Getting rich is hard enough. But teaching the next generation how to be rich is tricky, too.
More people are confronting that issue as the booming stock market, an improving economy and the success of young companies such as Twitter and Facebook swell the ranks of the well-off. By 2015, roughly 4.4 million wealthy North Americans—those with at least $1 million in investible assets—are expected to hold a total of $15 trillion, according to consulting firm Capgemini and RBC Wealth Management, up from 3.7 million people and $12.7 trillion in 2012.
Congress also opted to keep the federal estate-tax exemption at $5 million, adjusted for inflation, keeping a lot of money in the hands of wealthy families that otherwise might have gone to Uncle Sam. The exemption had been set to fall sharply.
Yet the challenges are rising at the same time as the stakes, according to parents and wealth advisers. Traditional hurdles—such as helping kids reared in comfort develop a strong work ethic—are compounded by 21st-century ones, including maintaining a safe presence on social media.
Many wealthy parents worry that fortunes will be squandered and their children's lives, instead of being eased by money, will be made more complicated or less productive. Some 57% of the respondents to a 2013 survey by U.S. Trust, Bank of America's private-bank unit, didn't think their kids would be ready to handle being rich until they were 25 to 34 years old. In a similar survey the prior year, 51% had the same view.
The good news is there are strategies that can smooth the transition and lower its risks, experts say. They recommend starting to talk about the family's money early, well before children are grown, and then building on those early conversations as the time nears when kids will receive any inheritance.
Amy Renkert-Thomas's maternal grandfather founded the Fisher-Price Toy company during the Great Depression and sold it in 1969 to Quaker Oats for more than $300 million in today's dollars. Her father's family, meanwhile, started a local brick-and-tile manufacturer in 1866, which the family still runs and which generates about $10 million to $20 million in annual sales.
While she was growing up in Canton, Ohio, her parents talked openly about where their fortune came from and handed over control of brokerage accounts with a couple hundred thousand dollars in them to her and her siblings when each of them turned 21. Her mother had gotten a similar account when she came of age and wanted to continue the practice.Getty Images Getting rich is hard enough. But teaching the next generation how to be rich is tricky, too.
Ms. Renkert-Thomas, who is now 51, says the experience helped prepare her to inherit a larger sum when her mother died in 2007 and to view her wealth as a "potential engine for entrepreneurship." For 12 years, she ran the family's brick-and-tile business in between stints practicing law. She now works as an adviser to other wealthy families that own businesses at Withers Consulting Group in New Haven, Conn.
"It's very freeing, very energizing, to think that that wealth is there to be put to good use," she says.
Here are steps that experts say wealthy families should take to help raise kids who are both wealthy and wise:
Few families have known nothing but privilege for generation after generation. Maybe it is the parents, or the grandparents, or the great-grandparents, but someone on the family tree only got rich after experiencing struggle and, likely, early failure.
Families have to tell the story of where the money came from, says Neale Godfrey, chairwoman of the Children's Financial Network, a financial-education firm based in Chester Township, N.J.
"Kids are so insulated from how it got created in the first place," she says. By the time the youngest generation arrives, the houses are often already large, the beach house is well lived-in and the club memberships have been long secured.
One way to get children involved is to show them where it all started—the first factory opened by the business, for instance. Ms. Renkert-Thomas says her father used to point out structures built with the family's brick products as they traveled around town during her childhood.
In telling the family's story, be sure to include mention of the mistakes and failures along the way, advisers say. It is hard for kids to grow up in a house where they think their parents are superheroes.
U.S. Trust's survey found that 53% of respondents who had children age 25 and older had disclosed only a little bit of information about their wealth to their kids. Another 8% had said nothing at all—an approach that, according to the experts, courts disaster.
A phone call by a trust officer on an heir's 21st birthday isn't the way to break the news that a sizable fortune awaits. The conversation should begin at least a decade earlier, and introductions to the trust officer and the advisers should start in the early teen years, advisers say.
"The surprise never works. Kids are blindsided and have no idea what to do," Ms. Godfrey says.
She says that in one family she knows, the oldest son inherited $7 million at age 21 with no prior notice. He just met with the family's financial adviser, who handed him a check and said more was coming at age 30.
The young man dropped out of college and bought a Ferrari, later crashing the car and frittering the money away due to a substance-abuse problem, and ending up in rehabilitation.
Ms. Godfrey says she was brought in by the parents to help prevent the same thing from happening with two younger siblings. She recommended the other children meet with financial advisers well before they received any of their inheritance.
That doesn't mean that kids need to know all the details about the family finances. The conversations can proceed in an age-appropriate way, experts say.
Joline Godfrey, chief executive officer at financial-education firm Independent Means in Santa Barbara, Calif. (and no relation to Neale Godfrey), says her company starts teaching children as young as five about financial literacy, then gradually expands into other topics, including what a trust is and why it is smart to have a good relationship with the trustee and, eventually, how to set up prenuptial agreements when they become young adults.
