Taking Steps for Inheritance Success
An inheritance can provide opportunities for your children to
reach their fullest potential, or it can bring out the worst in them.
Which effect it has on your family is largely in your control.
As chief fiduciary officer and national director of trust services for Northern Trust, Hugh Magill has advised many parents about the best way to transfer wealth to their children. He shares his insights into how parents can ensure their children’s inheritance fosters success and contributes to their well-being.
Q: What is one of the biggest concerns you hear from parents when they are creating their wealth transfer plans?
Many parents want to ensure that their wealth continues to be a positive factor in their children’s lives, especially after the children inherit. Many ask questions about what ages their children should inherit and whether or not the amount they plan to leave their children is too much. Warren Buffet’s plan to limit his children’s inheritance, albeit to substantial amounts, has fostered some of this concern.
Q: What advice do you offer these parents?
Estate planning is best when it begins with a consideration of the family’s values and what role financial wealth plays in fostering those values. A family that values entrepreneurship highly will want to ensure its children have access to capital to invest in entrepreneurial ventures. Another family may place a high value on philanthropy, which might lead it to leave a substantial portion of its wealth to a family foundation where children and grandchildren may continue to carry on a family legacy of giving.
The best approach for the actual transfer of wealth varies between families. However, my experience has shown that most inheritance success stories share certain details, including a belief that while financial wealth contributes to a family’s happiness, it is not the sole source.
For most families, raising children with values and helping them develop character will go a long way toward shaping their attitudes toward wealth. Children who have the family’s values instilled in them throughout their upbringing will approach their wealth through the lens of these values. And if the family’s wealth transfer plan also is built around these same values, it likely will contribute to the children’s well-being.
Q: When you talk about the family’s values, what exactly do you mean?
By values, I mean those essential traits that define the family, the things the family considers central to who they are. Another way of getting at this is to ask, “What is our family’s legacy? How and for what is our family known?” By asking these questions in the context of wealth transfer planning, a family can ensure that its wealth will support and encourage the continuation of that legacy.
If the family feels that using wealth responsibly is important, that view will likely be carried through with the younger generation — but only if the family takes the time to communicate and demonstrate those values regularly. If you feel giving back is an important, do your children see your involvement in philanthropy? Does the family discuss the organizations you support, and why?
These discussions don’t have to be formal introductions to the family’s philanthropic endeavors. Even regular conversations at the dinner table about your volunteer work or groups you support will help instill these values in younger generations.
Q: Is it better for families to discuss their wealth with their children from an early age, or does that knowledge cause problems?
Parents can take steps throughout their children’s lives to help them understand money and wealth. This can be as simple as providing your child an age-appropriate allowance and expecting the child to take responsibility for certain household tasks, to developing a comprehensive financial education plan.
Of course, the most appropriate time to begin discussing the details about the family’s wealth will vary depending onthe family’s philosophy about its wealth and the children’s financial maturity.
I’ve worked with several families who entrusted financial assets to their teenage children, then helped them structure a portfolio and learn how to manage it. That’s an excellent way to instill knowledge about financial markets and the how those markets can affect your financial well-being. Other families may involve the children in the family foundation, allowing them to oversee the distribution of a certain amount of money. There is also no substitute for work experience, beginning with part-time jobs that are compatible with educational endeavors, and continuing with full-time employment.
Over time, children who have been exposed to real-life money management situations such as these develop a financial maturity that prepares them for dealing with wealth as adults.
Q: When should I start telling my children details about our financial situation?
Children usually have a good idea about the family’s financial status. Indeed, it isn’t uncommon for children today to have Googled their parents to see what they can ascertain about their employment, charitable activities or wealth circumstances. Disclosing details about the magnitude of a family’s wealth and wealth transfer plan should be handled in a way that is sensitive to children’s financial maturity and life circumstances.
Although the best time to begin providing these details is very subjective, it’s far better to have some conversations before an outside event forces your hand. I’ve heard some people say they would prefer to discuss a family’s financial situation only when necessary, for example, when illness strikes. Two issues concern me with this approach: We can’t time these events, and when they do occur, other emotions such as frustration and grief will likely complicate the process.
It’s far better to introduce your wealth and the responsibilities it entails when your children have time to think it through on their own, ask questions and come to terms with what it all means.
When your children have the financial maturity to understand the implications of their inheritance, you need to provide them with the knowledge and understanding of what your wealth transfer plans entail. This discussion is even more important when you have unique circumstances, such as a family member with special needs, or a family business or vacation home that may make your estate plan more complicated than your children expect.
Q: What are some recent trends that contribute to inheritance success?
The largest change I see is a greater desire from Boomer parents to discuss their financial circumstances and wealth transfer plans with their children. This was done much less frequently in the prior generation, which meant that a child’s first knowledge of these matters came when a parent died. If the children didn’t understand or agree with something, it was too late to discuss it.
Discussing these subjects is not easy. Parents have natural concerns about how wealth will influence their children’s independence. They also are discussing their own mortality. At the right time and in the right setting, however, this can be one of the most important and meaningful discussions you can have with your children.
A practice I’d like to see more of is putting together what some call an “ethical will.” This is a document of some sort — either a letter to children or a section in your will — that describes the family’s legacy in terms of values. Your estate planning documents are often the last communication your family will receive from you. How comforting if those documents included a heartfelt expression of your love for them and a perspective on your past and your hopes and dreams for their future.
avoiding PARADISE LOST
Vacation homes can have as much sentimental as monetary value to a family. As a result, an ill-planned transfer of the family vacation home can cause unintended strife.
One family approached the situation very methodically, with happy results. The vacation home had been in the family for generations, and the father wanted his three children and their families to continue to enjoy it. After discussing the situation with his advisors, the father decided to transfer ownership of the property to a qualified personal residence trust (QPRT) naming his children as the beneficiaries.
Before setting his plan in motion, the father explained his intentions to his children and his desire for them to share the property fairly and harmoniously. To achieve this, the family decided to address usage guidelines that would ensure that successive generations could continue to use and enjoy the home with minimal conflict.
The children then voiced their concern that one sibling’s “good idea” for improving the property might not be received enthusiastically by the others. To avoid conflicts over property improvement and decorating, they all agreed to avoid “freelance redecorating” during their visits, and to leave the property in exactly the condition they found it.
The family decided to form a limited liability company to own and manage the property after the termination of the QPRT. The company, which has members from all family branches, makes all decisions about remodeling and capital improvements, and is responsible for routine maintenance and upkeep. These undertakings are funded by an endowment established especially for this purpose. Therefore, family members of both substantial and lesser means can still continue to enjoy the property without undue financial burden.
By discussing their concerns before making the transfer, they were able to maintain family harmony.