Millennials are not inclined to get financial help or professional advice after receiving an inheritance, a recent survey from TD Bank says. The survey found that 83% of millennials who have received or expect to receive an inheritance feel confident in their ability to manage the gift. But almost half of those who have received an inheritance wish they had received professional advice on managing it.
The largest ever intergenerational transfer of wealth is anticipated in the coming years. Many people will spend their lifetime accumulating family wealth. You might think they are a step ahead. Unfortunately, the survey shows that it may be received by the ill prepared. Often times heirs don’t spend their inheritance responsibly. In fact, nearly 70% of family wealth transference and business succession plans fail. Surprisingly, only 3% of these failures can be attributed to errors in financial life planning, legal issues or taxes.
Rather, the vast majority of failures were attributable to poor family trust, communication and heir preparation. Most of the time the entire family is not even advised or consulted. This suggests that with better preparation, many of these failures could have been successes.
While preparation can take many forms, developing a Family Financial Life Plan can go a long way in giving people confidence, knowing their family and heirs are ready to manage the funds. Key ingredients are good communication and family engagement in a collaborative process. The role parents or elders play in creating a conducive environment for constructive family discussions cannot be overstated. To do so, it works best if the parents are well prepared beforehand.
For many people, articulating their feelings may not come easy. Perhaps a good first step is to explore why parents may anticipate awkwardness and discomfort, real or imaginary, with money talks. Top challenges may include:
- Do we have enough for ourselves?: People may question whether they can meet their own needs before figuring out how much to give to heirs and charities.
- Avoiding mortality discussions: It is human nature to not want to think about our own mortality, which can serve as a basis for avoiding related discussions.
- How can we be fair and equal?: Some may dread a discussion between competitive children about who gets how much and when. Fair can translate into equal in good parenting parlance which may or may not best serve the family’s needs, especially when children may have unequal financial circumstances.
- Painful reminders: Traditional bread winners may already be struggling with middle age, coming to terms with their life’s meaning and regrets about what may have been sacrificed as a spouse, parent, or loved one to achieve financial success. So there may be hesitation that bringing up family finances could also spark painful emotions that clients see as best left undisturbed.
- Don’t rock the boat: Parents may hesitate to initiate conversations that may spark controversy within the family and opt instead to avoid discussing delicate issues that could cause upset. This is especially true given the money pressures the younger generations may feel from our challenging economy.
- It’s not our business: By the same token, adult children may hesitate to ask about family finances so as to not appear overly anxious, perhaps falsely assuming parents will take the initiative that these matters are none of their business despite their inherent stake. The end result is that important conversations may never take place.
As we consider the best ways to resolve these concerns, it can be helpful to better understand those issues that most worry parents concerning the effect of their wealth on their children.
- Too much emphasis on material things
- Naïve about the value of money
- Spend beyond their means
- Have their initiative ruined by affluence
- Not do as well financially as parent would like
- Not do as well financially as parent did
- Hard time taking financial responsibility
- Resented because of their affluence
- Suffer from parent not being around
- Date or marry someone who wants affluence
In short, increasing the success of wealth transference strategies requires much more than simply employing better taxation, preservation and governance of that wealth. Since many concerns are grounded in the parent’s direct experience and the resulting perceptions, their resolution not only rests in better preparing heirs, but may require a revision or updating in those perceptions as well. The parental concerns address behaviours, knowledge, application of that knowledge, and what is often referred to as not yet acquired common sense and good judgement. To be truly effective, that effort is best combined with an objective assessment of family skills that is more grounded in the here and now than being burdened by history. Prior stereotypes or outdated opinions could leave a lasting impression that is best re-evaluated in the present.
Challenging though these worries may seem, we have found that by having a framework, many of these worries can be successfully resolved. The result can be a sense of confidence that the savings they have worked their lifetimes to accumulate will be handled as they wish with a much lower chance of heirs being left hurt and disappointed.
How We Do It
Lifestyle Adequacy: Before figuring out how much to give to others, people find it invaluable to first understand how much they will need to support their own lifestyle. We are able to calculate the required lump sum after allowing for CPP, pension benefits, retirement savings, employment earnings, rental income and a multitude of other potential income sources.
Understanding Values and Priorities: It is important that family elders are clear and in agreement on their values and priorities before initiating those discussions with their families. We find it helpful to utilize a values based Financial Life Planning process. Using that process, we are able to facilitate a deep, meaningful exploration of what is important to each client and why, which in turn provides a basis for dialogue and finding common ground. A discussion of philanthropic passions can provide a helpful means of conveying values to your heirs.
Gaining an Objective Perspective: Especially for young people, many may have graduated with onerous education loans and credit card debt while at the same time may be challenged to find career jobs. Effectively managing their money, plus an eventual inheritance, will require familiarity, if not core competency, in these key areas:
- Budgeting & Managing Debt
- Savings & Investing
- Assuring Adequacy of Life, Disability & Medical Insurances
- Buying a First Home or Upgrading an Existing Home
- Optimizing Employer Benefits
- Planning an Estate Including Wills & Trusts
- Managing Income Taxes
- Managing Education Funding for Children
A first step may be to encourage heirs to objectively assess where they may need extra support. By so doing they may increase their self-awareness and at the same time will help you gain a more current, perhaps objective picture of their financial prowess.
Identify Your Interest Areas: Making philanthropic decisions together can provide a good basis for inviting important financial discussions and, as a result, can enhance trust and openness among your family members. As a starting point, you may want to consider organizations that have positively affected you and others with whom you feel close. These are often causes that “speak” to you and resonate at an emotional level.
Prioritize Opportune Gifting Assets: Potential tax treatments can be a key. Top gifting options may include assets with significant unrealized gains, those that may not generate adequate cash flow, and troublesome assets like some rental properties.
Family Mission Statement: When created openly and with consensus, this sharing process can greatly facilitate family communication and serve to build trust among its members. There are typically three key parts that can be built by completing these sentences:
- Values that influence my giving are…
- I would like to (goal of your time, treasures and talents) help (further what purpose, interest or social issue) ….
- Organizations (specify organizations or types of organizations) with which you would like to engage. Identify organizations offering best fit for your goals.
Identify Best Fit Organizations: Before selecting an organization, it is important to understand how supporting it can help you achieve your mission and charitable objectives. Numerous services are available that gauge a non-profit’s effectiveness and results. You may want to tour their facilities, perhaps as a family group, and speak with staff and even perhaps the clientele it supports.
Implement and Monitor Your Plan: Philanthropy is an evolving process, not a single event. Family “traditionalists” may have very different views than Millennials. You may want to uphold your ancestor’s philanthropic legacy while remaining open to the ideas and experiences of new generations. It is important to revisit the statement annually.
In summary, we all want our remaining time and money to be spent with as much clarity as possible. It is difficult to address issues of money with our loved ones; it is human nature to want everything to just go on as it is and trust the future will somehow take care of itself. But by carefully and mindfully speaking to your family members about your wishes and theirs, an ease of living is created because the hard stuff is on the table. Everyone then can continue living their lives without secrets, doubts, and possible questions. This comfort and ease can permeate the family system, allowing for time together to be as rich as possible. The above has been found invaluable in helping people facilitate a productive, inclusive Family Life Planning process in line with Keeping Life Current.