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I’m an Advisor to Wealthy Families: 7 Little Changes That’ll Make Your Money Last for Generations

SARINYAPINNGAM / Getty Images/iStockphoto
SARINYAPINNGAM / Getty Images/iStockphoto

You may have heard of the third-generation curse, which causes 90% of wealthy families to lose their money by the third generation. But some individuals manage to deplete their wealth even sooner, especially if they came into a lot of money quickly.

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For instance, athletes, entertainers, executives and entrepreneurs who achieve runaway success after years of financial hardship may suddenly find themselves with seven-figure bank accounts and no idea how to carefully spend and manage their money.

The same thing can happen to people who inherit a lot of money. In fact, money mismanagement is one of the primary factors in the third-generation curse if sound financial values and solid money management strategies weren’t passed on through the generations.

Many of these families did not start off wealthy, and had already developed sub-optimal money habits by the time they became wealthy. Often, it’s hard to change those habits that have been formed over a lifetime. But when you have money, you, unfortunately, become a target. Your behavior needs to change if you want to preserve your wealth.

GoBankingRates spoke to Ken Eyler, CEO of Aquilance, a financial administration company focused on bill pay, bookkeeping, and complex entity and investment reporting for wealthy families. He shared with us seven tips to preserve generational wealth, whether you are a new heir, a social media influencer who hit it big, or an entrepreneur who’s struggled for years before finding that business idea that set you up for life.

Tighten Your Security Profile

As an advisor to high-net-worth and ultra-high-net-worth families, I often encounter those who make easily avoidable mistakes with their fortunes. Many of these families did not start off wealthy, and had already developed sub-optimal money habits by the time they became wealthy.

I see security as one of the biggest vulnerabilities for families. One of the common pitfalls are folks who were accustomed to posting about their travels on social media, especially if they first made it big in the public eye.

But when they are traveling on private jets and leaving their multimillion-dollar homes, they open themselves up to threats when they reveal their whereabouts. My recommendation is to post after the fact instead of in the moment. Also, take seriously the importance of anonymity when checking into hotels or visiting tourist attractions.

Preventative measures are also important to increase the safety of your family and your property, both physically and digitally. Install good locks and monitored alarm systems as a start to protect your property. Employ secure methods of communication to share sensitive information –not email.

Review Your Insurance Coverage

My clients are often unsure about the changing nature of the insurance they need. They don’t know what is available, or how and when to obtain it. As they enter into the HNW category, protecting their assets becomes more complex. For example, securing coverage for expensive homes in risk-prone areas (such as Florida and California) is challenging today. It often requires working with a reputable broker that specializes in HNW coverage who can advocate to carriers.

Additionally, I’ve seen issues arise when there are gaps in insurance coverage. For instance, a client pays cash for a $20 million home in Manhattan and moves in with their $5 million art collection. They didn’t have a mortgage, so no one required insurance at settlement, and it was overlooked. If you are uninsured for Property & Casualty insurance, you probably also neglected to shop for liability coverage. This can lead to problems if you are a victim of fire or theft or if anyone is injured in your home.

Work with the Right Professionals

Just as you want to speak to a broker who specializes in insurance for HNW individuals, you should consult with other financial professionals to ensure you are making the right decisions. Financial planning tactics that you used in the past may no longer be sufficient, and a top wealth advisor who understands allocations and high-end strategies is a critical piece of your financial infrastructure.

Find a good financial advisor who holistically understands your assets and has visibility across multiple accounts. They can help you plan your spending and manage your cash flow in order to make the best decisions for your future.

Having a team of exceptional professionals in other areas who communicate to enable continuity is also crucial. I recommend working with an experienced trust and estate attorney, a tax accountant that specializes in high-income, high-net-worth clients, financial administrators that work exclusively with wealthy families, and an insurance broker that understands expensive properties and the unique risks of wealth.

Review your Retirement Plan

It’s true: Everyone needs to plan for retirement, including the ultra-rich. Your retirement lifestyle will likely look much different now that you’ve made it big. But make sure you are planning for the future to have enough money to live the way you want to live.

Folks who come into a lot of money very quickly — often actors, athletes, entertainers, and entrepreneurs — have a short time in which they gain income. They are not always prepared for how to best manage this fast influx of cash and need to be ready in case that income stream dries up just as suddenly as it started.

Also, what seems like a lot of money at first can change very quickly when you consider taxes, the staff you have to pay and all the other expenses that come with managing a lot of money. You need to plan for your net income (after all expenses), not just the gross amount on your paychecks. If you don’t, you could be very disappointed later when you don’t have what you expected.

Optimize Your Financials for Tax Benefits and Philanthropic Initiatives

Charitable giving not only has an incredible altruistic impact but can have big financial advantages as well. It’s no secret that wealthy families optimize their charitable giving initiatives in order to benefit from key tax breaks. Investing in Opportunity Zones, for example, offers tax benefits that can reduce your overall income tax burden. Philanthropy can also be a fantastic way to involve your family in causes important to you. You might even wish to start a foundation to ensure your legacy of supporting certain causes lives on when you’re gone.

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Ensure and Facilitate Effective Communication

I highly encourage families to have constant communication with their trusted advisors and family members. Given the number of parties who may be involved, it’s quite easy to lose sight of where things stand.

Your wealth advisor, your tax accountant, and your financial administration firm should remain in close contact, sharing information and reporting that they need. Your estate planning attorney should also be in the loop so they can stay on top of a solid estate plan. Your family should also be in regular communication to ensure that they understand the implications of the estate plans put in place. For example, an asset transferred to a Trust is no longer owned by you, although you or your family may be a beneficiary.

Receiving information and sharing reports from a financial administration firm (like Aquilance), so that everyone understands your spending, your balance sheet, and any future commitments such as debt payments or capital calls that will deplete cash, is imperative. By sharing these key financial statements and reports, your team can operate with a level of transparency and clarity that is hard to achieve without shared communication.

Manage Debt Wisely

Speaking of debt, it is important to use it carefully. Use it to manage cash flow while living within your means. On one hand, purchasing a large asset such as a home, expensive car, or aircraft with cash may be unwise as it depletes cash on hand that you may need for something else. On the other hand, incurring large debts that are beyond your ability to ultimately pay back can result in a negative net worth, which has ultimately bankrupted some formerly wealthy people.

Coming into money — either through hard work, inheritance, luck, or any combination of the above — is, of course, a positive thing that opens up many doors. But not preparing for your new lifestyle can quickly make all of those benefits disappear.

Additional reporting by Dawn Allcot.

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This article originally appeared on GOBankingRates.com: I’m an Advisor to Wealthy Families: 7 Little Changes That’ll Make Your Money Last for Generations

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