Unprepared Heirs: Starting the Family Conversation About Wealth Transfer

Posted on Mon, Oct 08, 2018 ©2019 Drucker & Scaccetti

Multistate-Tax-ServicesBy: Jane Scaccetti, CPA, MT, PFS and Nastassja Markham Coletta, JD, LLM

 

The reports differ from $30 trillion to perhaps only $9 trillion, but nearly all experts agree the greatest wealth transfer in history will happen in the next 25 years with a significant transfer of wealth happening in the next 10. Is your family prepared?

 

What is wealth? Wealth is relative; there is no specific universal definition or amount. Generally, we focus on wealth because we wish to leave more to our children than was given to us and we want to know that what we worked hard for–or maybe inherited because someone else worked hard–will be nurtured and protected, enjoyed and perhaps even grow for another generation.

 

Most of us are good stewards of our wealth. We have trusted advisors who collaborate with us and each other to be wise about taxes, investments, and legal risks. We use insurance to reduce risks we can’t control but may threaten our wealth. We are reflective and thoughtful.

 

But what we aren’t is prescient and immortal. And too often, mostly due to the sudden death or sickness of the family leader, the next generation is ill prepared to handle the wealth of the family.

 

Studies show that the greatest risk to family wealth isn’t investment allocations, returns, taxes or politics. The greatest risks are family dynamics, miscommunication, and relationship problems within the family. In a nutshell: unprepared heirs.

 

Even among close-knit families we have seen that there is often little communication about family wealth or what will happen when the then-leader is no longer around to lead. Often families that think they are communicating are not doing so effectively. We’ve found this real-life example from one of our clients (the adult child of a family) to be an all too common occurrence: “Dad told us to come over before the Eagles game. He sat my two sisters, my wife and I around the table with our mom. He said we had a lot of money and if something happened to him, we and our children should be fine. We didn’t need to save for our children’s education- there was a ‘fund.’ He asked if there were any questions. We asked a few like, ‘why are you telling us this now,’ and ‘are you and mom OK?’ He reassured us that there were no imminent issues and within a few minutes we went into the living room to watch the pregame show.”

 

So, what should a family leader do today to prepare their family for when they are no longer here or able to lead?

 

Let’s zoom out for the goal and then zoom in for three tangible steps you can take right now.

 

Zoom out: Our goal is to educate the family to be good stewards of whatever family wealth you have built for them and those not yet present.

 

Zoom in – Step 1: First Family Meeting

Meet with your heirs and tell them what you are planning to do. Explain the need for family communication and education around family wealth. Explain—without detail or numbers—what makes up the family wealth (real estate, operating business, investments, etc.). Control expectations if your family will automatically think in billions, but resist outlining specific numbers until the next meeting (the second meeting is described below). This first meeting is about you understanding what is going on in your family members’ heads, too.

 

Define your family story, how you approach wealth, what family virtues you admire and your vision of the long-term family wealth. For example: one of our clients only wanted to help one generation at a time and there were no funds bequeathed to grandchildren; he would leave that up to their parents. Another stressed the need for philanthropy in the family—not just financial giving, but community service, too. One family leader explained how she wanted to provide for the younger siblings of her ‘blended family’ equally: “You don’t get credit for coming on-board early!”

 

Convey what you see as the long-term goal of wealth communication and planning and what you hope to achieve at this and the second meeting. Ask your family what they hope to achieve by participating. What are their concerns? Having two separate meetings allows time for questions to percolate and speculation among the heirs to be vetted before the next meeting. This first meeting sets the tone for family education and governance and it is important to plan it carefully—with a goal and an agenda!

 

Zoom in – Step 2: Prepare for Second Family Meeting

Before you have the second family meeting, you must do your homework. Resist the urge to meet again without facts or using just some of the facts. Create a list of all assets, including how they are titled, their most recent value and their tax basis. Verify ownership of bank and investment accounts and real estate. Seek verification of all retirement plan and insurance beneficiaries. Verify the ownership of these policies, not just the beneficiary. Don’t trust your memory on this…too often, we forget what we did years ago. List all liabilities and note if they are secured by an asset (as would be the case with a mortgage), credit cards, or a guarantee for another’s debt. List all investment partnerships held directly and not through an investment account. If not immediately accessible, actual ownership, value and tax basis may be reasonably estimated.

 

Don’t just focus on the financial assets. Create a list of your heirs’ strengths and weaknesses. This is difficult to do, but vitally important. Maybe in your family there is a member who is a financial or legal guru. Another family member may be the keeper of family culture – they plan the parties and broker a solution to hurt feelings. There may be family members who are the historians – less interested in dollars and feelings, more interested in legacy and purpose. It is not always true the financial guru is the leader if you are gone because often that skill can be supplemented in an outside advisor.

 

Meet with your family advisor and compile a plan that includes what your current Will and Financial and Health Directives; indicate and identify items that need to be changed. Seek the thoughts and insights of those who know you best. Often, your family advisor will be able to provide unique insight into your plan and how it may work with your family. With one of our clients, a young manager had been working primarily with the family patriarch but as the children grew up she started fielding questions and engaging with them, too. As the father began to discuss his plan, the manager provided valuable insight regarding the spending patterns and goals of the children, which was able to assist the father in preparing for the meeting. Her addition to that planning meeting proved invaluable.

 

You might change or tweak your plan based on insights from the first meeting. Maybe you originally planned for trusts that terminated and distributed the assets completely when the beneficiaries reached a certain age but now you see the benefit to keeping the funds in trust with flexible provisions to get maximum protection from creditor and spousal claims. Maybe you originally excluded in-laws from the first family meeting, but now think they should attend the second meeting. Or maybe they were at the first and you are certain they should not attend the second! Just remember: when you sit down for the second meeting with your family, be prepared…likely they will be.

 

Zoom in – Step 3: Second Family Meeting

This second crucial meeting should include the trusted family advisors if they are familiar with most family members. As with most relationships, it takes time for everyone to be comfortable, so consider a third meeting if your heirs have never met your advisors. Start the meeting by restating your goals: you wish your heirs to be good stewards of whatever family wealth you have built for them and those not yet present. Sometimes, this second meeting where details and values are discussed requires a series of meetings depending on the number of next gen and the complexity of the family. But regardless, it is at this second meeting where the family beliefs, values, practices, norms, ideas and finances are discussed in detail.

 

This blog attempts to cover wealth planning and the complexity of families – all diverse and distinct. Almost always, the lack of communication and planning is at the heart of family wealth dissipation. Our goal is to express the need to communicate within the family and plan for the next generation.

 

Let us help you develop a plan that works for you and your family.

Topics: Trusts, investments, wills and estate planning, Next Generation, beneficiaries, Estate Plan, conversation, family wealth, Families, transfer of wealth, unprepared heirs

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