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We Need To Talk About Inheritance - But Too Many Don't

Tom Burroughes, Group Editor , September 11, 2019

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Authors of a recent report discuss what deters families from discussing wealth with their offspring and what can and should be done to help the process.

A large number of high net worth Americans are still not talking to their children – including grown adults – about the wealth they are likely to inherit out of a misplaced, if understandable, desire not to confuse or frighten inheritors about the amounts involved.

A few weeks ago, The Merrill Center for Family Wealth produced a white paper showing that an alarming six in 10 wealthy families have no process or structure in place to ensure that they communicate family wealth decisions effectively. At a time when trillions of dollars are due to be transferred to younger adults, the stakes for getting such transfers wrong are huge.

“We haven’t had a level of data that is that detailed before,” Matthew Wesley, co-author of the paper and director at the Merrill Center for Family Wealth, told this publication in a recent call about the report.

“Families aren’t great at communicating about wealth inheritance for three reasons: it is complex and they don’t know where to start, they are concerned about the impact and, in a few cases, they want to control the information,” Wesley said.

Merrill advises HNW families to gradually increase the amount of information they give to their children, working from a broad discussion about core values and the purposes of wealth, then talking more about structures, such as trusts, before full transparency about the amounts involved. The firm’s report likens the process to turning up the dimmer switch rather than simply turning on the light.

The white paper delves into detail about how the stages of educating children should be approached; it also sketches out the different approaches families have in deciding what and how much money to transfer to children. The paper found that 69 per cent of families give children equal amounts; 11 per cent base it on merit; 8 per cent base it on need and 12 per cent will select some other test.

The report also breaks down families’ philosophies about decision making in great detail: 35 per cent of them are “autocratic”; 21 per cent are “technocratic”; 17 per cent “democratic”; 17 per cent “meritocratic” and 10 per cent are “representative”. These terms are defined as follows: autocratic is where one person makes the main decisions and others give few or no contributions; technocratic families draw input depending on the special knowledge and training of family members; democratic families adopt collective decision-making; meritocratic families enable decisions to be made by those with a proven track record of making good decisions, and representative families will select certain members to act on behalf of all members on their behalf.

A focus on wealth structures (trusts, foundations, etc) is particularly important, Wesley said. “People don’t inherit money or assets as such – they inherit structures,” he said.

The “dimmer switch” process tackles a concern families have about how fast or slowly to educate their kids about what they might inherit, he continued.

Advisors, can provide an “executive function”, to steer clients through some complex financial conversations at times when there can be a lot of emotions in play, Wesley said. In particular, advisors help frame conversations in a forward-looking way: “It is about helping clients so that they – and their families – are equipped to be more proactive and less reactive.”

“The financial advisor becomes a kind of governor in the process that helps the family regulate the space of disclosure” he said, hoping that the white paper’s guidance on how advisors can set conversations will aid them in future.

There is a real need for more advisor training for how they work with families, which is partly why the white paper was written, he said.

“Advisors are often wonderful at working with clients about managing their reactions in markets but in family communication issues they can be a bit flat-footed,” Wesley said.

The insights into family communication don’t just apply to transferring money and assets from older to younger people. They are highly relevant in transfers between siblings, or in widowhood, divorce, or other transfers involving those of the same generation.

“There is a really big issue around how to negotiate the social complexities of wealth,” he said, talking about how wealth owners/inheritors have to consider their public profiles and reputations.

Third-generation clients, for example, can be “embarrassed” by their wealth, or feel intimidated about living up to their ancestors’ achievements.

“Others are really smart about inheritance…..you decide a lifestyle that is worthy of your inheritance and you adopt a stewardship approach and engage in a process,” he said. One insight, for example, is that inheritors don’t necessarily rush to give money away but invest it wisely so they can increase the good they want to do in the world over a much more extended time.

Among other findings of the white paper, it showed that among the 65 per cent of families that don’t have formal family communications in place, 15 per cent don’t have family advisors; 11 per cent lack family councils; 11 per cent have no family succession plans; 11 per cent have no investment policy statements, and 7 per cent have no mission statement.

For that study, Merrill asked more than 650 high net worth people across the country how they make different types of financial decisions and communicate within their family.

The Merrill Center For Family Wealth is part of Merrill Lynch Wealth Management, an arm of Bank of America.

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