Key Takeaways:
- Many heirs are unprepared for the responsibilities of managing inherited wealth, which leads to poor financial decisions.
- Family governance structures promote shared values and support long-term wealth stewardship.
- Education, mentorship, and real-world experience help younger generations develop the skills needed to make sound financial decisions.
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Preparing the next generation to manage family wealth is an often-overlooked aspect of long-term financial planning. Without guidance, heirs can quickly deplete or misuse their inheritances and the wealth intended to last for multiple generations can erode within a single generation or two.
Whether a family is managing significant assets or hoping to pass down a more modest legacy, here are several strategies for equipping the next generation to act thoughtfully and responsibly.
Establish Family Governance Structures
A clear family governance structure creates a foundation for long-term stewardship. This framework can take many forms — including family meetings, advisory councils, or family mission statements.
An effective family governance structure should have:
- Clear guiding principles or values: Articulating the family’s values around money — including saving, entrepreneurship, charitable giving, and education — helps younger generations understand what is being passed down and why.
- Well-defined decision-making processes: Establishing who is involved in decisions regarding investments, philanthropy, and distributions helps reduce ambiguity and prevent conflict.
- Regular communication channels: Holding structured, periodic family meetings keeps members informed and involved. This is particularly important as younger generations come of age and begin to participate in discussions about family finances.
Governance structures are especially helpful in multigenerational families where different branches may have diverging needs or priorities. Clarity fosters unity and reduces the risk of misunderstandings that can lead to litigation or fractured relationships.
Build a Culture of Financial Education
Financial literacy is essential for anyone managing money, but especially when a family legacy is involved. Many wealthy families invest in structured education programs, hiring consultants to teach their heirs about taxes, philanthropy, financial management, and trust administration.
But formal instruction is not the only path. Families can incorporate financial education in everyday life long before significant wealth transfers occur.
Age-appropriate discussions about earning, saving, and spending set the tone early. Younger children might help plan a family budget for a vacation, while teens can review a sample tax return or investment statement.
Use real-life scenarios to involve young adults in real decisions — such as selecting a charitable cause for a family donation or researching mortgage options. These exercises build context and accountability. Transparency around the purpose and limits of family resources helps younger generations understand that wealth is not infinite and comes with responsibility.
Financial education should evolve with age and experience, eventually covering topics like estate planning, business succession, and responsible investing.
Mentorship and Real-World Experience
Learning by doing is the most effective way to develop financial stewardship. Pairing younger family members with mentors within the family or trusted advisors provides context, guidance, and the opportunity to ask questions in a safe and supportive environment.
Mentorship might include inviting young adults to observe or participate in meetings with investment managers, tax professionals, or philanthropic boards. It can also involve taking on small-scale financial responsibilities — such as overseeing a donor-advised fund or managing a portion of a family investment account (with the right amount of oversight).
Trusts are another way to pass down wealth while encouraging good decision-making. For example, the trust may allow distributions for specific milestones such as education, home ownership, or business investments, but prevent heirs from unchecked spending that will deplete their assets.
Integrating mentorship into long-term wealth and legacy planning creates space for heirs to learn from small mistakes and build confidence before stepping into larger roles.
The Risks of Lack of Preparation
Without a structured approach to financial education and engagement, even well-intentioned heirs can fall into common traps. Some begin to spend their anticipated inheritance before receiving it, taking on debt with the expectation of a future windfall.
Problem is, that windfall may:
- Never materialize: According to the Federal Reserve, among families in the top 1%, the expected inheritance in 2019 was $940,000, while the actual average inheritance was $719,000. People are living longer, and those longer life spans often mean greater healthcare costs and assistance needs.
- Be smaller than expected: Even if families don’t burn through their assets on end-of-life care, the older generation might spend more money on living expenses and travel, lose money due to market downturns or poor investment decisions, or donate a majority of their wealth to charity.
- Takes longer to arrive: Settling the estate may take longer than expected. While a simple estate may be settled within six months, complex estates with assets that are difficult to value or disputes between family members or creditors can take several years to resolve.
When heirs do inherit, they may lack the skills or discipline to manage it. A 20-year study by the Williams Group found that 70% of wealthy families lose their wealth by the second generation, and 90% by the third generation.
Families that take the time to educate and mentor the next generation can shift the narrative. Instead of viewing wealth as an entitlement, heirs learn to view it as a resource to be managed wisely and passed on responsibly.
How MGO Can Help
Preparing the next generation for wealth stewardship requires thoughtful planning, clear communication, and the right structures to support long-term success. MGO’s Private Client Services team works closely with your family to develop strategies that align with your values and goals. We can help establish governance frameworks, design trust structures with appropriate distribution provisions, and engage heirs at every stage of life.
Reach out to our team today to find out how we can help your family build a legacy of informed stewardship.