though it was difficult at first to deny him the funds, letting the well run dry empowered their son to work through his own obstacles and start earning the funds himself. By overcoming challenges independently, he built self-esteem and resilience, as well as the persistence and leadership skills that helped make his second business a success.
Just as there’s a window early in life during which babies have the ability to develop fluency in multiple languages, a critical period may exist for financial literacy.12 When parents teach the fundamental principles of saving and spending early, money talk becomes a native tongue. If they wait too long to introduce basic concepts, financial management may never feel intrinsic or even familiar. Facilitating financial self-reliance sooner rather than later often pays a long-term dividend by instilling a lifelong sense of financial ownership and awareness.
By creating an atmosphere where failure is seen as part of the process, wealth creators can help the rising generation develop self-reliance.
Capitalizing on real-life experiences as teachable moments is one way to integrate money management into everyday conversations. For example, discussions around how allowances were spent, how to budget for a family vacation, or how to maintain a car could each be an opportunity for education.
Some families create governing structures such as a family-owned limited liability company, or LLC, to help ease the learning process, while others make a point of revealing financial information and strategies at developmentally appropriate ages in the child’s life. Either way, when they come of age and start receiving distributions, children who learned financial principles early will have a context for understanding wealth, giving them a leg up when it comes to saving and spending.
Years unfold chronologically, and so it seems only natural to organize financial priorities sequentially. However, tethering your financial life to a simplified timeline is actually less effective for achieving long-term goals. Here’s why: There will always be a “next thing”—that is, those day-to-day concerns that can derail progress on long-term goals—coming down the pike. By putting off what matters, the risk that it will never get done can increase.
There will always be a “next thing” coming down the pike. By putting off what matters, the risk that it will never get done can increase.
That’s why the most successful investors align their priorities with desired outcomes that are not on their calendar. They intentionally put values front and center of their financial lives so they don’t sideline their most important goals in favor of the next thing on their schedule.
Consider a couple who was torn over whether or not to sell a successful family business started by their parents or grandparents. Holding on to the business was bound up with integrity and honor—fundamental family values. However, once they included their children in the conversation, the couple realized that conflating the business with integrity was actually compromising their values. If the day-to-day obligation to manage the business drove the decision to keep it, that could undermine their sense of integrity and, ultimately, their legacy. Even though it was disruptive in the short run to the family plan, in the long run, a goals-based approach defined by their own values, and not those of the initial wealth creator’s, helped them make the best decision as stewards of family wealth.13
Lectures about the value of a dollar notoriously induce eye rolling among younger generations. Yet for those who’ve never experienced financial hardship, money doesn’t carry the same meaning as it does for those who’ve had to scrimp and save. In fact, many young people who find out that 80% of the world lives on less than $10 a day immediately reframe the value of money right then and there.14 Philanthropy can be a sustainable way to gain and maintain perspective on value—both personal value, and wealth’s true worth—by connecting family members with money on an emotional level.
Writing a check to and volunteering for a nonprofit or other charitable organization can be one of the greatest benefits of wealth, but really determining why giving matters is quite another.
Writing a check to and volunteering for a nonprofit or other charitable organization can be one of the greatest benefits of wealth, but really determining why giving matters and how that affects the distribution of wealth is quite another. The philanthropic process helps add layers of value to a single dollar: Seeing the consequences of gifts and investments, determining comfort levels with being approached by particular causes, and internalizing the overall impact on community can help the rising generation understand the concept of value.
What’s more, understanding the impact of wealth on a community adds value to personal spending, especially when it concerns day-to-day choices, like deciding whether to fly coach, first class or private. Coming back to our example above, consider the fact that $10 hardly covers a meal at most fast-food restaurants in the United States, while the same amount could feed a family of four for a full day in the developing world. One patriarch involved family members in the “flying” choice for a family vacation—in the context of giving the excess not spent on a private plane to charitable causes. That experience not only educated family members as to the practical costs of different forms of travel, but made a huge impact on the future decision process of the entire family. The end result of that knowledge is that dollars spent, both on philanthropy and on personal luxuries, will carry greater meaning.
Families who discuss wealth openly tend to have a strong team.That’s because, as with any sort of team, gathering a diverse set of players brings a variety of skills and strengths to the table.16 An advisory team often consists of trusted individuals such as a private wealth advisor, an estate attorney, a CPA and a respected family officer, who together can help the family make decisions in everyone’s best interests.
The specific goals of families tend to be as varied as family members themselves, but the core motivation remains the same: to achieve what matters most.
Creating a family advisory team with multiple experts can help mediate conversations, make sure that each and every member’s voice is heard, and serve as a system of checks and balances to ensure choices that are in alignment with the overall family goals. What’s more, when one family member doesn’t engage in conversations about wealth, it’s often detrimental to the entire group. A team can help to decide the best course of action—whether it’s to partition off assets or to simply accept that an individual wants “out” of wealth planning without any financial attachments. In either scenario, the structure and consistency put in place by an advisory team is crucial to successful communication.
