We spend our lives building wealth to support ourselves during our retirement. If we are successful with this task, we find ourselves living off our nest egg’s earnings, not taking away from the principal. When this is the case, the question of how to pass the wealth on to the next generation, or generations, can become a topic that needs to be addressed.
Clients express, “We want our kids (who are now adults) to have a respect for wealth and feel a responsibility for creating it for themselves. We don’t want them to be entitled, living off our hard work and playing every day instead of working.”
They ask me, their financial advisor, “How do we do this?”
Family wealth management, true multi-generational wealth planning, has several components. Some of it is easy, like having correct beneficiary designations on accounts and using trusts to protect wealth while avoiding unnecessary expenses like the probate courts.
But what about informing family members? How should that be handled? I have found that the key is communication because the last thing you want to do is create a problem within the family. Most people don’t want family members arguing about wealth that they are receiving.
Start with things that may have a sentimental value, like the family home. Sometimes everyone agrees on what to do with the house, but what if one person says “sell”, one says, “I’ll never sell my share” and another says, “Do whatever you want, I just want my money”? How do they resolve this?
If you have talked to your family ahead of time, you may have been able to tell them – “It is my wish that you sell the farm and split the proceeds from the sale. If one of you wants to buy it for the appraised value, then you will have the first right to buy. If two of you want to purchase it and can’t agree, then it is sold to a non-family member, and you are to split the proceeds.”
That’s simple enough and if they know about it ahead of time, they won’t argue with each other. If you have left part of your estate to a charity, let them know this ahead of time too.
I understand that this may sound simple enough, but in reality, it can be more complicated, so plan to avoid mistakes. Think about your kids and shape your conversation with each of them before you talk to them as a group.
One conversation will not be enough. Thinking that you have discussed this with them, so they will remember everything you said, and you never need to discuss this topic again, doesn’t work. Wealth can be complicated and more difficult for some to understand, but easier for others, so take your time and discuss the topic early and often.
Share your values with them as part of your explanation. By explaining what is important to you, it may make it easier for them to understand. My wife and I use the expression “take the high road”. Our kids have grown up hearing us reference these words on a regular basis, so that when they are confronted with a difficult situation, they know what their parents would tell them….”take the high road”.
Ask them if they want anything specific in the house. You might be surprised what you find out. They may have an attachment to something that isn’t overly important to you, and you may decide to give it to them sooner, instead of later. Seeing your kids enjoy something can be as gratifying as enjoying it yourself.
No matter how detailed you are with your instructions of who gets what, some things will be overlooked, so give them a way to address this. For example, have everyone draw a number from a hat. The lowest number picks first and when you get to the highest number, that person picks again. 1,2,3,4,4,3,2,1 This is fair, and it gives them a system, so they don’t have to come up with something on their own.
Ask your financial advisor for help. A good advisor can be the unbiased third party, who can lead the conversation, explain how things work and even help explain your intentions, without emotion.
Having secrets and letting your family members find out after you are gone is one way to approach this topic, but I have found that being open and honest with your family, saves money, time, and the most important thing of all – it can save their relationships.