Each year, high-net-worth families spend huge sums preparing their assets for transition to their heirs, engaging high-powered estate and tax planners who set up complex vehicles like family limited partnerships, life insurance, charitable remainder, charitable lead and various other kinds of trusts. Yet, despite the best efforts of top-notch professionals, according to Roey Williams and Vic Preisser in their 2007 book Estate Planning for the Post-Transition Period, “70% of estates lose their assets and family harmony following the transition of the estate.” Given the talent engaged, it doesn’t seem likely that the failure is due to poor design. So why do the majority of plans fail?
Williams and Preisser state that “The major causes of post-transition failures were discovered to lie within the family.” The unsuccessful families failed mainly because the heirs were unprepared, they didn’t trust each other and communications broke down. In other words, while high-net-worth families and their advisors pay great attention to preparing assets for transition to the heirs, very little if any attention is paid to preparing the heirs for the assets they will inherit.
Thanks to the Spectrem Group, a research and consulting group focusing on the wealthy, we have new insights into how baby boomers are preparing their heirs for the transference of wealth. Spectrem’s study, Legacy 2.0: Baby Boomers and Wealth Transfer, surveyed investors from the baby boomer generation (born 1946-1964) who inherited at least $500,000 about some of the details related to the inheritance they received. They then asked those same boomers about their wealth transfer plans to see if they had learned lessons from the past. The following, sadly, are some key findings:
- 37% anticipated that there would be disputes among their beneficiaries when the wealth transfer took place.
- On a scale of 1 to 100, more than one-fifth rated their transfer process at below 50 – the wealth transfer doesn’t always go smoothly.
- Only 50% of inheritors planned to make their transfer easier for their beneficiaries.
To prepare your heirs for the eventual wealth transfer, I offer the following list of questions:
- Do your children (and their spouses, if any) know your estate plan?
- If not, what would make you comfortable sharing this information? With your children? With their spouses?
- What steps should you take to address your concerns?
- Might there be a plan to provide certain information sooner and other information at a later date?
- Have your heirs read your will and other estate planning documents?
- If no, when do you think is an appropriate time for them to see these documents?
- Do your heirs know the family’s net worth, both yours and their own (if they have assets in their name)?
- If no, when does providing this information become advantageous to you and your heirs?
- Are your heirs in communication with your team of advisors (your attorney, accountant, insurance advisors and financial/investment advisor)?
- If not, would it be useful for family members to meet those people, even if information-sharing is limited?
- Have the children been involved in the formation of the investment policy statement, and are they familiar with the investment strategy, the goals and how to manage the assets?
- If not, when might this involvement be advantageous?
Unfortunately, in the majority of cases, families treat money and the issues surrounding wealth as taboo subjects. And the “lessons” of noninvolvement get passed on from one generation to the next. Thus, in most cases the answer to the above questions is “no” – and that explains why the failure rate is so high. A report from BMO Wealth Management, Estate Planning for Complex Family Dynamics, showed just how poorly heirs are prepared and how that can lead to family discord. For example, they found that 52% of all adults surveyed do not even have a will, a figure that rose to 56% among adults aged 35 to 54. Among other important findings were:
- 40% thought the distribution of their parents’ estates was unfair, with unmarried adults most likely to feel aggrieved.
- Only 28% of all adults said they knew details of their parents’ wills or estate distribution plans.
- 40% of parents surveyed have never discussed their estate intentions with their children.
Family feuds can easily develop when members do not feel they have been given their fair share and have not been included in the process. Of course, it doesn’t have to be that way. The solution to the problem is that, while it is important to treat family wealth as a private matter, it should not be private within the family. Open communication between parents and heirs can prevent many problems. Williams and Preisser, whose research focused on high-net-worth families, believe that in order for a plan to be successful, heirs (including spouses) should have some influence in how the estate is structured, or at least have input. They recommend that among the issues that should be addressed is whether the estate plan matches the skills and interests of the heirs. And there should be a plan to prepare the heirs for their future responsibilities. Heirs should know the impact of their wealth on their families and the responsibilities of wealth.
To help with the transition, Williams and Preisser’s book provides the following checklist for creating a successful transition plan, one that prepares heirs for the roles they will eventually have to fulfill:
- Have a family mission statement (FMS) that spells out the overall purpose of the family’s wealth and a strategy to implement it, with roles well defined. An FMS is a superb way to communicate important family values and provide overall direction as future decisions are made. It can be an important standalone activity and serve as a kickoff for the longer transition plan process.
- The entire family participates in the important decisions. While families are complicated, finding a way to achieve broad-based input is the surest way to achieve a successful outcome.
- Family members have the option to participate in the management of assets. This is a critical issue for certain families, particularly when a closely held business is involved.
- Heirs understand and have bought into their roles. This can be a long-term process, and an outside facilitator may play an important role in achieving a desirable and harmonious result.
- Heirs have reviewed and understand all documents. While this should be the goal, given different interests and aptitudes, a customized approach that addresses each heir’s needs should be developed.
- Asset distributions are based on readiness, not age, of heirs. Too often, distribution provisions are written based on age because of its formulaic simplicity. A more careful, tailored approach is generally better.
- Mission statement includes incentives and opportunities for heirs. Since it’s likely that each family, and each individual member, will have different thoughts about what this might look like, many families have found that the best way to achieve a successful outcome is to use an outside facilitator.
- Younger children are encouraged to participate in philanthropic grant-making decisions. A good way to pass on philanthropic values early is to begin the process of getting children involved in money issues.
- Family unity is considered an important asset. Many families have found that this is a critical factor in helping them work through complicated issues.
- Family communicates well and regularly.
Family values, as well as current and future goals, should inform the entire financial planning process. Done well, financial planning is about much more than investment management. And just as most battles are won in the preparatory stage, the success of a family wealth transition plan depends on preparing the family for the transition of not only the family’s wealth but also the family’s values.
Larry Swedroe is the director of research for The BAM Alliance.
This article originally appeared on AdvisorPerspectives.com.
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