Financially Speaking: Have You Had ‘The Talk’ With Your Kids?
… Not that talk, but the one about transitioning family wealth. You have worked hard all your life and today you are in fantastic financial shape. You have been diligent investing your money and, for some, steering the company you founded to the pinnacle of success. You have provided for your family, educated your children, paid for their weddings, and now you can rest on your laurels. Now what?
One of the things that most do not do is communicate with their children about money. To have a successful transfer of your wealth, you should be clear on what you want your children to do with the inheritance they will eventually receive at your death. George Bernard Shaw said, “The single biggest problem in communication is the illusion that it has taken place.”
Many of us at some point in time have probably fantasized about what we would do if we won the lottery. Maybe you thought you would purchase a home on the beach, perhaps buy a yacht, maybe a Bentley convertible or Maserati, or take exotic vacations. The truth is, striking it rich and not earning it does have its problems.
According to the National Endowment for Financial Education, approximately 70% of people who come into sudden money are broke within a few years. Now, you may think I’m talking about just those who win the Mega Millions or Powerball lottery. Today I’m talking about those who inherit money. Whether you hit the lottery or receive an inheritance, almost the same percentage will fail.
So how to do you help ensure that your children become successful with their future inheritance? Talk with them. Most parents are uncomfortable discussing their assets with their children. The two reasons we hear most are they fear that discussing future inheritance with their children may make them less ambitious with their own career path and it may also show their children’s greed. You should have this family conversation prior to meeting with all of your advisers.
It is best to identify which immediate and extended family members you want to name as potential beneficiaries. Maybe there is one child who may need more help due to a disability (intellectual or physical), or perhaps you have an elderly parent who you may have to help financially when you are gone. Before you speak with any potential heir, take time to write down things you specifically feel passionate about. This will help you stay on track when you have the talk.
You want to have an in-depth conversation with your family about your wealth. Obviously, I’m not talking about minor children. Adult children and heirs may benefit from knowing that they will receive a potential inheritance and if so, how much. This may allow them to help shape their life choices. This is true especially if there is a family business involved. This can possibly help with their decision to attend college and pursue a particular major that could benefit the family business down the road. You may also find out that your child has no intention of joining the family business, and that is OK. It allows you to make different succession plans while there is still plenty of time.
Remember, this is not a sprint but a marathon … take your time. This is not a one-and-done meeting. Family legacies may be complicated and so can the reaction of family members once they review the inheritance plan. If your intent is to name one of your children as executor, it is better to discuss this with that person prior to the family meeting. There are also times that it is better to name an outsider as the executor, so your children can communicate with the outside party instead of hounding one of their siblings. You may also want to communicate about who gets what family heirlooms. Sometimes it is better to ask each one individually if there is something in particular they would like to have.
Several years ago, my favorite aunt passed. She possessed a tintype photo from around 1850, of our great-great grandmother. It was the only picture of her. Her four brothers each wanted it, but it was bequeathed to me. My aunt had asked each of her nieces and nephews if they wanted anything when she died. I said I would love to have that picture. It now sits proudly on my mantle. All of her brothers wanted it, but it was spelled out in her will that I was to receive it. This helped avoid any problems.
There are times when you may want to leave something to a charity, such as part of your stock portfolio or, dare I say, your beach home. This is a great time to share the values you have with your children. Let them know the reasons why you may have divided your estate to include a nonprofit charity. This may help them to not be angry or confused when there is a legacy transfer outside of the family. This may also help to minimize any arguments when you are gone. It is also a way of showing your children that they too should be benevolent and help others.
The next time you meet with your financial adviser, invite one if not all of your children to the meeting. This can be helpful in discussing financial matters openly. Keeping your children informed of the inheritance planning process can help increase the success of the transfer of family wealth. This may be one of the last chances to help educate your kids. This may help them avoid costly mistakes that often pop up when there is a lack of preparation.
Most wealth transitions fail due to not having a plan, not communicating your plan, and failing to prepare your children. You should express your desire on what you would like to see your heirs do with their inheritance. This will help improve the odds of generational wealth. I get it, there are many who do not want to share this information with their children for a variety of reasons. If you feel they don’t have the financial IQ to handle this, discuss this with your advisers and you can always leave it to them in trust.
Maybe the 1984 Cyndi Lauper song said it best:
“Money changes everything
I said money, money changes everything
We think we know what we’re doin’
That don’t mean a thing
It’s all in the past now
Money changes everything”
Take the time now to think about what you want and how you want to do it.
Whew, thankfully the talk is over, so grab your chair, book and favorite beverage and head to the beach. Don’t forget the sunscreen.
Fred Dunbar, CLU®, ChFC®, RFC®, AIF®, is President of Planning Directions, Inc., a registered investment adviser, and Common Cents Planning, Inc. He also offers securities through Commonwealth Financial Network®, member FINRA/SIPC. Advisory services offered through Planning Directions, and fixed insurance products and services offered by Common Cents Planning, are separate and unrelated to Commonwealth. Fred may be contacted at 800-647-0762, by e-mail at fdunbar@commoncentsplanning.com or by mail at 239 Baltimore Pike, Glen Mills, PA, 19342. He’s always happy to meet with you “down the shore” at 6606 Central Avenue N. Sea Isle City, NJ, 08243.
This commentary is meant for general informational purposes only and is not intended to be a substitute for professional financial, tax or legal advice. Investing involves risks including the potential loss of principal. Past performance is no guarantee of future results.
