As a parent, it’s natural to want to help your children financially, even when they become adults. According to a recent report from Savings.com, half of parents with a child over the age of 18 provide them with at least some financial support. And while each financial situation is different, it is important to talk to your adult children about generational wealth planning and bring them to the financial table when the time is right.

The goldilocks approach to communication is key

Too little communication too late in the financial conversation could make your children inadequately prepared for their financial future. Alternatively, too much communication too early could lead to an unhealthy reliance on a parent’s wealth. According to research from The Williams Group, 60% of family wealth transfers fail due to the breakdown of communication and trust within the family unit, so finding a balance in communication that’s “just right” is crucial when discussing finances.

Don’t have the financial conversation with your kids alone

Talking about finances and wealth can be awkward for both parents and their children, so bringing in a trusted third-party adviser is important. In finance, a trusted third-party is often found in a financial adviser who holds their certified financial planning designation, which is the gold standard in the industry. This person should serve as an advocate for both the parents and the kids, while understanding and prioritizing the client’s goals and expectations. The Williams Group study suggests that 70% of generational wealth is lost by the second generation and 90% is lost by third generation. Working with a financial adviser can help ensure future generations are set-up for success and can sustain the inherited wealth year-over-year.

A trusted adviser’s responsibility is to understand your goals and future objectives such as charitable and legacy contributions. The adviser will help you create a comprehensive financial plan to balance your needs while ensuring you have sufficient assets to live life comfortably. By spending or giving away money without a plan, you could end up running out of funds or becoming a financial burden on your own kids down the road as you age.

Avoid enabling financial irresponsibility

As a parent, it’s important to set appropriate expectations related to money. Children can grow accustomed to having nice things and living off their parents’ generosity, but once they leave the nest and start to make their own money, it can come as a shock when they realize they can’t afford the same lifestyle they grew up with. By setting expectations and having conversations about money early on in life, you can ensure your children aren’t caught off guard if parental financial support changes as they age.

Take emotion out of the equation

Talking about money with family can oftentimes seem taboo, but it’s critical when talking about generational wealth transfer. The key is to take the emotion out of the conversation and ensure family wishes are known and executed correctly, whether that’s through investing, charitable giving or something else. By working with a professional fiduciary versus a loved one, you can ensure your  wishes are carried out in an impartial manner. Unlike loved ones, independent professionals can separate themselves and implement the client’s wishes without the risk of damaging family relationships.

Consider the tax benefits for financial gifts and contributions

There are also tax benefits to financial gifts and as we approach the end of the year, it’s a great time to consider making these contributions to your children. In 2022, the annual gift exclusion per person is $16,000 and will rise to $17,000 per person in 2023.These gifts allow you to give away up to $32,000 for two spouses without counting against your lifetime gift tax exemption.

Additionally, setting up a generation-skipping trust (GST) allows you to pass down your estate to your grandchildren, skipping the next generation. By passing over your own children, these assets avoid the estate taxes, taxes on an individual’s property upon death, and are applied directly to the heirs. Alternatively, you can set up a dynasty trust that is designed to avoid or minimize estate taxes being applied to family wealth with each generation. Both options are beneficial for those who have significant wealth and savings.

You can also consider setting up a 529 college savings plan to use for your grandchildren’s private school or college education. A 529 plan is designed to help pay for education and offers significant tax advantages. The money contributed to the plan goes in after tax, grows without tax and can be withdrawn tax-free for qualified expenses. Tax benefits can vary by state, so be sure to talk with your financial adviser to see if a 529 plan is the right option for you and your family.

Don’t forget about your own financial needs

One of the biggest mistakes a parent can make is giving so much financial support to their children that they can’t afford retirement. According to the CNBC Millionaire Survey, 22% of millionaires said they provided financial support to an adult child who needed it since the onset of the pandemic. In addition, 21% said they had provided financial support to other family members. When financially supporting loved ones, it is critical to ensure this help doesn’t prevent you from retiring on time and living out your later years without financial stress.

Ensuring your family is cared for financially is an important goal for many. Including your children in the conversation is often critical to make sure your wishes are expressed and expectations are set. Lean on your financial team to help prepare you for these conversations and to support your financial goals for your family.

If you are interested in learning more about generational wealth planning and how UMB can help you as a financial partner, visit our website.


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