Too often families don’t talk about money. We have a long-held cultural tradition in America of not talking about two taboo topics: money and death. Because of that, most parents do not discuss their financial situation with their adult children, especially their plans for what happens to their money when they die. A recent study by Wilmington Trust found that only 10% of people with a net worth of more than $20 million had given complete information about inheritance to their heirs.
This issue does not just affect the super-rich. Families of all levels of wealth report a reluctance to discuss money. This lack of communication is unfortunate because it can cause many problems when money transfers from one generation to the next – from hurt feelings to damaged relationships to outright financial loss.
Parents aren’t the only ones uncomfortable with the topic. Children are hesitant too. They don’t want to appear greedy or nosy. And parents sometimes feel embarrassed or simply don’t want to have their decisions critiqued or questioned by their kids.
The participants of the Wilmington Trust study said they were concerned that if their kids knew about the money they were going to get, it would negatively affect their work ethic. This may sound reasonable but our experience is that kids of wealthy families already know they probably have something coming to them someday. Plus, work ethic is largely developed by family values instilled while growing up and probably will not be affected by knowledge of a future inheritance.
In these cases, it is better to communicate with the child than to leave him or her guessing. “Holding off discussions about money until much later, when children reach their 40s or 50s, has its own complications. When parents are silent, adult children tend to poke around for details – to their parents’ annoyance,” said Maria Elena Lagomasino, CEO of WE Family Offices.
Even minor decisions about who gets what after the parents are gone can cause problems if the reasons are not discussed early on. There are usually good reasons for one child to get more money than another or that extra-special family heirloom. But it is best for parents to make the reasons clear to their kids early, long before they are no longer alive. There is potential for serious conflict between the kids if this is not done.
Also, it is important for parents to consider what the kids want before they make final plans. For example, if you are thinking of leaving more money to one of your children because he has a greater financial need, it is best to make this clear to everyone before you put it in a legal document. Maybe he prefers not to get more. Perhaps you misjudged his financial situation.
Some advisors believe the main reason estate plans fail to transfer assets smoothly is because there is poor communication within the family. This is just as important as having good estate planning documents that properly address the legal and tax aspects of estate transfer.
To help ensure an orderly process, experts recommend scheduling a family meeting or series of meeting to discuss all of this. This way, the topic doesn’t surprise anyone and both parents and children can prepare ahead of time. In fact, parents are sometimes not exactly sure how they want to handle things. Talking with the family can help them formulate a plan that makes them comfortable.
Experts say the discussions should mainly focus on the what the parents want and how the kids can best help them accomplish their goals. Parents should not feel pressured and kids should not be looking only at what they are going to get. Everyone should have a goal of respecting others and being empathetic. If the family is having difficulty, it can help to leave out the details and specifics. Start with the big picture and focus on goals to make things easier.
When there is a family business, parents often want to pass it along to the children who are involved. But it’s important to gauge whether they want to continue that role. If they do, you can look for ways the children who will not be involved might receive other, comparably valued assets, such as stocks, bonds, real estate, or life insurance proceeds.
Vacation homes are another potential source of conflict. Before leaving these assets to more than one person jointly, find out whether they want them and how they might continue using them. Various legal vehicles are available for sharing these homes, financing their operation and buying out people who do not want to participate. A good estate planning attorney is very helpful is situations like these.
Kids who are going to receive a large amount of wealth would be well suited to have early education from their family’s wealth advisor – an investment expert, not a legal advisor. This will prepare them to handle the money properly and make smart financial decisions. Joel Treisman, a descendant of the Cullman family of Phillip Morris wealth, said that despite having a Stanford degree and an MBA from Yale, he was totally unprepared to handle his large inheritance even in his 40s. “There was no family preparation. It was delegated to the family trust-and-estate lawyer to send me a letter on my 21st birthday to talk to me about wealth that was going to revert to me outright,” Mr. Treisman recently told the New York Times.
At Dan Goldie Financial Services, we have often met with the adult children of our clients to serve in this role as financial educator. Regardless of the financial situation of your children, it is important for them to have the knowledge to handle money prudently.
Dirk Gilliard is a partner with Dan Goldie Financial Services, one of the Financial Times top 300 financial advisors in the US. Questions or comments? Check out his GuideVine profile to watch Dirk’s videos and learn more.