This article is adapted from Perpetual Wealth: How to Use “Family Financing” to Build Prosperity and Leave a Legacy for Generations, the forthcoming book from Kim D. H. Butler and Kate Phillips.
The statistics about generational wealth are not encouraging. It makes us ask, does financial planning really work? (Check out our Ultimate Guide to Financial Planning Myths for more.) Studies quoted by the Wall Street Journal confirm that as much as 70% of family wealth is lost by the second generation, and 90% by the third. This makes financial planning for retirement very tricky.
Another study based on survey data from the Federal Reserve and a National Longitudinal Survey found that one-third of heirs had negative savings within two years of the gift. For these beneficiaries—one in three—every penny is lost or spent.
According to Chris Heilmann, U.S. Trust’s chief fiduciary executive. “Looking at the numbers, 78% feel the next generation is not financially responsible enough to handle inheritance.” And there seems to be evidence of such pessimism. “It takes an average of 19 days for the recipient of an inheritance to buy a new car,” asserts Rhys McCarney Ph.D. when discussing beneficiaries of sudden wealth.
There are many reasons why people fail to build and pass on generational wealth. Some — but not all — problems are financial.
So… how can your family KEEP the wealth that most families LOSE!? The first step is diagnosing the problem accurately.
The Solution to Create Generational Wealth
In Perpetual Wealth, the forthcoming book from Partners for Prosperity co-authored by Kim Butler and Kate Phillips, we detail ten reasons why typical financial planning actually sabotages lasting wealth in Chapter One. Among the ten reasons are:
- The normalizing of systemic risk.
- Focus on net worth rather than developing human capital.
- Use of temporary rather than permanent life insurance protection.
- Government rules and taxes.
- Never-ending fees.
- Lack of liquidity and control.
- A failure to prepare heirs for success.
If we had to boil down all of the problems causing the failure of generational wealth in the great majority of American families, it would come to ONE thing:
When you fail to save and build liquidity… when you take a tax break now in exchange for decades of taxation and fees in retirement… when you roll the stock market dice without preparing for the next recession… when you obtain life insurance that expires too soon… when you fail to prepare heirs for success and decide to let beneficiaries “figure it out when you’re dead,” you are sabotaging long-term wealth.
The Family Financing method in Perpetual Wealth breaks the cycle of generational wealth sabotage. How exactly does it do that!? With four key elements conspicuously missing from typical investing advice and practices—all of them, not coincidentally, characterized by long-term thinking.
We created the chart below as a visual representation of the Family Financing method and the four keys to creating legacies that last:
The 4 Cornerstones of Generational Wealth:
Cornerstone #1: Financial Foundation
Let’s start in the lower left. We placed the Financial Foundation at the bottom because, after all, it’s what all else rests upon. The foundation includes your Family Fund, savings and protection, and positive money habits.
You’ve no doubt heard the parable that warns the listener to never build a house upon the sand: “The rain fell, and the floods came, the winds blew and beat against that house, and it fell…” (Matthew 7:27) It’s the same with your financial house! You must build the proper Financial Foundation for a family—beginning with the simple (yet often overlooked) habit of saving.
Your savings creates your “Family Fund”—the “seed money” for your family’s wealth and prosperity. It’s the money that’s guaranteed to grow—no matter what. This is your fund for emergencies and opportunities. It’s the money that lets you sleep at night—even when a financial storm is wreaking havoc on most investors.
Because of the unique, centuries-old financial product we use for saving in the Family Financing system, the foundation of your financial house comes with insurance for the storms of life built right in!
Just like saving money, risk management and permanent protection are often not given the full attention they deserve. You probably have car insurance, home insurance, and other types of insurance. But the Family Financing system insures the most valuable treasure possible: the people in your family.
Usually, “savings and protection” are NOT the same thing—not at all. But whole life insurance works differently.
