Five Things To Know About Legacy Planning

We did a lunch & learn last week on IRA Trusts, something you newsletter readers have read about, courtesy of me, all too often. IRAs are potentially great assets to pass on, but only if structured properly. Unfortunately, there are many pitfalls with IRAs and inheritances.

One issue that comes up a lot, at these events and in meetings with my clients, is the desire to pass things along to heirs and beneficiaries, but the worry that comes along with that that the recipient will squander that gift.  Not too many people trust an heir, especially a young one, with a significant sum of money. And, honestly, would you trust yourself at 22 or 27 with a six figure sum of cash?

Here’s a list of five things you may not have known and might not have considered about the problems that can arise when you attempt to establish a legacy.

1. Most Legacies Are Gone By The Third Generation

In a 2015 study published by Reuters, approximately 70% of wealthy families lose their wealth by the second generation and more than 90% lose their wealth by the third generation.  So while you might be good with money, there’s no guarantee that your children will be and there’s certainly no promise that your grandchildren will be.

2. Most Folks Don’t Know What To Do With Wealth

The same study looked at why the heirs lost the money so easily, and the primary driver was “lack of financial education”.  As a whole, humans are very reserved talking about money (Freud theorized that our minds treat gold & money similar to what we do in the bathroom) and, as such, we keep it secret. Our relative silence on the matter means we don’t transfer much financial knowledge from generation to generation.  That leads to a lot of folks inheriting sums of money they don’t know how to manage. 

3. Even More Don’t Value Wealth When They Have It

The Reuters study had a particularly interesting finding: the average length of time between a person inheriting a sum of money and that person buying a new car is 19 days.  The idea that a fool and his money are soon parted is, more often than not, proven to be right, and a person born into money… or who inherits money… doesn’t have the discipline to keep it.  Spendthrift habits often take hold among people given a large sum of money, because they don’t properly value the hard work it takes to make that money or keep that money.  Second- and third-generation wealth tends to see a lot of spendthrift habits.

4. Wealth Attracts Predators

My dad loves to tell the story of a man who learns he will soon inherit a fortune when his ill father passes away.  When he shares this fact with a woman he is attempting to woo, she eagerly wants to learn more and soon the two become… stepmother and stepson. The fact of the matter is, wealth attracts predators and bad situations.  And no matter how smart you think your heirs and loved ones are, they can still be blindsided and victimized.

5. The Best Defense… Is The Best Defense

While lack of financial education is a huge trigger, even the smartest heir can still fall victim to emotional whims and conniving predators.  The best defense isn’t to teach them well, it’s to use the legal system to protect what you’ve earned and the legacy you’re leaving to the maximum extent possible.  A properly executed trust can establish your legacy, provide for your heirs across multiple generations, shield them from the actions of predators and, in some cases, even shield them from creditors. 

If you have any questions on trusts, and what they can do for your family and your legacy, don’t wait around for something to happen.  Let’s answer those questions and shore up any problems as soon as possible!