It is not uncommon for wealth transfer planning to focus solely on the amount of money to be transferred and potential strategies for minimizing taxes. However, one of the most lasting gifts that a grantor can provide family members is an understanding of their long-term goals for the family and how this is shaped by shared history and values.
When approaching the wealth transfer process, it may be helpful to shift the focus away from the idea of “leaving wealth” to the concept of what successful transfer would mean to both you and your beneficiaries as it relates to their future dreams and aspirations. It is also helpful to take a step back and to try to objectively assess how these outcomes may progress in reality. Think about what defines your family: is there relationship history that needs to be taken into account? Are there implicit/explicit roles that certain members take on? Are there rules and behaviors that are common and should be considered? Careful consideration of family dynamics and establishing a thoughtful framework around the wealth transfer process can help ease tension and establish a shared understanding among family members that can lead to a successful wealth transfer.
Wealth Transfer: The Basics
Wealth transfer is no longer just about “leaving money for your loved ones.” It is about preserving your wealth and accomplishing your wealth transfer goals while encouraging values and goals-based wealth management. There are many ways to conduct a successful wealth transfer, but the most meaningful ones start with understanding what you hope to accomplish. When you know what your intentions are, your beneficiaries will be able to better understand how your vision involves them and their goals as well. By making the consideration of goals and intention an important component of wealth transfer, you will be able to assure that your gift has an impact.
The problem we often see in family wealth planning is the division of everything equally, without seriously considering alternative options. This approach can result in three major errors:
A child providing daily care of an incapacitated parent for years will not regard equal division with another sibling who has no family responsibilities as fair. Due to their choice to help the parent, they might feel more entitled to compensation for the expenses they may have taken on to accommodate the parent. Meanwhile the parent might have thought that equal division would not create conflict within the family.
Another common example is irrational age-based distributions. Wealth owners often pick an arbitrary age for distributions for two reasons:
The parents will say they are very concerned about the beneficiary getting money at too young an age. Typically you may consider popular ages of maturity like 21, 25, 30 or 35 and pick an age that seems right in the moment often this is an age 10 or 15 years into the future.
Distributions at the age of 25 sounded great when the child was 16 but now when the 25-year old is in the middle of dating a spendthrift college dropout the age decision seems very inappropriate. These changes can affect how much is appropriate to distribute and why. It is helpful to consider what your personal goals are and to regularly evaluate the situation of each beneficiary to discover the best solution for all involved. By changing the dialogue from focusing on specific levels of wealth to an open discussion about values and intent, the family will come away with a stronger sense of unity and a foundation in what it means to manage significant wealth.
Preparing for the Process
The relationship history, roles, rules and behavior of every family exert strong influences on the implementation of a family member's wealth transfer plans. After grantors see the problem with their current wealth plan, they are often reluctant to revise the plan, opting to leave it as it is so the others can sort it out after death. Family dynamics assures the expected “sorting out” will not happen in the way you expect. Experience has shown us that when the referee is gone the rules of the game change, and often it takes a court to “sort it out.”
The first task is not to change family dynamics but simply to understand them. This means taking note of both positive and negative attributes. The goal is to look for patterns within the history, roles, rules and behaviors of the family to help locate where potential areas of disagreement may occur and to prepare for those situations.
Every family will have a unique blend of positive and negative dynamics that are currently normal for them, and it is up to the advisor and the grantor to determine where the problems lie. Identifying these triggers of negative dynamics will in turn help drive the wealth transfer discussion and make it easier to adjust strategies if needed. We call some of the most common negative family dynamics “The Big Four.”
The “Big Four:”
Acknowledging and watching out for the “Big Four” is a first step in trying to project how these dynamics will be improved or worsened by the planned wealth transfer. Ultimately our goal is to look for wealth strategies that build effective family behaviors such as mutual empathy, being understanding, accountability, boundaries and flexibility.
Many individuals choose to create a Wealth Transfer Statement of Intent to help explain their values and to quantify the benefit to the beneficiaries. It changes the measurement of love and affection from the equal splitting of wealth to empowerment by beginning a life-long conversation about values and expectations. To create a statement of intent, you must be able to visualize the outcomes you want and think about the exact benefit to the beneficiaries.
A Wealth Transfer Statement of Intent has five components:
Your statement of intent should encompass your values, goals and expectations. We suggest your statement of intent be revisited every three to five years to ensure that it still satisfies your expectations. Your statement will be tested and changed by future conversations and interactions with family and advisors as years go by, but it is the key to successful planning.
A Family Dynamics “Audit” of a wealth transfer plan takes a closer look at lifetime and after-death transfers through the lens of family relationships, culture, and experiences to determine where specific strategies might stress those relationships. In addition to a Statement of Intent, family leaders can work with their advisors to identify areas where wealth transfer strategies could potentially exacerbate — or even cause — problems within a family’s dynamics. The family dynamics audit process helps the family visually summarize the tenor of family relationships across generations, without judgment. The goal is to “see” relationship patterns more clearly. Asking sometimes difficult questions about how various loved ones and relationships might be affected is an important part of the process. Once risk areas are identified, the grantor then has three options at their disposal:
Bringing the Family Closer
Oftentimes, discussions about wealth transfer are delicate and instill a sense of hesitation among all involved. Reframing the process to proactively address the family's unique dynamics, as well as financial goals and focus on the purpose and values surrounding the transfer will have a much stronger impact. With the benefit of a clear understanding of what should be accomplished and the rationale for transfer strategies, financial wealth can both enrich the family and strengthen the relationships in the years to come.