Aligning your heirs around a guiding purpose for your family wealth and identifying philanthropic missions can help ensure successful wealth transfer for generations to come.

By Phil Tobin

This article is the second in a series taken from The One Page Legacy Plan by Phil Tobin, a free downloadable eBook from iGiftFund. In this piece, we’ll explain why establishing a purpose for your wealth and pursuing philanthropic goals can help ensure the longevity of your family wealth for generations.

“Shirtsleeves to shirtsleeves in three generations” is a saying in our business that refers to the common familial wealth cycle: the first generation builds wealth, the second generation spends the wealth, and the third generation has to start over again.

This theme is expressed the world over. The first generation comes from a life of hardship and is determined to make a better life for themselves and their families. They’re willing to work hard and make sacrifices in order to reach this goal. In later years, their efforts pay off; they’re able to enjoy a more comfortable lifestyle, often with assets to pass on.

Their children, the second generation, grow up a witness to their parents’ toil and struggle. They understand the importance of hard work. Although they now live a more comfortable lifestyle, they may still remember a childhood filled with frugality. Because of this awareness, they typically make sound financial and educational choices that help them build upon the foundation their parents worked so hard to create. Nevertheless, by their later years, the second generation is lucky to have not spent the wealth.

The third generation, however, has no memory of want or struggle. They only know a life of plenty and are often unaware of the work that went into creating the lifestyle they now enjoy. Without this understanding, it’s no surprise the third generation simply squanders the wealth their parents and grandparents worked so hard to build.

So how can you keep shirtsleeves to shirtsleeves from happening? How can you as a parent or grandparent make sure that the future generations will live even better lives than we did – fuller, happier, longer, and more meaningful? As you seek answers these questions, consider the role of philanthropy.

The role of philanthropy in legacy planning. Like most parents, you have high hopes and dreams for your children and grandchildren. You hope to see them create loving relationships, achieve professional success, and make productive contributions to society. You want to see them grow up as caring, generous adults with deeply held philanthropic values.

Family philanthropy provides opportunities for family members of all ages to experience the joy of giving. It also allows them to understand the meaning of the family wealth. It is a powerful tool to help family members learn to work together and prepare before the wealth transition. This is a key component to helping families create legacy that will survive more than three generations.

The benefits of family philanthropy. Philanthropy can be truly useful and meaningful, helping to solidify family values and build heightened financial literacy.

Why? Because when family members work together, they communicate and learn to trust each other. By making gifting decisions together, younger family members develop a wide variety of skills, including communication, negotiation, shared decision making, accountability, investing, and financial literacy, as well as cultivating a responsibility to help others. This leadership development will shape their ability to manage and grow the family wealth in the future.

Experts have thoroughly documented additional benefits of family philanthropy. Research from the Lily School of Philanthropy at Indiana University shows that children who perform acts of kindness experience increased feelings of well-being, popularity, and acceptance among their peers. These feelings also result in better classroom behavior and higher academic achievement.

Dr. Eileen Gallo and Jon Gallo wrote in their book, “Silver Spoon Kids: How to Raise a Responsible Child in an Age of Affluence,” that philanthropy enriches children’s capacity for empathy and giving. “They learn that satisfaction can be derived from money not just because it enables them to buy what they want, but because it can create better lives for others,” the Gallos write. “Although children may intellectually grasp this concept, they also need to experience it as a participant in the philanthropic process.”

James E. Hughes gives this striking observation in Family Wealth: Keeping It in the Family: “Paradoxically, families often learn more about long-term wealth preservation through the process of learning to give away than by the process of learning to accumulate and spend.”

Ultimately, the unique benefit of family philanthropy can be found in helping younger family members learn both independence (how to be self-sufficient and self-supporting) and interdependence (how to be emotionally, economically, ecologically, and morally responsible to other family members and their world).

Family philanthropy should be a top consideration for all high net worth families who want to create a successful family legacy that will last for generations and produce healthy stewards of wealth.

Phil Tobin is Chairman and President of iGiftFund.

Next in this series: Establishing the importance of family philanthropy is one thing—but executing a successful strategy is another. We’ll explore a few example wealth transfer transition scenarios and how family philanthropic planning enables success.

About iGiftFund

iGiftFund is an IRS-recognized, independent, public charity that sponsors donor advised funds.  Its mission is to inspire donors to create, preserve and distribute their philanthropic legacy and to make a truly remarkable impact on the lives of others, including the donor.

With the hallmarks of simplicity, accessibility and low administrative fees, iGiftFund sets the standard of excellence in the industry and distinguishes itself from the large, national commercial and independent DAF sponsors. Based in Hudson, Ohio, iGiftFund works nationally with donors and with financial advisors on their familiar investment platform, in open architecture. iGiftFund’s administrative fees are the most competitive in the industry, starting at just 45 basis points on the first $500,000 tier.