Family and Finances: Start the Dialogue

Family communication, education, and understanding are just a few of the components that can add to the success or failure of managing family money. Here are some of the steps you can take to deal more effectively with family finances.

Inheritance: Avoid the “Three-and-Out” Dilemma

There are many complexities involved in how money is transferred between generations. In many cases, inheritance encompasses the tiny details that can make the difference between keeping your money in the family and losing it to spending blunders, investment errors, and costly tax consequences. Some studies indicate that a family’s wealth is usually dissipated within about three generations—the thinking being that the first generation earns the money while the second generation gets to enjoy it. Because the second generation didn’t earn the money, they may have less respect for how to handle it. By the third generation, family members have no concept of the discipline needed to earn the money and may have no financial management skills at all.

When we think about a pending inheritance, or passing family money to the next generation, the “three-and-out” dilemma becomes even clearer. There’s an overriding concern among many families about how not to lose an inheritance. Parents may worry about how to divide the funds among children. Many also worry that poor spending habits or costly life events, such as divorce, may dangerously erode the funds. These concerns are as valid as the steps for addressing them.

The first step is to encourage an open family environment where money can be discussed. For many families, this can be intimidating. Families must resolve to openly discuss their hopes for what can be accomplished with family money. Discussions need to be interactive with an emphasis on defining the family’s values and mission for the money. The big myth to recognize is that talking to children about money will give them a sense of entitlement. The reality is quite the opposite. And never be fooled into thinking a family money conversation is a one-time event—the discussion should be an ongoing process. The last thing anyone wants is for their kids to one day be stuck in a financial squeeze that could have been avoided with proper discussion, planning, and resources.

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