How Do You Manage Family Wealth?
Family wealth needs to be nurtured with strong values and care. However, many families can’t budget, spend, save and invest their wealth wisely. The results of failing to manage a family’s wealth properly include costly estate settlement fees, unnecessary taxes, greater exposure to financial risks, etc. That’s why 7 out of 10 wealthy families lose their fortune by the second generation. Read along for five proven tips on managing your family wealth to ensure longevity. You can also check this site for more information and tips!
1. Set up a Family Office
Modern life is complicated. Usually, the wealthier a family becomes, the more complicated its life gets. Within such complexities, it’s easy for wealthy families to lose focus on the ideals and objectives that first drove their financial success. Many families now consider a family office such as an administrative arm of their wealth. The primary role of a family’s office includes:
Relationship Counselors
Disputes are costly, and a loss of trust between relatives can be challenging to reverse. Lack of communication can breed mistrust. A family office can encourage constructive dialogue and consensus to keep family members updated about investment decisions and asset values.
There might also be a conflict between successful parents who have created the family’s wealth vs. the younger generation on how to spend the wealth. The younger generation might want to live by their ideals rather than being restricted by the values of their parents, the family office can help bring the two sides together.
Constitutional Guardians
Family offices recommend a charter or written constitution that dictates the family’s governing philosophies and values regarding wealth creation, management, and distribution. Through this charter, the family office helps ensure that those values are encouraged and observed.
Human Shields
An experienced family office helps solve the family’s legal, regulatory, and accounting matters and keep the family members informed as required. This allows your family to concentrate on other things like formulating the next investment strategies, running the family business, or living life unimpeded by the huge administrative duties accompanying significant wealth. Indeed, a family office is ideal for wealthy families looking to enhance and preserve their wealth across generations.
2. Emphasize Proper Risk Management
Proper risk management and procedures can help manage your family’s wealth effectively and ensure its longevity. Your financial advisors can help pinpoint the most common sources of risk and how to avoid them. Risk management can also involve keeping wealth in the family with a life insurance policy.
For instance, dividend-paying whole life insurance is purposely structured to help you pass down more wealth to your children. This type of life insurance has key features that make it possible to manage your family wealth effectively:
- It earns non-guaranteed dividends
- It earns a guaranteed rate of return
- It’s guaranteed to pay out a tax-free death benefit
- It acts as a volatility buffer against market downturns
- It offers assets protections that are usually protected against creditors
A dividend-paying whole-life insurance policy is a surefire way to protect and grow your family’s wealth. You can also increase family banks’ power by purchasing additional policies for your kids. Put all these policies into a trust for a better way to keep wealth in your family.
An irrevocable life insurance trust (ILIT) offers extended estate tax protection, gift tax benefits, and protection against lawsuits. The death benefit of any insurance policy held by the trust is tax-free and paid to the trust when the policyholders pass away. Some rules indicate when and how the trust’s beneficiaries can use these funds.
If you pass away while your kids are still minors, the trust will act as a guardian of their inheritance until they age.
3. Prioritize Education
Education is paramount to properly managing your family’s wealth. Encourage your kid to pursue their passions and talents. Teach your kids that their earning potential is up to them. If they desire to be wealthy adults, they need the proper mindset to generate wealth.
Educate your kids on the value of hard work and where to find opportunities. Depending on their age, this might be as simple as paying them to do extra chores at home, encouraging them to seek internship opportunities, or helping them seek part-time jobs on the weekends. This will educate them on how to capitalize on their abilities and manage their generated wealth.
Moreover, provide them with financial education to help them save more. Educate them about investing and saving for retirement if they’re old enough. Help them prioritize expenses depending on what’s essential to them, and show them how to budget effectively. Educate them on how to budget for fixed expenses like:
- Public transport costs
- Land taxes and council fees
- School or tertiary study fees
- Mortgage rent or repayments
- Car, health, and household insurance
- Credit card and personal loan repayments
- Utilities – phone and internet, water, electricity, gas
Here are variable expenses you can encourage your kids to budget on as well:
- Food
- Holidays
- Entertainment
- Car repairs and petrol
- Medical and dental fees
- Personal items like haircuts and clothing
- Household goods and home maintenance
- Stationery, textbooks, and school uniforms
- Gifts- for example, for weddings or birthdays
- Registration fees and equipment- For example, for music, sports, and dance programs
Educating your kids on managing these expenses prepares them to manage family wealth effectively when passed down as an inheritance.
4. Build Up Retirement and Emergency Funds
Neglecting your financial future when providing for your family is easy, but retirement savings shouldn’t take second place. Life is full of twists and turns. You may face unexpected life events such as:
- Job loss
- Costly car repairs
- Sudden relocation
- Unexpected travel
- Medical emergency
- Emergency Home repairs
- Pet’s medical emergency
Unplanned expenses can dent your family’s finances. Fortunately, an emergency fund can help you cater for unexpected events. Discuss with a financial retirement planning expert to help you best plan for a stable financial future.
5. Design a Monitoring Plan
Work with your financial advisor to help devise a monitoring plan. Discuss that plan with your family and ensure they understand the benefits of being committed to such a plan. Regular family meetings are opportunities to evaluate the family’s goals and ensure that you all have a voice in the decision-making. Wealth management, retirement planning, estate tax management, asset allocation, and succession planning can require an experienced financial advisor to start a productive conversation to help your financial goals align with those of your family. Having the assurance that your family wealth is secured can feel incredibly great!
Wrapping It Up
Many uncontrollable events might diminish family wealth. Fortunately, these tips can help preserve, protect, and maintain your family wealth across multiple generations. Make sure you understand and adapt these tips to your family’s values.
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