There are plenty of risks that affect family wealth throughout the years, but today I wanted to go over the most common, major risks to family wealth in 2022 and how to avoid them.
We touched on the why behind fading family wealth in our article here, but I wanted to dive in a bit deeper and highlight some of the more common risks I see again and again.
All too often, family wealth fails to last. One generation builds a business—or even a fortune— lost in the ensuing decades. Often, families fall prey to serious money blunders, making classic mistakes, or not recognizing changing times.
If you’re thinking of making changes or need help navigating your own personal situation, please be sure to contact our office before making any changes. We can help you look at all angles of your circumstances and create a strategy that’s aligned with your financial goals.
This is not just a matter of failing to create a strategy but also failing to respond to acknowledge financial weaknesses.
As a hypothetical example, say there is a multimillionaire named Alan.
The designated beneficiary of Alan’s six-figure savings account is no longer alive. He realizes he should name another beneficiary, but he never gets around to it. H
is schedule is busy, and updating that beneficiary form is inconvenient. Alan forgets about it and moves on with his life.
However, this can cause significant headaches for those left behind.
If the account lacks a payable-on-death (POD) beneficiary, those assets may end up subject to probate. Using our example above, Alan’s heirs may discover other lingering financial matters that required attention regarding his retirement accounts, real estate holdings, and other investment accounts.
Minimal or absent estate management
Every year, some multimillionaires die without leaving any instructions for distributing their wealth. These people are not just rock stars and actors but also small business owners and entrepreneurs.
According to a recent Caring.com survey, 58% of Americans have no estate preparations in place, not even a will.
Anyone reliant on a will alone may risk handing the destiny of their wealth over to a probate judge. The multimillionaire who has a child with special needs, a family history of Alzheimer’s or Parkinson’s, or a former spouse or estranged children may need a greater degree of estate management.
If they want to endow charities or give grandkids an excellent start in life, the same idea applies. Business ownership calls for coordinated estate management with consideration for business succession.
A finely crafted estate strategy has the potential to perpetuate and enhance family wealth for decades, and perhaps, generations.
Without it, heirs may have to deal with probate and a painful opportunity cost—the lost potential for tax-advantaged growth and compounding of those assets.
The lack of a family office
Decades ago, the wealthiest American households included offices: a staff of handpicked financial professionals who supervised a family’s entire financial life. While traditional “family offices” have disappeared, the concept is as relevant as ever.
Today, select wealth management firms emulate this model: in an ongoing relationship distinguished by personal and responsive service, they consult families about investments, provide reports, and assist in decision-making.
If your financial picture has become far too complex to address on your own, this could be a wise choice for your family.
Hackers can hijack email and social media accounts and send phony messages to banks, brokerages, and financial advisors to authorize asset transfers.
Social media can help you build your business, but it can also expose you to identity thieves seeking to steal both digital and tangible assets.
Sometimes a business or family installs a security system that proves problematic—so much so that it’s silenced half the time.
Unscrupulous people have ways of learning about that, and they may be only one or two degrees separated from you.
No long-term strategy in place for family wealth
When a family wants to sustain wealth for decades to come, heirs will want to understand the how and why, and be on the same page.
If family communication about wealth tends to be more opaque than transparent, then that communication may adequately explain the mechanics and purpose of the strategy.
No decision-making process
In some high net worth families, financial decision-making is vertical and top-down. Parents or grandparents may make decisions in private, and it may be years before heirs learn about those decisions or fully understand them. When heirs do become decision-makers, it is usually upon the death of the elders.
Avoiding these major risks to family wealth
Horizontal decision-making can help multiple generations commit to the guidance of family wealth. Financial professionals can help a family make these decisions with an awareness of different communication styles. In-depth conversations are essential; good estate managers recognize that silence does not necessarily mean agreement.
You may attempt to reduce these risks to family wealth (and others) in collaboration with financial and legal professionals. It is never too early to begin.
As a fiduciary financial advisor, I’m able to take a 360-degree angle look at a financial plan to make sure that estate planning is not only included but done properly with even the most unexpected future in mind.
If you feel you need to prepare more for the future or reexamine your existing estate planning strategy, I’d love to set up some time to chat.
We’re happy to work with you either in person, over the phone, or virtually, based on your preference. Give our office a call and we can schedule some time together.