Why financial planning should include the whole family

In the next two decades, we will see the greatest wealth transfer in American history. It is predicted that Baby Boomers will transfer $30 trillion in wealth, mostly to their family members. How they manage that wealth will impact lives, communities, companies and ultimately our country.

But there’s an aspect of this that people don’t often talk about - inheriting money is not as easy as it sounds. One might assume that affluent families remain wealthy indefinitely, but often, that is simply not the case. It may sound like a dream to have a windfall inheritance – but if it’s not managed the right way, there is a risk that it may fall short of the giver’s intentions and have much less impact than intended.  

Consider just a few statistics. About 70% of affluent families lose their accumulated wealth by the second generation. Similarly, about 70% of family-run businesses fail or are sold by the second generation. These generational financial losses are so significant that recent research suggests, contrary to popular belief, “inheritances and other intergenerational wealth transfers have only a limited effect on wealth inequality and the intergenerational transmission of financial well-being.” According to Thomas Stanley's book, The Millionaire Next Door: The Surprising Secrets of America's Wealthy, just 20% of today’s millionaires inherited their wealth. A full 80% earned it on their own. 

These statistics are leading many families to reassess the kind of estate they will leave behind to loved ones. There’s a real fear among parents that leaving wealth to their heirs could lead to extravagance, apathy or other bad habits.

As Chief Commercial Officer at Northwestern Mutual and leader of our retail investments business, I’ve seen the passion that families have for setting up the next generation for success. It’s clear, however, that financial resources alone are not enough to ensure intergenerational financial security.

That’s why I encourage everyone to think more expansively when it comes to financial and estate planning - and we are seeing a growing trend across our company: financial planning conversations that connect the entire family.

I’ll share one example from our Wealth Management Advisor Craig Volk. He recently took on the challenge of connecting four generations:

• grandfather Les Bakken, age 104
• daughter Sally Lee, age 78
• granddaughter Barb Lee, age 50
• and great-grandson Jack Wiese, age 18

Les wanted a plan to pass on his wealth to his family, but his now-widowed daughter Sally wasn’t sure how to do it – because her husband was the one in the family who kept track of their finances. Their advisor, Craig, pulled them all together so everyone understood the plan, and each had a financial plan for themselves – setting up the entire family for financial stability and security in the future.

It’s not just about savvy financial advice – it’s about how to truly transfer life advice from one generation to the next.

As part of their conversations, of course, Craig and his team talk about ways to capitalize on opportunities like today’s historically-low interest rate environment, where it can be more efficient to transfer wealth through intra-family loans, installment sales, third-party borrowing, Grantor Retained Annuity Trusts (GRATs) and Charitable Lead Annuity Trusts (CLATs). The economic downturn has also provided an opportune time for elders to consider the transfer of their businesses or their shares to their next of kin, as it’s less costly to transfer ownership of a business currently assessed at a lower value.

But the conversation can’t just be about these financial factors – it’s about strengthening families from one generation to the next. Beyond financial planning tactics, these conversations are also moments to reconnect with children on values, hopes, expectations and the financial acumen they need to be successful in the future. It’s a chance to talk about what mindsets and moves will help them to live productive and flourishing lives.

Barb recently reached out to Craig to express her sincerest gratitude saying, “My mom [Sally] used to dread having financial conversations and now she’s excited to go and meet with you and your team.”

While every family is different, I think there is a core aspect to this that we can all relate to. The real gain we get from our family members is not often financial – it’s the values, passions, dreams, and philosophies they instill in us. And that has to be part of the estate planning conversation in a very significant way.

I personally relate to Craig’s story because my parents always taught me that the importance of money is not to be rich – it’s to be secure. Wealth is a tool we can use to create a path to freedom and independence. Ultimately, those learnings are where I find the deepest value.

If you haven’t had an open family conversation about money, I’d encourage you to do so – making sure you’re not just thinking about dollars, but about impact and legacy.