Family Wealth Transfer Part I: How To Protect Your Children From Their Inheritance

By Hightower Great Lakes on October 10, 2017

“How do I protect my children from others (and themselves) when they receive their inheritance?”
That’s one of the most frequently asked questions Financial Advisors, Attorneys and Certified Public Accounts encounter. And no wonder: over $59 trillion in wealth is set to be transferred to heirs and charity in the coming decades up to 2061^[1]. While that figure also includes the taxes that will be paid, it’s an enormous sum of money nevertheless.
It’s been called the greatest wealth transfer in history. If you’re part of it, then it’s only natural you should have a few qualms about passing down your estate. Do any of these concerns sound familiar?

• Kids who inherit money have a propensity to overspend—big time!
• Lots of kids participate in self-destructive behaviors, whether or not they inherit money
• There’s a good chance that as your child grows up, they may enter a relationship with someone you don’t trust
• Some parents are also concerned about a child with a disability or special needs

In this series of four articles, we will outline key issues in performing a self-assessment of these risks. As you read the series, please note that some of the challenges will be addressed in more than one article.  Also note, you should consult with legal counsel in your state of residence BEFORE you undertake any actions referenced in this series.  We will begin the Series with Family Wealth Transfer University, to be followed by:

1. Planning for Marriage
2. Planning for Controlled Distributions
3. Planning for Special Needs

Article  I – Family Wealth Transfer University

In polite society, we are taught from an early age not to discuss our income or personal wealth with others. Our children learn to silently assess financial success and wealth by outward manifestations such as the size of someone’s home, the brand of their autos, or their vacations and clothes.  Our children use these same methods with their parents as well!
Whether these outward manifestations are accurate representations is debatable, but know this: kids can go online to access data about the worth of your home. They also know what kind of car you drive… they can connect the dots to get a pretty good estimate of how well you’re doing financially so it doesn’t make much sense to try and hide it.

Guiding Kids’ Priorities is Hard—More So When You Don’t Talk

Have you ever looked at your children, or someone else’s, and thought “how can children who grow up in the same house with the same parents turn out so differently?” Clearly, their personalities are different, and with different personalities come different priorities, tolerances, skills, beliefs, and interests.  And that’s when you do your best to have frank discussions about all the important topics! Now imagine what little influence you’ll have if you never even have those discussions about wealth and inheritance.
The point is: if we actively try to teach our children certain life lessons and they get different messages and outcomes, how uncertain will the outcomes be when parents go out of their way NOT to discuss wealth or wealth management with their children? It just doesn’t make much sense to avoid having these discussions with your kids.
Here’s what you should keep in mind when considering how to protect your children from their inheritance. That’s followed by three actionable steps to take right now in order to prepare yourself for the important family discussions you have ahead of you.

Understand That There are Some Valid Fears at Play Here…

Many clients are reluctant to discuss their wealth with their children for fear the children will disclose confidential information. That’s a privacy concern and it’s truly valid: you have a right to keep your financial affairs to yourself or within your immediate family.
Others fear their kids will become complacent in their endeavors with the expectation of inherited wealth.
Other wealthy parents fear their kids will hire a hitman to accelerate the maturation of their inheritance (don’t laugh—it’s a valid fear).
Clearly, though, there has to be a middle ground between privacy, politeness, and frankness with your kids about money matters.

Think About Going Beyond ‘Someday this will be all yours’

I would suggest there is no obstacle to a productive discussion that cannot be overcome if the discussion is handled properly and followed up with consistent messaging. Here’s what can happen if this doesn’t take place.
I have seen family businesses cause serious family strife, all because no frank discussions about wealth ever took place with the kids. In spite of all the brilliant advice the founder gave to the next generation, the only conversation the child being groomed to take over ever heard was the off-the-cuff remark “someday this will all be yours.”
Unfortunately, although it was said with the best intentions, that comment was in direct conflict with the existing succession plan the founder implemented with the spouse and business advisors. This plan provided for shared ownership and management authority among multiple family members after the founder’s death, but that was not explained to the child being groomed. The result is family strife.
One loose comment can undermine and overshadow a lifetime of grooming, so care must be taken in this discussion process.

Be Prepared to be Clear and Use Precise Language

Using precise language is key. Parents need to keep in mind that some generic language they use might have a different meaning to the heirs hearing their message. For example, children have a widespread misconception that “fair” means “equal”. Be prepared to help them understand the nuances of meaning in those words.
Parents also need to decide what they are willing to disclose honestly, without vagueness. If you want to be vague about something, then it is probably not a good idea to raise it in discussion.   Only discuss those matters about which you are willing to be honest and forthright, even in the face of follow-up questions.

The Three Tasks Before You

1. Look inward. The first and hardest task of this process involves self-assessment. Parents, you need to honestly take a good look inward and determine your motives and desired outcome in initiating this discussion. For example…

• Are you trying to inspire your children to work harder by imposing incentives or business plans?
• Are you trying to prepare your children to be asset-savvy and have protections in place for when they do receive their inheritance?

2. Have a goal. You should not try to “feel out” your children’s intentions with random questions or disclosures. Rather, you should go into these discussions with an objective.   At the same time, you also need to determine what you are willing to disclose to your children, and honestly assess your children’s ability to maturely accept and manage the information received.
3. Assess your children. Finally, parents need to honestly identify which, if any, of the children are spendthrifts, malingerers, substance abusers, philanderers, or the like, so that appropriate planning steps can be taken. Be ready to discuss those issues if they impact the planning discussion.

Final Thoughts

When parents are armed with the parameters of what they are willing to honestly disclose and what family issues need to be addressed, they can begin to formulate the message they want to deliver. Communication with family members can be challenging, so if you are not “all in”, it might be better not to initiate the discussion at this time.
You may want to discuss the potential meeting with your Financial Advisor or Attorney to verify that you are ready to take this step. The next articles in this series will further assist those willing and able to initiate the dialogue by helping frame specific parts of the discussion.
 

Scannell Wealth Management is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC a registered investment advisor with the SEC. All securities are offered through HighTower Securities, LLC and advisory services are offered through HighTower Advisors, LLC.
HighTower Advisors LLC, its affiliates and HighTower Advisor’s Financial Advisors do not provide tax or legal advice.  You need to consult your legal and tax  
Sources:
^[1] A Golden Age of Philanthropy Still Beckons: National Wealth Transfer and Potential for Philanthropy Technical Report . retrieved 9/19/2017 from http://www.bc.edu/content/dam/files/research_sites/cwp/pdf/A%20Golden%20Age%20of%20Philanthropy%20Still%20Bekons.pdf