"If you can begin the talk early, by the time they are 10 and 12 years old they have an orientation to financial literacy, and it's easier to deal with than when they are 19 years old and this is the first they are hearing of it," she says.
Don't discount the value of games, either. Traditional board games can help boost financial awareness, according to advisers who cited the Game of Life and Pay Day, both made by Hasbro, as examples.
In addition, a website called the Secret Millionaires Club (www.smckids.com) features animated videos with voice-overs by Bill Gates and Warren Buffett teaching the basics of financial decision-making and starting a business. The site, which is targeted at a broad audience, offers a number of other educational games and resources for parents and teachers.
Once children have a general feel for their family's finances, it is easier to explain the need for discretion and privacy.
That conversation is particularly important for teenagers and preteens who may be establishing a presence on social media. Going on Facebook or Twitter to describe details of the family's upcoming ski trip to Gstaad can increase the risk of theft, advisers say. It is better to share information in a more controlled way with a closer circle of friends by email, for example.
U.S. Trust is adding content about online security and identity protection to its Financial Empowerment education program for the children of clients, in part because clients have raised questions about the topic, says Chris Heilmann, oversaw the program's creation.
Even as adults, heirs need to learn how to handle questions about their personal circumstances, particularly given that lists of the wealthy that are easily available online can make it difficult to maintain a sense of privacy.
Ann Freel, director of family education and governance services at private bank Northern Trust, says she had clients in a small town who grew anxious about how to respond to questions from friends after they quit their jobs to do full-time volunteer work.
The bank coached the couple through scenarios where they would have to respond to questions. "They realized that not only were most of the questions quite innocent, but that they could effectively manage the inquiries and deflect unwanted attention," Ms. Freel says.
Once children understand that they are better off financially than most everyone around them, parents often must work a little harder to impart down-to-earth values.
"You can start as soon as your kids say 'I want.' Kids prone to immediate gratification have lower self-esteem. Kids who understand money is more than instant gratification have higher self-esteem," says Nathan Dungan, a wealth coach in Minneapolis and author of "Prodigal Sons and Material Girls: How Not to Be Your Child's ATM."
The task is even more difficult if parents don't practice what they preach. Trying to teach the value of a dollar is tough when parents make lots of shopping trips to high-end stores. Similarly, a message about the importance of viewing others as equals may not carry as much weight if a parent uses a demeaning tone of voice with service workers.
"Kids develop attitudes about money and wealth by observing their parent's day-to-day actions more than anything else," Ms. Freel says.
Those lessons also can continue into adulthood. Frank Crocetti, who is 62 and a former executive at Fidelity Investments, is a private investor and a board member of a technology startup company. He says he tried to teach his children basic lessons while they were growing up.
"I tried to make them smart about money," says Mr. Crocetti, who lives in Boston. He arranged in recent years for his 32-year-old son, Paul, and Paul's wife to go through U.S. Trust's financial-education program.
Paul Crocetti, who is a newspaper editor in Waltham, Mass., says his parents didn't flaunt their wealth while he was growing up. He adds that they didn't go through the program in anticipation of getting a windfall from his parents. "We're not really focused on that aspect. We're focused on what we are doing with the money we have," he says.
He says the program helped him when he wanted to refinance the mortgage on his home.
Establishing good work habits also can start at a young age. Parents can provide allowances for chores completed around the house and, later, suggest entry-level jobs in a restaurant or a local store.
As kids get older, parents can get them involved in day-to-day money decisions in the home, such as managing a limited budget for car expenses, after-school activities or a week's worth of groceries, Ms. Freel says.
Then, when the time comes to manage a serious amount of money, they have a better chance of managing well, experts say. And don't be afraid they might fail at first, says Jill Shipley, a private adviser in West Palm Beach, Fla.
Ms. Shipley cites a wealthy client whose adult son wanted to buy a restaurant franchise. The son, who was in his 20s, had worked in the business for a year before the father agreed that if he put together a business plan and got a mentor, he would fund the purchase. Three-and-a-half years and $1.5 million later, the experiment failed.
But the son went on to become a partner in another business, and is now thriving, Ms. Shipley says. "Allow children to make mistakes and gain experience," she advises.
Ms. Renkert-Thomas's mother had a similar attitude about the brokerage accounts her children got control of when they turned 21. "She basically told me to do with it as I chose, but I have to live with the consequences," Ms. Renkert-Thomas says.
The account contained enough money to help pay for graduate school and buy a house—but not enough for her to quit school and stop working, she says. Ms. Renkert-Thomas made typical young-person mistakes, such as overspending on restaurant meals, but ultimately she came to view the money as startup capital.
Now, Ms. Renkert-Thomas's own children are 20 and 18, and she says she is getting ready to set up brokerage accounts for them, too.
Write to Liz Moyer at email@example.com
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