The following process will help families prepare children and grandchildren for the challenge of managing significant wealth and/or a family business.

In part, the discussion focuses on how children, and ultimately grandchildren, can learn to work effectively with professional financial, tax and legal advisors and/or the professional executive team managing a family business when those heirs themselves are not directly involved in the family business.

Research shows how families can cooperate and collaborate to make wise planning decisions for all family members and develop self-sufficiency as opposed to dependency among the younger generation.

In the 30 percent of affluent wealth transitions that were successful, Williams and Morris found three broad common elements:

1. Candid Communication. There was a tremendous degree of trust, openness, cooperation and mutual respect among family members. This was in sharp contrast to the pattern in the families where estate transitions failed where parents communicated more with professional advisors than with their children.

2. Independent Achievement / Meritocracy. Only after achieving independent academic and career success, were heirs allowed to choose to become involved in either managing the family's business or assets. At the time of "transition," these heirs indicated to researchers that they felt "well-prepared" to take over.

3. A Written Plan. Families whose transitions were successful prepared a formal succession plan and family mission statement, which included concrete steps to train (and test) heirs. These families also laid the groundwork for their children to have successful working relationships with competent professional advisors.

Five Basic Steps to Prepare Heirs...

In addition to the three steps above, there are several steps that parents should take to help their children avoid the pitfalls of inherited wealth:

  1. Conduct regular family meetings where open dialogue is encouraged and professional advisors are often present to help facilitate discussion and ensure that every adult family member's point of view is heard and a consensus achieved.

  2. Encourage teamwork and a sense of objectivity and fairness within the family so that even when a decision does not go a family member's way, he or she realizes that the decision making process was fair and is able to wholeheartedly embrace the direction that the family decided to take.

  3. Do not make cash gifts to children before they are ready (often age 35+), but rather invest in their and their children's college education. As mentioned, in The Millionaire Next Door; Stanley and Danko found that there was an inverse relationship between cash gifts to children and both the net worth and income that those children were able to earn. They suggested teaching children to save 20 percent of their income each month and to live within their means.

  4. Allow children to learn from failure and encourage an environment where all family members, including parents, can candidly assess their own strengths and weaknesses. Don't act as a safety net unless health and well-being is involved.

  5. Encourage your kids to pursue their passion not yours.

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