FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 17, 2019

IN THIS ISSUE:

1. 70% of Estates Lose Their Assets & Family Harmony

2. Sadly, Lack of Communication is the Main Culprit

3. Less Than 30% of Heirs Know Parents’ Inheritance Plans

4. Have a Well-Written Transition Plan Provided to Heirs

5. Summary – The More Your Heirs Know, the Better

70% of Estates Lose Their Assets & Family Harmony

Last month I read an interesting article by Larry Swedroe in Advisor Perspectives which noted that 70% of estates lose assets and family harmony during the inheritance process. I was not aware the number was remotely that high. So, today I will summarize Mr. Swedroe’s findings with the hope that they can be of help to our clients and subscribers.   

Every year, high-net-worth families spend huge sums of money preparing to transfer their assets to their heirs when the time comes. They often engage expensive, high-powered estate and tax planners who set up complex vehicles like family limited partnerships, life insurance, charitable remainder and various other kinds of trusts.

Yet, despite the best efforts of top-notch professionals, “70% of estates lose assets and family harmony following the transition of the estate.” That’s according to Roy Williams and Vic Preisser in their book Estate Planning for the Post-Transition Period. Given the talent engaged, it doesn’t seem likely that the failure is due to poor design. So, the question is: Why do the majority of estate plans fail to meet their objectives?

Williams and Preisser state that “The major causes of post-transition failures were discovered to lie within the family.” The unsuccessful families failed mainly because the heirs were unprepared, and/or they didn’t trust each other and communications broke down. In other words, while high-net-worth families and their advisors pay great attention to preparing assets for transition to the heirs, very little if any attention is paid to preparing the heirs for the assets they will inherit.

Lack of Communication is the Main Culprit

Unfortunately, one of the biggest problems is that many parents are reluctant to discuss their wealth with their children or other heirs, and even fewer want to discuss the subject of who gets what and why. This is just stupid, in my opinion!

Thanks to the Spectrem Group, a research and consulting group focusing on the wealthy, there are new insights into how Baby Boomers are preparing their heirs for the inheritance of their wealth. Spectrem’s recent study, “Legacy 2.0: Baby Boomers and Wealth Transfer,” surveyed investors from the Baby Boomer generation (born 1946-1964) who inherited at least $500,000 from their parents about some of the details related to the inheritance they received.

They also asked those same Boomers about their current wealth transfer plans to see if they had learned lessons from the past. The following, sadly, are some key findings:

• 37% anticipated that there would be disputes among their beneficiaries when the wealth transfer took place.

• On a scale of 1 to 100, more than one-fifth rated their transfer process at below 50 – confirming that the wealth transfer doesn’t always go smoothly.

• Only 50% of parents leaving wealth to inheritors took concrete steps to make their transfer easier for their beneficiaries.

To prepare your heirs for the eventual wealth transfer, a recent book from Larry Swedroe and Kevin Grogan, Your Complete Guide to a Successful and Secure Retirement, offers the following list of questions to consider and communicate to their heirs:

• Do your children (and their spouses, if any) know your estate plan?

• If not, what would make you comfortable sharing this information with your children and their spouses?

• What steps should you take to address your concerns about sharing this with heirs?

• Might there be a plan to provide certain information sooner and other information at a later date?

• Have your heirs read your will and other estate planning documents?

• If no, when do you think is an appropriate time for them to see these documents?

• Do your heirs know the family’s net worth, both yours and their own (if they already have assets in their names)?

• If no, when should providing this information become advantageous to you and your heirs?

• Are your heirs in communication with your team of advisors (your attorney, accountant, insurance advisors and financial/investment advisors)?

• If not, wouldn’t it be useful for beneficiaries to meet those people, even if information-sharing is limited?

• Have the children been informed of your investment beliefs, strategy, the goals and how to manage the assets?

• If not, when might this involvement be advantageous?

Unfortunately, in the majority of cases, families treat money, how to invest and the issues surrounding wealth as taboo subjects. But the result is that if you keep this information from your children, they may do the same with theirs. No wonder the failure rate is so high!

