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.

LEARN MORE: Wealthy children need financial skills requisite of living with the reality of wealth. In “Insights on Children and Wealth: Preparing Children for a Life of Wealth,” Joline Godfrey, CEO, Independent Means, Inc., shares why teaching children to manage money is one of the most effective ways to provide them with training that will serve them through life.

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?
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.

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