Many of us spend our lifetime accumulating our wealth. But did you know that often times heirs don’t spend their inheritance—our wealth—responsibly? In fact, nearly 70 percent of family wealth transference and business succession plans fail. This is according to Victor Preisser and Roy Williams in their book Preparing Heirs: Five Steps to Successful Transition of Family Wealth and Values. Surprisingly, only 3 percent of these failures can be attributed to errors in investment planning, legal issues or taxes. Rather, the vast majority (actually 60 percent) of failures were attributable to poor family trust, communication and heir preparation. This suggests that with better preparation, many of these failures could have been successes.
While preparation can take many forms, my 35+ years as an independent advisor has shown that developing a Family Plan can go a long way in giving clients confidence, knowing their family and heirs are ready to manage the funds. Key ingredients are good communication and family engagement in a collaborative process which I will outline below. The role parents or elders play in creating a conducive environment for constructive family discussions cannot be overstated. To do so, it works best if the parents are well prepared beforehand.
For many clients, articulating their feelings may not come easy. Perhaps a good first step is to explore why parents may anticipate awkwardness and discomfort—real or imaginary—with money talks. Top challenges may include:
- Do We Have Enough for Ourselves? Clients may question whether they can meet their own needs before figuring out how much to give to heirs and charities.
- Avoiding Mortality Discussions: It is human nature to not want to think about our own mortality, which can serve as a basis for avoiding related discussions.
- How Can We Be ‘Fair and Equal’: Some may dread a discussion between, say, competitive children about who gets how much and when. All too often, “fair” can translate into “equal” in good parenting parlance which may or may not best serve the family’s needs, especially when children may have unequal financial circumstances.
- Painful Reminders: Traditional bread winners may already be struggling with middle age, coming to terms with their life’s meaning and regrets about what may have been sacrificed as a
- spouse, parent and/or loved one to achieve financial success. So there may be hesitation that bringing up family finances could also spark painful emotions that clients see as best left undisturbed.
- Don’t Rock the Boat: Parents may hesitate to initiate conversations that may spark controversy within the family and opt instead to avoid discussing delicate issues that could cause upset. This is especially true given the money pressures the younger generations may feel from our challenging economy.
- It’s Not Our Business/We Don’t Want to Appear Greedy: By the same token, adult children may hesitate to ask about family finances so as to not appear overly anxious, perhaps falsely assuming parents will take the initiative and/or that these matters are none of their business despite their inherent stake. The end result is that important conversations may never take place.
As we consider the best ways to resolve these concerns, it can be helpful to better understand those issues that most worry parents concerning the effect of their wealth on their children. According to a U.S. Trust survey of Affluent Americans:
PARENT’S WORRY ABOUT THEIR CHILDREN % WHO ARE WORRIED [2]
Too much emphasis on material things………………………….60%
Naïve about the value of money…………………………………… 55%
Spend beyond their means………………………………………….. 52%
Have their initiative ruined by affluence………………………. 50%
Not do as well financially as parent would like………………49%
Not do as well financially as parent did………………………….44%
Hard time taking financial responsibility……………………… 42%
Resented because of their affluence……………………………… 36%
Suffer from parent not being around……………………………. 35%
Date or marry someone who wants affluence………………. 34%
Limited exposure to non-affluent people……………………… 33%
Feel they have big shoes to fill and will fail…………………… 18%
In short, increasing the success of wealth transference strategies requires much more than simply employing better taxation, preservation and governance of that wealth. Since many concerns are grounded in the parent’s direct experience and the resulting perceptions, their resolution not only rests in better preparing heirs, but may require a “revision or updating” in those perceptions as well. “The parental concerns address behaviors, knowledge, application of that knowledge, and what is often referred to as not-yet-acquired ‘common sense’ and ‘good judgement.’” To be truly effective, that effort is best combined with an objective assessment of family skills that is more grounded in the here-and-now than being burdened by history. That John could not handle money as a teenager, or Sally spent every penny as soon as she got it, could leave a lasting impression that is best re-evaluated in the present.
Challenging though these worries may seem, our clients have found that by having a framework, many worries can be successfully resolved. The result can be a sense of confidence that the savings they have worked their lifetimes to accumulate will be handled as they wish—with a much lower chance of heirs being left hurt and disappointed.
How We Do It
“Your Number” Lifestyle Adequacy: Before figuring out how much to give to others, clients find it invaluable to first understand how much they will need to support their own lifestyle. Following the thought process of Lee Eisenberg in his bestseller, The Number: A Completely Different Way to View the Rest of Your Life, we are able to calculate the required lump sum after allowing for Social Security, pension benefits, employment earnings, rental income and a multitude of other potential income sources (see our white paper: “Are Your Financial Goals Achievable? The Importance of Having ‘Your Number’” for more details).