A report from BMO Wealth Management, Estate Planning for Complex Family Dynamics, showed just how poorly heirs are prepared and how that can lead to family discord. For example, they found that 52% of all adults surveyed do not even have a will, a figure that rose to 56% among adults aged 35 to 54. Among other important findings were:

• 40% thought the distribution of their parents’ estates was unfair, with unmarried adults most likely to feel aggrieved.
• Only 28% of all adults said they knew details of their parents’ wills or estate distribution plans.
• 40% of parents surveyed have never discussed their estate intentions with their children.

Less Than 30% of Heirs Know Parents’ Inheritance Plans

As noted above, the study found that less than 30% of heirs knew about their parents’ wills or inheritance plans, and 40% of parents never discussed it with their children. My reaction: Totally unacceptable and reckless!

Obviously, Debi and I are different. We have had detailed discussions with our kids about our wills and trusts and the planned distribution of our assets when each of us passes away. Fortunately, we have two savvy, successful adult children, and we will distribute to them equally.

Yet family feuds can easily develop when members do not feel they have been given their fair share or have not been included in the process. Of course, it doesn’t have to be that way. The solution to the problem is that, while it is important to treat family wealth as a private matter, it should not be private within the family.

Open communication between parents and heirs can prevent many problems. Williams and Preisser, whose research focused on high-net-worth families, believe that in order for a plan to be successful, heirs (including their spouses) should have some influence in how the estate is structured, or at least have input.

They recommend that among the issues which should be addressed is whether the estate plan matches the maturities, skills and interests of the heirs. And there should be a plan to prepare the heirs for their future responsibilities. Heirs should know the impact of their wealth on their own families and the responsibilities of wealth.

Have a Well-Written Transition Plan Provided to Heirs

To help with the wealth transition, Williams and Preisser’s book provides the following checklist for creating a successful transition plan, one that prepares heirs for the roles they will eventually have to fulfill:

1. Have a family mission statement (FMS) that spells out the overall purpose of the family’s wealth and a strategy to implement it, with roles well defined. A FMS is a good way to communicate important family values and provide overall direction as future decisions are made. It can be an important stand-alone activity and serve as a kickoff for the longer transition plan process.
    
2. The entire family participates in the important decisions. While families are complicated, finding a way to achieve broad-based input is the surest way to achieve a successful outcome.
    
3. Family members should have the option to participate in the management of assets. This is a critical issue for certain families, particularly when a closely held business is involved.
    
4. If so, heirs should understand and have bought into their roles. This can be a long-term process, and an outside facilitator may play an important role in achieving a desirable and harmonious result.
    
5. Heirs have reviewed and understand all documents. While this should be the goal, given different interests and aptitudes, a customized approach that addresses each heir’s needs may need to be developed.
   
   Asset distributions can be based on readiness, not age, of heirs. Too often, distribution provisions are written based only on age because of its formulaic simplicity. A more careful, tailored approach is generally better.
    
6. Younger children are encouraged to participate in philanthropic grant-making decisions. A good way to pass on philanthropic values early is to begin the process of getting children involved in money issues.
    
7. Family unity is considered an important asset. Many families have found that this is a critical factor in helping them work through complicated issues.

Summary – The More Your Heirs Know, the Better

Family values, as well as current and future goals, should inform the entire financial planning process. Done well, financial planning is about much more than investment management, which is also very important. And just as most battles are won in the preparatory stage, the success of a family wealth transition plan depends on preparing the family for the transition of not only the family’s wealth but also the family’s values.

While many parents are reluctant to address their family net worth and inheritance issues with their adult kids, this is a huge mistake. Be open with your adult kids about your net worth, your wills and your inheritance plans. They will need all the help they can get to preserve the assets you wish to leave them – and not squander it in attorneys’ fees and legal challenges.

Bottom Line: You do not want your heirs to squander the assets you have spent your adult lifetime building. But above all, you do not want their inheritance from you to result in family feuds and broken relationships. Secrets are never good! Be open and get them involved!! 

Wishing you the best,

Gary D. Halbert

SPECIAL ARTICLES

The Importance of Wills & Trusts & Other Personal Legal Documents

Budget Deficit Topped $1 Trillion in August – Reasons Why

Gary's Between the Lines Blog: August Jobs Report Disappoints, But Still Solid

 

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.