Insurance policy premiums for your home, car, and term life insurance policies—except in the rare instance when the insured unfortunately dies before it expires—represent costs. You pay the premiums and cross your fingers you won’t need the coverage. Either way, the premiums are long-gone. And the more premiums you pay, the less you can save.
Whole life premiums are completely different. Over time, they turn into an asset. This makes whole life insurance the ideal foundation for your family’s personal economy. The more you save, the more protection you have! And the more protection you purchase–the more liquidity you have available in your Family Fund.
Cornerstone #2: Family Lending
To the right of Financial Foundation you see Family Lending. This is a system for leveraging The Family Fund to invest in the success of the family. This could include investing in your family’s human capital through education, training, mentorship, etc. It could include investing in financial assets, such as cash-flowing real estate, or providing a down payment for a first home. It could be used to launch or expand a family business or refinance higher-interest debt so it can be paid off more quickly.
Family Lending serves another, perhaps less-obvious purpose. It gives younger family members an opportunity to learn and practice their money management. Do they want to apply for a family loan? Great, they will need to show they are saving first! Then they will have to apply for the financing they desire using a process that will require them to think through WHY they want that money and how it aligns with the values your family holds dear. (This could include productivity, sustainability, stewardship, etc.)
Family Lending provides valuable money management lessons. Young family members will get practice is paying back what they borrow! They’ll be responsible for determining their repayment schedule and replenishing the Family Fund. They’ll also have opportunities to sit on the Family Council and see how and why loans are approved—or not approved.
Cornerstone #3: Leadership
Family Financing leverages more than financial assets—it leverages the experience, skills and wisdom of the founders and other leaders through Family Financing Leadership.
Family gatherings, retreats, and governance offer opportunities for younger family members to grow leadership skills and confidence. And while the “financial” part of Family Financing can be done very simply without any of those structures, the chance to nurture family relationships and allow younger members to learn from family elders is priceless.
This cornerstone also reminds us that generational wealth is not primarily a process of growing dollars that can be passed from parents to younger generations. It’s about growing children and grandchildren into leaders. Whether they are leading a company, a team at a job, or a household, Family Financing can provide opportunities to:
- work with others towards common goals
- speak and give presentations
- demonstrate discipline and responsibility
- nurture their ability for long-term thinking and consistent action
- evaluate and advocate for non-profits doing good in the world
- contemplate corporate and personal mission and values
- participate in planning events and making decisions
- receive mentorship from more experienced family members
- help guide and mentor younger family members.
Cornerstone #4: Legacy
Now we end in the upper left-hand corner, in the place where some people would prefer to begin—with the inheritance! And perhaps this is the point the grid helps to drive home: virtually every parent would love to give an inheritance, just as a child hopes to receive one. However, very few families have a system for creating inheritances that last with any certainty.
If you follow the Family Financing method, it will ensure that each generation saves for the next and one financial legacy leads to another. And true wealth extends far beyond a trust fund or inheritance. Legacy means passing on knowledge, mission, values, traditions and memories—as well as money.
Perpetual Wealth takes a holistic view of “legacy” and gives you tools and ideas to create a legacy that goes far beyond dollars, far beyond your own capabilities and limitations, and even beyond the confines of your lifetime.
The Bottom Line: Family Financing practices can help you develop the financial capital AND the human capital of your family. By understanding how typical financial advice sets you up to fail, you can do better! You can succeed. Your children can succeed, and your children’s children can succeed.
Your legacy can succeed.
Find out more about generational wealth strategies
Typical financial planning—while much better than nothing—leaves much to be desired when it comes to building and maintaining wealth for generations. There is SO much more to prosperity than a balance sheet. That’s why the Family Financing method in Perpetual Wealth help you invest in the most important thing you know of… the PEOPLE in your family!
We can show you how to ensure that your legacy lasts! We explain it all in Perpetual Wealth… but you don’t have to read the book to reach out and talk with us about multi-generational strategies and life insurance. Contact Partners for Prosperity today to schedule an appointment with Kim Butler, receive a complimentary quote in the form of an illustration, and get your questions answered!