Most of us have heard the saying “Shirt sleeves to shirt sleeves in three generations.”

And you may be tempted to pin this squarely on the estate tax, but the adage holds true in countries across the globe, with or without an estate tax.

Over the years, I have witnessed both great failures, and great successes in the transfer of wealth between generations, and have noticed that one popular approach often results in complications which are a little counter-intuitive. While many parents have the best intentions for keeping their cards close to the vest when it comes to sharing information about family wealth with their heirs, this strategy, let’s call it “financial protectionism”, may not be your best bet for a successful outcome. The following example illustrates some of the potential pitfalls. There was an heir who received a portion of his inheritance while his mother was still alive, but who had no real understanding of his family’s wealth. The heir spent the inherited sum while waiting for the remaining portion of the inheritance, which was distributed upon his mother’s death. The lack of communication between the two generations left the son to draw his own conclusions, and to live his life accordingly. Unfortunately, and we observe this often, his assessment of the total value of the family’s wealth was much greater than the actual amount, and this amount was further diminished after the estate taxes and administrative fees had been assessed. With no other significant source of income, in order to maintain his desired lifestyle, he was forced to sell the home where the family had lived for three generations, and subsequently downsized his residence several more times, all while enduring increasing levels of stress and uncertainty as he approached what were supposed to be his golden years.

This disastrous result is somewhat predictable from a practitioner’s perspective, and unfortunately, all too common. Yet, with improved communication, an appropriate amount of financial education and a coordinated estate planning and cash flow management strategy, a far more manageable, and far less stressful outcome could have been achieved.

So what can be done to facilitate a successful transfer of wealth? One of the key components of our approach to next generation wealth planning is providing basic financial education for the heirs, so that they have a better understanding of the components of family wealth. Equally important is establishing lines of communication between the generations about what the heirs can reasonably expect from their inheritance, setting expectations necessary to keep the transition on track, and maintaining an open and respectful dialogue about both generations’ vision for the family’s wealth.

Would you expect someone to operate heavy machinery without proper training and guidance?  I hope the answer is “No”, but this is exactly the scenario into which we place heirs if we do not share our knowledge and experiences with them before the transfer of wealth occurs.

In families where parents and heirs have prepared for the transfer of wealth, clear guidelines and responsibilities have been set and agreed upon, well in advance of any triggering life event. I have had the good fortune to work with some families where the parents have engaged with their children throughout their formative years, and into adulthood, about their vision of family wealth, and have encouraged an increasing level of involvement in the technical and structural aspects of managing it as they grew older. In some cases, the heirs, to whom cash and other assets had been incrementally transferred for tax planning purposes, played an active role in the planning and management of assets set aside for their own kids’ retirement.  Financially educated heirs, who are engaged in the process of managing family wealth, are likely to experience a greater sense of financial security, and to be contributors to, rather than detractors from, the family’s long term planning and legacy.

Managing wealth correctly is challenging.  There are many complex relationships between the components of family wealth that must be understood, balanced and integrated. Few of us are born with the innate ability to simply “figure it out” as we go along.  And while it is imperative that the younger generation accepts and manages their responsibilities, the bigger challenge can be for the elder generations. Historically, there has been a reluctance for parents to share information about their wealth with their children out of fear it will create a lack of incentive for them to be productive.

One of the challenges to this notion of financial protectionism is that heirs often simply want to know what to expect, so that they can better prepare for their future. Another consideration is that heirs may wish to be more involved in how and why decisions are being made because somewhere down the line, they know they will be the ones making these calls, and first-hand knowledge can be vital. And, as illustrated in the previous example, a lack of communication has the potential to cultivate the double landmine of a lack of productivity spurred on by an over estimation of family wealth. Additionally, the void created by a lack of communication can easily be filled with misconceptions about trust and even love. These crossed signals may be the unintentional result of the older generation simply not knowing how to discuss certain aspects of their wealth, but the resulting misconceptions can cause real damage to familial relationships.

How do we reduce these conflicts and improve the odds of success? At Waldron, we work with our clients to encourage and facilitate discussions around family wealth. This is conducted in a way to share information at a pace with which the senior generations are comfortable, and that educates the younger generations about how and why decisions are being made.  Through open and honest dialogue, family relationships can be strengthened, and the odds of successfully perpetuating the family’s wealth will be greatly improved.

To ask one of our financial advisors any questions you have about preparing for a successful transfer of wealth, click here

Robert H. Wyche & Lara Dalton, CFP®

Partner and Managing Director

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