How, when, if? The question of wealth transfer

A small silver lining of the COVID-19 crisis is the chance it’s given so many of us to reflect on the important things in life, from our work, our homes and living spaces, to our relationships, family values and life goals. For high net-worth families especially, these trying times have created opportunities to think about longer-term financial considerations such as estate planning and how, when and even if, to transfer wealth to the next generation.

In last week’s post, we reported on the urgency of having a valid estate plan in this time of COVID-19, and the new issues and regulatory changes that impact will preparation and signings as a result of social distancing measures.

In this post, we take a step back and examine the bigger issue of wealth transfer, and the important, though sometimes difficult, conversations that need to happen. Because determining how, when or even if, to pass on wealth to the next generation is often one of the most contentious topics facing high net-worth families.

The reason, as Susan Fulford of Dynamic Legacy Inc., Newport’s Professional in Residence for Family Advisor Services notes, is that many families simply never discuss inheritance, much less how it can or should be used. Avoiding or not exploring the topic can often lead to misunderstandings, conflict and irreparable rifts.

The key to making any wealth transfer work, Fulford explains, is understanding that it’s a detailed process when managed properly—one that involves gathering the right information, discovering the family’s shared values and developing a plan to ensure the next generation has the right tools to competently and confidently manage (often vast) inheritances.

Do an asset inventory

The first step, says Fulford, is simply understanding the extent of the wealth that will one day change hands.

“There are many families that know they’re affluent, but don’t understand the scope, impact and complexity of managing that eventual transfer. They often don’t consider the impact it will have on the individuals once a transition is completed.”

Beyond conducting a comprehensive inventory (including inheritances yet to transition), that also means taking important financial planning considerations into account, from the tax and legal implications of a large inheritance to asset valuation. If a family member has valuable art, jewelry or other collectibles, for example—let alone assets such as businesses, properties or an extensive portfolio of investments—determining their value can be an arduous process. Factor in differing family members’ emotions, and the challenge can take on a whole new level of difficulty.

That’s where a trusted third-party family enterprise advisor can help explore alternatives and engage the family members.

“Meaningfully engaging family members in dialogues around transferring wealth and succession is key to avoiding future conflict,” Fulford explains.

Share ideas and learn about each other

An often-overlooked step, says Fulford, is taking time to learn about the characteristics of the family. This part of the process is important for understanding each other’s core values and long-term life goals. Finding confidence in the rising generation—those who will inherit the wealth—starts by recognizing a shared set of values.

When commencing a client engagement, Fulford typically asks each family member to identify what they believe to be their parents’ top five values, sharing stories, giving examples. She says the results can be revelatory, allowing family members to see each other in a completely different light.

It often creates a “Value Bridge”, which she then adopts as the name for the session. Values that are adopted throughout multiple generations, through marriage and chosen life partners expand the bounds of common ground beyond usual familial relationships. Various family members start to see the values as the familial link between individuals. This inevitably bolsters family cohesion, purpose and legacy.

Some families want to encourage hard work and accomplishment and won’t give gifts to their heirs during their living years—if ever—in an effort to eliminate presumed entitlement. Other benefactors want to see their wealth enjoyed by the whole family while they live. Many want to see it extrapolated; they wish rising generations to leverage the affluence into greater accomplishment during their lifetime. Philanthropic legacy goals will inspire families to support communities, while a real sense of current need has caused some families to plan ‘spend down’ gifts, donating part or all of their fortunes in the near term.

“Whatever the wealth creators decide drives the decisions,” Fulford stresses. “Observationally, once they engage family members in the discussion, the goal isn’t consensus on how money should be transitioned, but what could be accomplished with everyone’s input. Values are about how you live your life today. How people remember you after you are gone is the legacy you create through your actions now.”

Part of that discussion means analyzing various family members’ talents, skills and even vulnerabilities. The goal is to find and build competencies, confidence, experience and sound decision-making abilities in the next generation, while building trust and encouraging open dialogue. It is delicate work, requiring a lot of transparency by all parties.

Key questions to ask: Do some heirs have aptitudes in specific areas, and if so, where? Can aptitudes be acquired, developed or outsourced and managed? Does anyone need to be looked after in terms of health or other requirements? Are there geographical concerns that should be addressed either through investments or chosen residence? Do issues such as marriage dissolution, incapacity of family members and unexpected crisis further complicate family dynamics?

Fulford encourages families to focus on process and habits creating a positive communication framework. Families need to create a safe and neutral place to discuss the myriad of topics they should consider as part of the governance and wealth transfer process. “There are opportunities in having a conversation with the next generation to use wealth as a platform to grow, learn, invest, innovate, manage and legacy-build together,” she says.

Let them practice

Here’s a difficult truth: many individuals will struggle to manage the wealth they inherit if they haven’t had the chance to earn it or contribute to its growth. There are many reasons why.

For example, some may suffer a lack of purpose and direction in their lives and, without oversight, will overspend. Others might overestimate their new wealth and will choose to live a lavish lifestyle that far exceeds the previous generation, quickly eroding their inheritance. Largely out of loving intent, parents and grandparents have often ensured rising generations don’t suffer, sacrifice or go without. The result: they have no experience supporting themselves financially.

That’s why Fulford says many families give their heirs a chance to build trust, ask questions, make mistakes and prove their managerial mettle by advancing some of the assets they’ll eventually inherit. “We go to driving school to learn how to drive, so we need to give the next generation an opportunity to find their competence and confidence managing wealth,” she says. Good business decision-making becomes part of the parenting process. Let them make mistakes with small amounts of money before they have the responsibility and burden of managing significant sums.

That often means transferring a limited amount of an inheritance to an heir during a benefactor’s living years—perhaps a small investment portfolio or an income property—and providing an opportunity to make decisions autonomously or to ask for guidance as to how it should be managed.

Benefactors can monitor how the family member handles the responsibility. Doing so also provides an opportunity to guide and educate the recipient, rather than assuming they’ll naturally have the wherewithal to grow that wealth. Again, many won’t—at least not at first.

Giving them the time to gain experience and the tools to build wealth-management expertise will only increase the chances that the money will be handled in a way that aligns with the family’s identified core values.

“We want to get them to the table to think and create opportunities for success by planning ahead,” Fulford says. “Competency may take time to learn, and it’s not always inherited.”

If you’ve been wrestling with how to think about the transfer of wealth in your family, feel free to get in touch and Susan will be happy to have a conversation.