A recent study found that $53 trillion in wealth will be transferred from boomers onto the next generation between now and 2045. The research also found that family meetings and regular communication are considered the most effective wealth transfer planning strategies (81%) — yet many boomers are not taking the time to have these conversations.
“Like a successful business owner who can’t find the time to develop a succession plan, wealthy families all too often simply don’t go any further than having the best of intentions when it comes to talking about inheritances and multigenerational wealth,” said Howard Lutz, senior vice president at Intercontinental Wealth Advisors, LLC. “More often than not, the plan is to pass wealth on to future generations, yet the vast majority of people don’t take the time to formalize the process.”
Here’s a look at what should be discussed during conversations about passing on wealth, and why it’s vital to have these discussions ASAP.
Not Talking About Your Inheritance Can Lead to Financial Losses for Future Generations
Many Americans avoid talking about inheritance because they don’t know where to start — but not discussing this at all can have dire consequences.
“As we continue to move into the most significant period of wealth transfer in the history of the United States, researchers are focusing in on the longevity or lasting power of wealth from generation to generation. And the results are stunning: 90% of family wealth is lost by the third generation,” Lutz said. “So beyond the sheer desire to maintain the family wealth through generations, the benefits of family conversations help explore and navigate many common issues of family wealth.”
These issues include current resources, investments and goals; shared values; attitudes toward charitable giving; passing knowledge on to the next generations; and preparation of children and grandchildren.
How To Approach the Conversation
Lutz notes that every family and their values are unique, so different families should approach this conversation differently. “When it comes to how to talk to your children about family wealth, try to center your discussions around your particular family values: What’s important to your family? What do you believe in? Do you want to leave the world a better place? Do you embrace that old adage about the importance of giving back to those less fortunate?”
He recommends approaching the conversation like a business meeting.
“Gathering with the family around the table in a business-like setting to talk through these issues is a good place to start,” Lutz said. “That is where family wealth governance often begins. Collaborating on a mission statement is a good idea. Establish policies for handling complex situations. Educate younger family members so they can effectively manage their own finances and at some point in the future take over primary responsibility for the family’s wealth.”
It’s also important to come to an agreement about who will handle what.
“Rules must be established and boundaries set for managing and meeting shared financial goals,” Lutz said. “Structure must be created around who makes decisions, how those decisions are made and, very importantly, how they are discussed and debated. Protocol and discipline must frame and surround emotional discussions.”
Be Open and Specific
During these conversations, it’s important for boomers to be candid about their finances.
“Boomers may want to provide information on the type and amount of assets they have, their estate plans and how their children can prepare themselves to handle their inheritance,” said Sean K. August, CEO of The August Wealth Management Group. “It’s also important to discuss any personal wishes or preferences regarding end-of-life care and funeral arrangements.”
Have These Conversations Sooner Rather Than Later
Boomers should start talking with their children and other beneficiaries as soon as possible, as it gives the next generation time to determine how this inheritance fits in with their own plans.
“By having a clear understanding of the boomers’ financial situation and estate plans, children can better plan their own financial future and prepare for the responsibilities that come with inheriting assets,” August said. “Additionally, it can help avoid potential conflicts and misunderstandings that may arise in the absence of open communication.”
It’s also a good idea to have conversations ASAP, simply because you never know what could happen in life.
“No one lives forever and unforeseen events can create tragic scenarios for a family,” said Sam Brownell, CFA, founder at Stratus Wealth Advisors. “For example, we were asked to work with a business owner whose partner had recently died in a car crash. The owners had no formal shareholder agreement to help the deceased owner’s family receive a cash payout for his stake in the business. The emotional and financial toll from the lack of planning on both the surviving owner and his family as well as the family of the deceased owner was immense, and could have been mitigated by starting the conversation earlier.
“It is always best to have conversations around inheritance when everyone is of sound mind and in a good emotional place,” he continued. “No one is at their best when their emotions are heightened, so we encourage all parents to remember that their legacy is much more likely to be intact if they provide their children with a roadmap.”
More From GOBankingRates