What is Purposeful Planning? What You Need to Know

Most people are familiar with the term "estate planning," in which families prepare for the transfer of wealth from one generation to the next. Lesser known is the term "purposeful planning," which takes estate planning to a deeper level by considering each family member's long-term goals and how wealth should benefit both a family's heirs as well as their community for generations to come.

“We've all read the statistics about how 70 percent of family wealth is gone by the second generation, and 90 percent of it is gone by the third generation," said Joe Goldman, a senior wealth planner with City National Bank in Beverly Hills. “An important part of successful wealth planning is to increase communication between all stakeholders and to focus on beneficiary preparedness. That's where purposeful planning comes in."

Approaching estate planning and wealth management with this family-oriented perspective is meant to give beneficiaries some control over their futures, which also requires developing their financial literacy.

“Purposeful planning is about looking at the mark you want to leave on earth and about teaching your children about their obligation to give back and to be financially responsible," said Mark T. Williams, a master lecturer in the finance department at Boston University and co-founder of FitMoney, a nonprofit focused on elevating financial education in public schools.

“With purposeful planning, focus is also placed on financial literacy and taking into account that those impacted by the plan will be future generations, not just those setting up the plan," he said.

 

Defining Purposeful Planning

Purposeful planning is a collaborative approach to wealth planning that takes family dynamics, the purpose of wealth and a big picture point of view into consideration.

“Whereas traditional estate planning is a client-centered approach that takes into consideration the goals of the person who created the wealth, purposeful planning keeps in mind the bigger picture," said Goldman. “Traditional estate planning focuses only on income and estate tax reduction and typically looks ahead only for the next 30 or 40 years."

But purposeful planning takes a broader approach that looks ahead for multiple generations, said Goldman.

“Purposeful planning involves taking into consideration not just the grantor's goal, but the goals and values of the beneficiaries who will be impacted by the plan," he explained. “To go through with this type of planning, we look at family dynamics and guiding the grantor in making sound decisions that will have a positive financial and non-financial outcome for successive generations."

 

Family-Centric Planning

While every family is different, many high-net-worth families choose to involve their adult children in the planning process, said Goldman.

“Once we understand the goals of our client or clients, we begin to involve the heirs," said Goldman. “We start by asking the clients what they hope to accomplish by involving family members and how much involvement they want. We know a lot about our clients, so we are always cognizant to share only as much as our client is comfortable with sharing with the family members."

The conversations between senior wealth planners and their clients about the potential impact of different estate planning decisions are fairly involved and nuanced.

Work Ethic

Many families share the concern about too much wealth creating a disincentive to work. “A lot of people ask me, 'How much is too much to leave to my kids?' and they want to know if they should control the distribution of wealth for different ages," said Goldman. “We talk about options like placing conditions on when the kids can inherit money, such as when they achieve a certain level of education or income."

Professional Goals

While placing conditions on inheritance can encourage heirs to be productive and be made with the best of intentions, Goldman also say it's imperative that his clients understand the potential consequences of these conditions and how to handle them.

“When children grow up in affluent families, they often start to connect money with love and affection from their parents," said Goldman. “Then, when the parents pass away and their distributions come from a trustee they don't know - and they have to meet conditions they didn't know about - it can cause friction. That's why it can be important to talk about the provisions of the estate plan with beneficiaries early on."

Personal Interests

Goldman recommends personalizing plans to take into account the goals and interests of the next generation, including what may happen if a condition isn't met. “You need to think about how to accommodate a beneficiary who wants to be a stay-at-home parent and may not meet an income-matching goal," said Goldman. “There are ways to manage distributions when one beneficiary wants to start a business, such as providing for loans or a special distribution from the trust. You can also include provisions to provide distributions at specified ages and then set aside other funds for purposes such as a down payment on a house."

Philanthropic Plans

Another important element that can strengthen family ties and be part of the estate planning process is how to handle charitable donations. Multiple conversations should take place between parents and their adult children to talk about their philanthropic goals and aspirations so that the estate plan can take that into account.

“Money means different things to different people, so part of purposeful planning is acknowledging what that means to individuals within the family," said Williams. “Wealth provides opportunity and flexibility to people, but some members of the family will be more interested in investing or starting a new business while others may be more interested in philanthropy. Those differences can be addressed with purposeful planning."

 

Purposeful Planning Benefits Early Starters

An important part of purposeful planning is training subsequent generations to make good financial decisions and to be good financial stewards of family wealth for future generations, said Williams.

“Parents need to start leading by example when their children are young. When they're older, some families shelter their kids from financial decisions, but that leaves them with little understanding of how to handle money," he said.

Family retreats that address financial responsibility, stock market games and discussions about needs and wants can all be part of the long-term training for high-net-worth families, said Williams.

“You want to give heirs room to make mistakes and learn lessons when they're young," said Williams. “Some families will do things like set up a stock contest between siblings and provide some funds to invest, rewarding the person who gets the highest return and the person who loses the least money. That can directly teach the relationship between risks and returns and lead to wiser decisions later in life."

Generally, purposeful planning takes place when the parents are in their 50s or 60s or older, and the beneficiaries are at least in their 20s or 30s, said Goldman, because then there will be more clarity on the personalities and goals of the younger generation.

“When families are younger, they can prepare for the future by modeling good financial practices, teaching financial literacy and talking about the emotional side of money," said Goldman. “That prepares them well for the broad approach of purposeful planning in the future."

For families who want to provide for the wellbeing of multiple generations, taking the extra time for purposeful planning can be the start of a powerful path to intergenerational wealth.

Are you interested in discussing your wealth plan with an advisor and wish to find one? Get in touch with a City National advisor today.