Understanding Your Own Values and Priorities: Airlines recommend in case of emergency to have your own oxygen mask on before helping your companion. Similarly, it is important that family elders are clear and in agreement on their values and priorities before initiating those discussions with their families. Our clients have found it helpful to utilize the Values Based Financial Planning process advocated by Bill Bachrach in his book by the same name. Using that process, we are able to facilitate a deep, meaningful exploration of what is important to each client and why, which in turn provides a basis for dialogue and finding common ground. A discussion of philanthropic passions can provide a helpful means of conveying values to your heirs (see our white paper: “Can Articulating Your Values Enhance Family Cohesion?” for more detail).
Gaining an Objective Perspective on Heirs: Especially for Generation X’ers and Y’ers, many may have graduated with onerous education loans and credit card debt while at the same time may be challenged to find career jobs. Effectively managing their money, plus an eventual inheritance, will require familiarity, if not core competency, in these key areas:
• Budgeting & Managing Debt
• Savings & Investing
• Assuring Adequacy of Life, Disability & Medical Insurances
• Buying a First Home or Upgrading an Existing Home
• Optimizing Employer Benefits
• Planning an Estate Including Wills & Trusts
• Managing Income Taxes
• Managing Education Funding for Children
A first step may be to encourage heirs to objectively assess where they may need extra support using the enclosed questionnaire, “Are You Prepared to Succeed Financially?” By so doing they may increase their self-awareness and at the same time will help you gain a more current, perhaps objective picture of their financial prowess (see our white paper: “How Prepared Are Your Heirs?” for more details).
Getting Your Heirs the Support They Need: Our A-Z Financial Resource contains valuable, easy to understand articles on these core skills that can provide a solid base for awareness and learning.
Identify Your Interest Areas: Making philanthropic decisions together can provide a good basis for inviting important financial discussions and, as a result, can enhance trust and openness among your family members. As a starting point, you may want to consider organizations that have positively affected you and others with whom you feel close. These are often causes that “speak” to you and resonate at an emotional level.
Prioritize Opportune Gifting Assets: Potential tax treatments can be a key. Top gifting options may include assets with significant unrealized gains, those that may not generate adequate cash flow, and troublesome assets like some rental properties (see our white paper: “Are You Enjoying the Joys of Gifting?” for more details).
Compose Your Family Mission Statement: When created openly and with consensus, this sharing process can greatly facilitate family communication and serve to build trust among its members. There are typically three key parts that can be built by completing these sentences:
- Values that influence my giving are…
- I would like to (goal of your time, treasures and talents) help (further what purpose, interest or social issue) ….
- Organizations (specify organizations or types of organizations) with which you would like to engage. Identify organizations offering best fit for your goals.
Identify Organizations Offering Best Fit for Your Goals: Before selecting an organization, it is important to understand how supporting it can help you achieve your mission and charitable objectives. Numerous services are available that gauge a non-profit’s effectiveness and results. You may want to tour their facilities, perhaps as a family group, and speak with staff and even perhaps the clientele it supports.
Implement and Monitor Your Plan: Philanthropy is an evolving process, not a single event. Family “traditionalists” may have very different views than Millennials. You may want to uphold your ancestor’s philanthropic legacy while remaining open to the ideas and experiences of new generations. It is important to revisit the statement annually.
In summary, we all want our remaining time and money to be spent with as much clarity as possible. It is difficult to address issues of money with our loved ones; it is human nature to want everything to just go on as it is and trust the future will somehow take care of itself. But by carefully and mindfully speaking to your family members about your wishes and theirs, an ease of living is created because the hard stuff is “on the table.” Everyone then can continue living their lives without secrets, doubts, and possible questions. This comfort and ease can permeate the family system, allowing for time together to be as rich as possible. Several appendices worksheets follow with recommendations that our clients have found invaluable in helping them facilitate a productive, inclusive Family Planning process.
This information is not considered a recommendation to buy or sell any investment or insurance and is being provided for information purposes only and is not a complete description, nor is it a recommendation. We strongly recommend an advanced tax and estate planning expert be contacted for further information since Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation.
Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named the industry’s most qualified Financial Advisor through Research magazine’s Hall of Fame in 2010.
Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.
Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara.
For more information, visit www.kwmwealthadvisory.com or call (866) 467-8981. Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC. KWM Wealth Advisory is a separate entity from WFAFN.
