Affluent Americans spend millions of dollars each year with high-powered estate attorneys and tax planners. The result? When the time comes, their assets will transition to their heirs through tax-effective, complex arrangements like family limited partnerships, life insurance, and various kinds of trusts.
Despite these efforts, it’s been estimated that for as many as 70% of estates, assets and family harmony are lost following the transition of the estate.1 Another large study of 3,000 families concluded that when wealth is passed from one generation to the next, an astounding 70% of it is squandered.2 It’s been estimated that 40% of children inheriting money think the distribution of their parents’ estate was unfair, and only 28% of all adults say they know the details of their parents’ wills or estate distribution plans.3
Is this the result of incompetent lawyers or poorly designed estate plans? Or the result of failing to prepare heirs? Ask parents what they fear most about leaving their wealth to their children and you’ll not hear about defective estate documents, but rather about ruining their kids’ initiative, kids spending beyond their means, or kids squabbling about how the money was divided.
This disconnect between where the parents’ money and effort
We’ve got some thoughts to pass along, based on a talk with our three grown daughters a few months ago. Ours is not a complicated plan. We intend to bequeath a certain amount of money to our children and give significantly to charity, either during our lifetimes and/or at our deaths. Warren Buffett once stated he wanted to give his kids enough so that they could do anything in life, even a poorly paid profession, but not so much that they could afford to do nothing. We’re far from being in Buffett’s league, but his words resonate with us.
Lessons we’ve learned from having a talk with our kids about our estate plan:
- The mechanics of settling an estate aren’t always clear to your kids. The terminology we’ve grown comfortable with by working with our attorney—executor of the estate, going through probate, gift tax lifetime exemption—are not part of the daily vernacular when you’re a 30-something millennial. We tried to explain the process, and will need to do it over again at some point. But at least they’ve heard the terms and have a diagram we prepared that provides an overview.
- You don’t have to descend into the numbers. We told the kids they’ll inherit some money when each of us dies, but we didn’t stipulate how much. We also talked about helping each of them, as needed and as we’re able, during our lifetimes. That makes it infeasible to be perfectly “fair” when the estate is finally settled. They seemed to accept that having help from Mom and Dad while we’re still alive makes up for the fact that one or the other sister may receive more money over time than they. And we hope we’ve avoided arguments or hurt feelings after we’re gone that might have occurred had we not taken on the “fairness” issue ahead of time.
- You can clarify their role and get input from them, increasing the likelihood of “buy-in.” We discussed with them why we had selected one of the girls as the executor of the estate. We asked them about their interest in being involved in making decisions about distributing funds to charities at our death. We also asked them about their preferences in using some of what we leave to help certain family members who have not had as much good fortune as we. These discussions provided good input as we consider revising our estate documents. And we hope the girls view our involving them as beneficial.
- It’s a great opportunity to talk about what’s important to you. In addition to the “fairness” discussion, we also had a chance to reiterate our views about the importance to us of leaving money to charity, our views on handling wealth, and our desire to help some relatives who have challenges we haven’t had to face. Our kids won’t see things exactly as we do, but we think an important part of our legacy to them is sharing our values.
- Expect comments or questions that you weren’t prepared for. We were ready for nervous chatter around the prospects of Mom and Dad
beingout of the picture. We weren’t prepared for the daughters to talk about each other’s demise and what that might mean. Nor did we anticipate their desire that we not leaveit to them to determine the amount of support to leave for assorted aunts and uncles.
- Encourage your kids to respond. Don’t squelch further discussion. Even adult children vary in their willingness to contemplate the death of their parents, in their grasp of the legal issues involved in settling an estate, and in their comfort with thinking through who will have to do what to settle an estate several years in the future. We think it’s important to keep the dialogue open, and we plan to return to this subject in the future.
We all realize plans can change. We hope this discussion occurred at least 20 or 30 years earlier than needed. But when that day does come, as inevitably it will, we want to believe that we’ve prepared our daughters to handle settling of the estate as we hope they handle life itself—with discernment, compassion, and competence. If you need some encouragement to engage in a similar conversation with your heirs, Investec advisors would be glad to discuss this and related issues with you.
Roey Williams and Vic Preisser, Estate Planning for the Post-Traditional Period (2007), as cited in “Estate Planning Includes Preparing Your Heirs,” by Larry Swedroe, published on Advisors Perspective, June 12, 2017 (https://www.advisorperspectives.com/articles/2017/06/12/estate-planning-includes-preparing-your-heirs)
2Josh Baron and Rob Lichenauer, “Keep Your Kids Out of the Entitlement Trap,” Harvard Business Review (Feb. 18, 2014), as cited in Stanley H. Teitelbaum and Martin M. Shenkman, “Psychological Issues of Bequests,” Trust & Estates (July 2016).
3BMO Wealth Management, “Estate Planning for Complex Family Dynamics,” cited in Swedroe, June 12, 2017.