When wealth transfer is discussed, people often focus (perhaps understandably) on the numbers: How much of our family’s wealth will pass from this generation to the next? How should we divide those assets?
But that focus obscures how complicated and personal the transfer process can be. The process involves discussions about sickness and death, and about how equipped your children are to receive assets or take on responsibilities.
It means confronting questions many would rather put off:
Who gets the vacation house?
Who will take over the family business?
Who will care for you when you cannot?
But procrastination carries financial and emotional costs.
According to a recent Bank of America survey , only 36% of ultra-high-net-worth respondents believe their heirs are very prepared to handle an inheritance, and 40% have experienced or expect family tension around inheritance.
These challenges aren’t limited to the ultra-wealthy, as the results of the recent Kiplinger-Morning Consult survey show. Whatever the numbers, all families will benefit from starting preparations sooner rather than later.
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A successful wealth transfer is an ongoing and complex process that requires more than moving assets from one generation to another. Knowledge, values and responsibilities are also being passed down. Yet I see far too many families focusing solely on the financial handoff.
Information must be passed down, too
The first step in any generational transfer is passing on information, and too many donors keep their heirs in the dark without realizing it. Unless you’ve explained how the family’s financial life is managed today, your children may not know how to step in tomorrow.
Take a moment and consider who in your family knows:
Where important financial and estate documents are kept (hint: don’t put them in a safety deposit box no one can access but you)
Which institutions hold the family’s bank, investment and retirement accounts
How to contact the family’s accountant, attorney or financial adviser
What bills and other recurring financial obligations need to be handled
Who has authority to manage finances if a parent becomes incapacitated
Who will coordinate caregiving, if needed
If circumstances permit, it’s best to walk your heirs through at least some of this while you have the opportunity. Whatever discomfort that may create will pale in comparison to them having to perform forensics on your life in the middle of a health crisis or while grieving.
Prepare heirs before the transition
A perfectly documented estate plan doesn’t prepare your heirs to step into the roles they may inherit. They need opportunities to understand the responsibilities before they’re expected to assume them.
This can start with small steps:
Tell heirs where your important documents are stored
Introduce heirs to advisers and consider letting them sit in on meetings
Show them how you expect your estate plan to flow — with or without numbers
Educate your family about finances, trusts and other foundational concepts
Explain why family finances are structured the way they are
You might eventually consider involving them in consequential conversations and decisions.
This gives heirs an opportunity to gain experience in the roles they may eventually assume. Importantly, it creates an opening to explain why you have made certain choices.
If there is a family business , consider explaining the values that shaped how the company was built and operated. If there is a vacation property you want to remain in the family, talk about why that matters to you and find out whether your heirs share that goal.
Those conversations can reveal misaligned expectations and goals early, when there is still time to adjust the plan rather than leaving the next generation to sort it out later.
The important part is beginning while the transitioning generation can still teach, listen and adjust.
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Every family has a handoff to plan for
Succession issues are something everyone should consider, even if you’re not handing off an operating company or a nine-figure estate. Of course, those families have lots of decision points, but all families must decide who will manage household finances, coordinate care and communicate with financial or healthcare professionals when parents are no longer able.
More time means more choices
No matter what or how much is being transferred, the best advice for every family is to start thinking about these issues early.
Unspoken assumptions are the root of many succession problems. Your children may have different expectations about who should take care of their parents or how much money they will receive . You may assume you know which child should handle the investments or business, only to be surprised that child has little interest in the responsibility.
These unmanaged expectations can lead to tension if the plans aren’t discussed in advance.
Families who start early will have more time to communicate what’s needed, to consider what structures best reflect their intentions and to decide who should take on which responsibilities.
That doesn’t mean you have to give every detail about your financial picture or your estate plan (which may change over time). But by equipping your family with the tools they need to step into the roles you intend them to assume, you will also give them the confidence to handle those responsibilities.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA .
