Your Legacy Is Not a Number — It’s a Decision Architecture
As I've discussed in my recent blog posts, many of the most important retirement choices don’t happen on a spreadsheet.
And, as you and your advisor navigate the complex money decisions that touch on your feelings, your relationships, and your goals, you'll probably start to see that these decisions also extend beyond the horizon of your own retirement.
But rather than asking yourself what you're planning to leave behind, a successful wealth transition should answer the question “What are we preparing the next generation to handle?”
A Generational Responsibility Transfer
As they approach wealth transfers, many families are so focused on who gets what that they don't have a plan for what heirs should do.
An inheritance of any size almost always comes bundled with emotional weight and practical complexity. Affluent seniors leaving behind large estates can increase that burden exponentially. And even if the next generation is committed to carrying on their family’s legacy with good stewardship, they may not have the skills or knowledge to navigate changes in tax code, the mechanics of capital gains, or proper asset allocation to maintain long-term growth.
And if beneficiaries are just smiling at all those zeros? Your hard-earned legacy could evaporate into condos and speed boats.
The financial decision-making framework that you've spent decades honing is every bit as valuable as the assets on your balance sheet. You need a plan to pass along that mindset as well. Otherwise, your legacy will inevitably be subject to trial and error: save this, sell that, spend what's left.
Some of your heirs' choices might work out. Many will be mistakes they'll never recover from.
Money Without Context
In wealth management, we often share a warning with seniors who are preparing their legacy plans: “Shirtsleeves to shirtsleeves in three generations.”
In far too many cases, affluent seniors spend their whole lives building wealth. The second generation spends – or squanders – what they inherit. And the third generation begins back at square one.
By some estimates, as many as 90% of wealth transfers fall into this regrettable pattern. And the cause is almost never a market downturn or a family business hitting a rough patch. More often than not, children and grandchildren just aren't prepared for the responsibilities that come with an inheritance, let alone a large one. And even if they do manage their own money responsibly, they may not be able to put a large inheritance in the proper financial context once their parents and grandparents are gone.
And that's not always the kids' fault! Seniors have spent decades learning how to build and manage their wealth. Benefitting from that wealth as a child via nice clothes, new cell phones, and five-star vacations is very different from suddenly being in charge of it.
Ultimately, transferring money is much easier than transferring wisdom. And when you leave behind money without context, confusion and resentment often fill the void.
For example, imagine you've created a trust to put some guardrails around your estate.
Now imagine your adult children find out about that trust, for the first time, shortly after your funeral.
Now imagine you've prudently put up different guardrails for each of your children, based on their needs and maturity.
That might be what's best for your heirs and for your estate. But without you there to explain the context – the Why – settling your estate might create tensions and hurt feelings that tear your family apart.
And without context, good intentions can be just as dangerous as bad blood. Leave everything to “the good kid” who has strong charitable inclinations, and rather than the lifetime of sustainable giving you’re imagining, your heir might give too much too quickly to people or organizations that won’t put your wealth to its best possible uses.
Lessons in Decision-Making
Your wealth transfer should not start with the reading of your will.
A lasting family financial legacy is built through years, if not decades, of actions and conversations both large and small: from piggy banks and summer jobs through paying for college and managing those first paychecks.
Do you want your child to inherit the family business? Don't drop her in the C-suite when she turns 25. Help her work her way up through your organization so she understands not just what your company does, but its mission, its culture, and the impact it makes on your community.
As you get a little older and start sharpening your legacy plan, that heir doesn't need to know how much you have in every account. But she does need to know what your financial values are. She knows you have money. She knows what you own. And she might also know what you don't own.
So, why did or didn't you stock the garage with sports cars?
Why do or don't you all spend summers in Europe?
Why do you make a large annual contribution to your favorite charity?
What are the priorities that have guided your spending and saving?
What tradeoffs did you have to make to build your wealth? Are there any that you regret?
Having these conversations can help heirs transition from a mindset of entitlement ("I deserve what my family has.") to a mindset of stewardship ("I have to take care of my family’s legacy for the next generation.").
You might even let your heir "test drive" your legacy. Ask her to research local charities to help you expand your philanthropy. Make a donation together. Talk about what kind of budgeting decisions she would have to make to sustain that giving, and other ways that she might be able to give back, such as volunteering. Walk through the decision-making process with her and she'll start to have a clearer understanding of true financial wisdom.
Simplify and Strengthen Your Legacy
The most tragic aspect of failed wealth transfers is that they are almost always preventable.
As you prepare for the retirement transition, consolidate accounts and pay down debts to simplify your balance sheet.
If you don’t have an estate plan in place, work with professionals to assemble legally durable documents.
Within your estate plan, include clear instructions for transferring your assets in the most efficient way possible. Use trusts to establish boundaries but avoid any unnecessary complexity that might muddle the process.
Review your plan and your beneficiaries at least annually, or any time your life or your goals change.
And have the hard conversations with those beneficiaries while you’re still able to explain your intentions, your reasoning, and your hopes for your family’s future.
A visit to Keen Wealth Advisors can help families navigate the wealth transfer process. We consider it an honor to help families facilitate wealth management conversations and design purposeful legacy plans aligned with their goals and intended to benefit future generations.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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