Family Wealth Management: Tips for a Successful Transition Between Generations
Photo Credit, Dvir Adler, Unsplash
Key Points
■ Develop a family financial map
■ Communicate early and often
■ Be clear about your expectations and values
■ Introduce your heirs to your financial advisor or investment professional
Passing on wealth entails more than just transferring financial assets to future generations. It is also about passing on what you value and protecting your children's connections with one another.
Unfortunately, evidence suggests that the process goes wrong for many families. Here are some actions you can take to prevent common and costly mistakes while boosting the possibility that your estate will properly transfer and survive for another generation.
Avoid This Unfortunate Inheritance Predicament
It is usual for parents to die and leave the family home to their children: in this case, Joe, Bill, and Marie. Joe intends to maintain and live in the house to preserve the homestead for future generations. As long as Joe can purchase Bill's portion, Bill is OK with it. Marie insists on selling the house since housing is in demand and a significant profit may be earned. And thus, the battle starts. No family wants their parents' legacy to be a dispute over riches, yet it occurs frequently.
Understand Why Most Transfers Fail
While wealth transfers fail for various reasons, a lack of communication is the most common. Most parents are hesitant to talk about money with their children. They may be afraid that such discussions would expose their children's self-interests or that discussing inheritance would make the children less driven to succeed. Parents may feel that such a discussion revolves only around trusts, tax tactics, and insurance plans. While your financial advisor or investment professional may use these tools to help you achieve your wealth transfer goals, the real reason for talking with your heirs ahead of time is to express your hopes for the impact the assets will have on your family and community — both now and after you are gone. A clear explanation of what you want to achieve with the assets may help your family’s legacy last decades.
Plan to Avoid Mistakes
While talking about your legacy with family members, it is essential to consider all of your potential beneficiaries. Prepare ahead of time and identify your immediate and extended family members so that you and your financial adviser or investment professional clearly understand who you may wish to plan for. You may have a child who must be watched while you are away. You may have older parents you want to support financially after your death. When meeting with your heirs, take the time to record specific details such as names, addresses, and phone numbers. Use this road map as the starting point for a planning conversation with your attorney, tax advisor, financial advisor, or investment specialist.
Shape the Conversation Appropriately
A detailed explanation of family wealth may be perplexing to minor heirs. Minor children should be maintained on a need-to-know basis and provided information in increments as they age. On the other hand, older heirs may benefit from knowing what they will receive to prepare for future assets that are compatible with their life choices and aspirations. This is especially true when it comes to passing on a family business. Such a legacy may influence an heir's educational choices or other options that benefit the business's health. On the other hand, knowing that the heir is a young adult is essential to making an alternate succession arrangement if the heir does not desire the business.
Take Your Time
The family money discussion should regularly occur, as legacies may involve complex planning. Your family members' responses may also change over time as they go over inheritance arrangements. Not everything needs to be discussed at once around the kitchen table.
To avoid having the conversation cut short by the reactions of other family members, you could choose one of your children to serve as your executor and have a one-on-one meeting. Several investment advisors may advise you to appoint an executor who is not a member of your family. In this manner, siblings can interact with an unrelated executor rather than putting demands on a related executor. You might also be able to talk about the disposition of family heirlooms. It may be simpler to ask each child discreetly if they are interested in your grandmother's jewels or your expensive artwork than to have an open debate when the entire family gathers for the holidays.
Share Your Values
Legacies can also entail agreements outside of the family. Consider giving a portion of your stock assets to a charitable organization, or you may leave the summer house to a charitable organization for housing or educational purposes. Inform your children about the reasons for the split of your inheritance so they are clear and respectful when your legacy passes to others. If you want to avoid controversy after you pass away, the why of your estate is just as crucial as the what. There is also an opportunity for your heirs to express their wants and thoughts so that they, too, may share their values with the entire family.
Introduce Your Financial Advisor or Investment Professional
This should occur before your children inherit your estate. If one of your children is your executor, ask that child to attend your annual review with your financial advisor so you can start talking about money freely. If another child is starting a career, meet with your financial advisor to discuss long-term savings options. They may educate your heirs on general money management, develop trust and communication around family wealth, and collaborate with your family to ensure your legacy lives on.
Communicate Early and Often
You may increase your chances of effectively transferring your fortune by involving loved ones in inheritance planning. For example, if you create an account for an heir and want them to be aware of it, invite them to a meeting with your financial advisor to discuss what you are doing and why. The same applies to any contribution to a savings account or an investment vehicle for retirement or education funding.
Please ensure your loved ones can access your legal, tax, insurance, employment, and financial connections. By engaging and teaching heirs along the way, you may help them avoid frequent and costly mistakes later on while also safeguarding your inheritance from the negative impact that surprise and a lack of preparation can have.
Aim to Achieve Wealth Transfer Success
While the high incidence of transfer failure is one of the most challenging problems in passing on wealth, most inheritance transfers fail for reasons you can usually manage.
Many individuals make mistakes you can prevent, such as not having a strategy, not explaining your plan, and neglecting to prepare their heirs. Please understand the frequent mistakes with your financial adviser or investing expert, create a plan for the people you want and need to provide for, and ensure everyone knows your goals and intentions before the time comes. When you communicate your wishes for your heirs' use of the legacy, you increase the likelihood that those assets will be available for generations. You can leave a lasting legacy.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
Portions of this article were sourced from the work of MFS Heritage Planning. Neither MFS nor any of its subsidiaries are affiliated with Optima Capital Management.
Our Insights