No matter where you are in the process, these core practices may help you and your loved ones purposefully navigate family wealth. The specific goals of families tend to be as varied as family members themselves, but the core motivation remains the same: to achieve what matters most. Combined with a goals-based approach to saving, sharing, investing and spending, the 10 strategies outlined here can help you work toward meaningful goals and opportunities.
1 The Meaning of Sustaining Wealth Survey—which involved investors with $5 million or more in investable assets—provided the foundation for many of the insights in this paper. The research was conducted in 2013 by Phoenix Marketing International, an independent market research firm, on behalf of Merrill Lynch Private Banking and Investment Group. For more, see Can You Make the Money Last? The Road to Sustainable Wealth (Merrill Lynch Private Banking and Investment Group, 2014).
2 Talking It Through: A Guide to Conducting Effective Multi-Generational Family Meetings about Business and Wealth, by Dennis Jaffe and Stacy Allred (Merrill Lynch Private Banking and Investment Group, 2014).
3 In this example, the matriarch and her advisor used the Merrill Lynch “Record Your Values” tool. For more information, please ask your advisor.
4 The process of articulating values across generations may reveal that generations are not so far apart: 73% of millennials with $1 million or more in investable assets said that they and their parents shared similar values (according to the Young High Net Worth Insights Survey, conducted in 2013 by Phoenix Marketing International, an independent market research firm, on behalf of Merrill Lynch Private Banking and Investment Group). For more information, please see Millennials and Money, p. 6 (Merrill Lynch Private Banking and Investment Group, 2013).
5 There is emerging evidence that the secret to successful and sustainable positive behaviors may be to focus on the internal—or intrinsic—motivations that drive individuals. In fact, focusing on external—or extrinsic—incentives may even serve to diminish desired behaviors in some circumstances. “The Secret of Effective Motivation,” New York Times, July 4, 2014.
6 The Path to Purpose: How Young People Find Their Calling in Life, by William Damon (Free Press, 2009).
7 For additional resources on developing passion, refer to Designing Your Life, by Bill Burnett and Dave Evens (Alfred A. Knopf, 2016) and Creating Meaning from Money by Stacy Allred (Merrill Lynch Private Banking and Investment Group, 2017).
8 The notion of “passion” seems to play a large role for entrepreneurial individuals, not just dollars and cents. For a review of research in this area, see “The Nature and Experience of Entrepreneurial Passion,” by Melissa Cardon, Joakin Wincent, Jagdip Singh and Mateja Drnovsek, Academy of Management Review, 2009.
9 In the Meaning of Sustaining Wealth Survey referenced in footnote 1, individuals who were 55 and younger were more likely than their older counterparts to think that their heirs’ share of the wealth should be earmarked to help with specific goals (e.g., education, first home). (Eighty-four percent vs. 62% agreed with this notion.) For more information, please see Can You Make the Money Last? The Road to Sustainable Wealth, p. 12 (Merrill Lynch Private Banking and Investment Group, 2014).
10 Three Pathways to Evolutionary Survival: Best Practices of Successful, Global, Multi-Generational Family Enterprises, by Dennis Jaffe with Jane Flanagan (The Family Office Exchange, Sept. 2012). This research found a climate of family openness, trust and communication to be a key factor for sustaining long-term family wealth and connection.
11 The Cycle of the Gift: Family Wealth and Wisdom, by James E. Hughes Jr., Susan E. Massenzio and Keith Whitaker (Bloomberg Press, 2012).
12 The idea of a “critical period” is hotly debated in academic circles. For information on how children and adult learning may differ, please see “Developmental Change and the Nature of Learning in Childhood,” by Michael Ramscar and Nicole Gitcho, Trends in Cognitive Science, 2007.
13 For more information on what is meant by a “goals-based approach,” please see Goals-Based Wealth Management: Helping You Pursue Personally Meaningful Goals (Merrill Lynch Private Banking and Investment Group, 2013).
14 The Developing World Is Poorer Than We Thought, But No Less Successful in the Fight Against Poverty, by Shaohua Chen and Martin Ravallion (World Bank, August 2008, sourced from GlobalIssues.org).
15 For more on how family members can structure group decision-making, see Group Decision Making the Behavioral Finance Way (Merrill Lynch Private Banking and Investment Group, 2012). And to address how men and women may—or may not—think differently about investment-related conversations, see Women and Investing: A Behavioral Finance Perspective (Merrill Lynch Private Banking and Investment Group, 2013).
The case studies presented are hypothetical and do not reflect specific strategies we may have developed for actual clients. They are for illustrative purposes only and intended to demonstrate the capabilities of Merrill Lynch and/or Bank of America. They are not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Results will vary, and no suggestion is made about how any specific solution or strategy performed in reality.