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How to Avoid 3 Common Pitfalls that Jeopardize Family Wealth

Cäcilie Albrecht, the “grand-dame” of the $40 billion Aldi supermarket fortune, died in November of 2018. She and her husband, Theo, had seen their son take up their financial values and conduct himself as a family steward. She’d written a will which clearly designated her wishes for her estate.

And yet, the Albrecht family is now engulfed in a massive feud. Cäcilie specified in her will that her daughter-in-law, who has survived her late son, should be cut out of the estate and disallowed from any participation in business decisions. She also cut out her five grandchildren. Her criticism? All of them indulged in lavish spending.

This story begins like a textbook example of a family that was doing it right, and yet, the fortune and family responsibilities were not passed on to the third generation. In spite of your best efforts and intentions, your ability to pass on your wealth and values to the people you love can still be thwarted if there are dangerous behaviors at work.

To successfully pass on family wealth, it is crucial that you and your heirs understand these potential dangers, evaluate where they might be present in your family, and work to root them out. Here are three of the most common pitfalls that jeopardize family wealth, plus suggestions for how you can avoid them.

Entitlement Rut 
Merriam-Webster defines entitlement as “the belief that one is inherently deserving of privileges or special treatment.” When a generation loses touch with the sacrifice that another generation made, the younger generation can develop an attitude of entitlement. This can easily sap their motivation, limit their contribution, and discourage their desire to learn financial smarts.

Sometimes, the Entitlement Rut can come about from misperceptions about how much wealth heirs should expect to receive. We sometimes hear elderly parents tell their adult children, “I’m leaving you plenty. You won’t have to worry about money.” Parents intend to be comforting when they say this, but often, their children get inflated ideas about how much they can expect.

The Entitlement Rut can set heirs up for failure because larger-than-life spending will result in a rapidly eroding estate. Even if heirs can sustain themselves on their inheritance, they won’t end up leaving much (if anything) to their children.

To avoid the rut, share financial stories with your kids and involve them in financial decisions. Remind them where the money comes from. Invite your children to attend meetings with financial advisors. When money is gifted with few or no expectations, that’s when the entitlement rut can set in.

Finally, remember that gratitude and generosity can be part of the antidote to entitlement. If you are seeing attitudes of entitlement in your children, start doing what you can to implement family traditions of giving.

Enabling Behavior
Most people know the saying, “Don’t give a man a fish; teach him how to fish.” But as parents, this is sometimes easier said than done. We don’t want to see our kids hurt or in pain; we want to protect them from making bad decisions. Ironically though, by protecting our kids, we often prevent them from experiencing the challenges they need to build up their own grit.

Enabling Behavior is similar to the Entitlement Rut, but the Entitlement Rut refers to the kids’ problem. Enabling Behavior refers to the parents’ problem. Here are a few examples of Enabling Behavior:

● A child runs up thousands of dollars in credit card debt, and the parent agrees to pay it off.

● A child convinces their parent to go in on an investment with them—maybe a development property or a business. The investment tanks, and the parent never gets paid back.

● Parents consistently buy their children’s big ticket items: a house, a car, etc.

If people come to expect consistent handouts, they’re never held accountable for their actions. They don’t have the opportunity to learn from their mistakes or gain needed lessons in financial literacy. Enabling Behavior can actually set up the people you love for making more mistakes—bigger mistakes—down the road.

If your child comes to you and needs help, of course it is okay to help them. But we’d encourage you to be thoughtful about how you do so. Consider laying down some rules. You could also consider using an intermediary. A third party can increase both the accountability factor, and the risk for your child—which could help them strengthen their efforts.

When your children are forced to take on the responsibility and consequences for their choices, you’re pushing them to be more thoughtful, careful, and smart about how they use their money. That’s loving!

Misplaced Trust
Bernie Madoff. Enron. Charles Ponzi. What do they all have in common? They all lost millions of dollars for people who trusted in them. Putting your trust in the wrong person, strategy, or institution is one of the most dangerous financial behaviors you can fall into.

Negative influencers don’t just show up on the front pages though, like Bernie Madoff. People take financial advice from other people all the time, be it a news story, an uncle’s tip about a hot stock, or a colleague’s “winning strategy” which he tells you about at the water cooler.

Bits of advice that float our way feel authentic and trustworthy. However, it’s rare that a financial tip will take into consideration your age, station in life, financial goals, financial needs, and current financial position. Sometimes even good advice may not be good advice for you.

Jim Cramer is a famed TV personality and stock picker and may give a solid stock tip on his TV show. However, you need a working knowledge about how to take a stock recommendation and fit it into your whole picture before following his advice. What if you have to fund enormous medical bills? What if your other child is in college? What if you also need to fund your retirement?

Before taking advice from a potentially negative influence, lay out the full picture of your finances. Consider your resources, your health situation, your family situation, your long-term goals, and values. When the entire picture is assembled, then you can start quantitative analysis and stress testing, and make decisions from there.

Plan Ahead of Time
Cäcilie Albrecht feared that the third generation would not be good stewards for the family’s wealth, and she may have been correct. Nevertheless, the pitfalls the family faced didn’t have to loom so large. With some preparation, financial literacy, and coaching, you can make sure your family wealth is safe for future generations.

It’s always a good idea to look at potential dangers like entitlement, enabling, and misplaced trust before they arise. That way, you’re protected against any hits that may come your way. Financial smarts and healthy values will help you deal with many of the biases and behaviors that can otherwise jeopardize your financial decisions. Also, a trusted team of advisors, along with strategic use of legal tools, can help protect your estate from dangerous circumstances.

For more advice on common financial pitfalls, you can find Pass It On on Amazon.

Roger and Lori Gervais are proud parents of three wonderful children: Anna, Will, and Jack. Roger and Lori are also the husband-and-wife team behind The Gervais Group, named by Forbes as “Best in State Wealth Advisors” in Wisconsin. Lori, a CERTIFIED FINANCIAL PLANNER™ professional, has been recognized for her commitment to clients and to the profession by Forbes, which named her to its America’s Top Women Advisor List. Roger, a CFA® charterholder, uses his background in engineering to offer clients a unique set of problem-solving skills. Throughout their thirty years of combined experience in the industry, Roger and Lori have made it their mission to simplify the complex world of financial planning.