Passing It On

#204 Year 5 Week 11

Dear Friends,

Do you hope to surprise your adult children by leaving them a nest egg when you’re no longer around? Are you hoping they’ll be grateful when they learn how much you’ve set aside for them? 

Research by consulting firm Cerulli & Associates shows that half of all children do not learn the details of their inheritance until after their parents have died. That means that in the US, where $72 trillion of wealth will transfer from high-net-worth individuals to their heirs over the next two decades, roughly $36 trillion will pass to heirs who might be ill-prepared to deal with their pending wealth. Even though many clients found it uncomfortable, I made it a point to encourage them to include children/heirs in the estate planning process because, too often, I witnessed the negative impact of not doing so. For the half of you reading this who haven't shared your estate plans with the next generation, please reconsider. At best, you’re missing an opportunity to educate your heirs; at worst, you’re setting them up to mismanage your hard-earned wealth.

Meeting with your children or designated heirs to discuss your portfolio is not only about revealing a number; it’s about education and preparation. It’s an ounce of prevention. Instead of focusing on how your heirs will benefit from your hard work, focus the conversation on the complex, nuanced process of managing wealth, the skill and experience needed, and the partnership with professionals like CPAs, attorneys, and investment professionals. Years ago, a client brought the relevant members of his family to my office to review their estate plans. We discussed the portfolio. We highlighted key tax provisions. We laid out the probable steps required to dissolve the estate when the time came. When the father passed, the kids knew just what to do to help mom. When mom passed, the kids knew what was required to wrap up the estate. There were no surprises. The heirs had years to prepare and anticipate what was to come. On the flip side, I once had a client representing their widowed mother’s estate. When the siblings learned they received a disproportionately small share of the estate, they were so aggrieved they billed the estate (i.e., their sister) for travel costs to their mother’s funeral! The conversation between parent and child or investor and heir is an opportunity to manage expectations and begin a rational dialogue that can continue with input from both parties. It’s a chance to defuse problems that may arise later.  

One of the most important reasons to share your estate plans with your heirs is that it will alleviate a significant burden on them and could forestall issues that may arise. The mourning period is not optimal for challenging your heirs' intellect and emotional strength. Often, the practical matters of estate law are the last thing an heir wants to confront while dealing with a meaningful loss. Asking people to make decisions under duress increases the likelihood of poor judgment. If your estate plans may cause bad feelings, take time in advance to explain why choices were made. Knowing the reasons behind specific attributes of your plan might prevent any feelings of resentment. Use this opportunity to identify items with sentimental value. Explaining why your antique car, wedding ring, or album collection went to a specific child will prevent the inevitable arm wrestling and potential angst when taking possession. Sharing your estate plans also allows you to address potential end-of-life decisions. Explain in detail your medical directives so that if that difficult moment arrives, your medical power of attorney (POA) doesn’t anguish over what they ‘thought’ you meant or wanted. Finally, use your estate plan to educate your heirs and reinforce essential values. This presents a beautiful opportunity to double down on important concepts such as spending within your means, saving, managing risk, and investing. This is a chance to remind them the estate didn’t just happen; it took work and years of discipline. Money doesn’t grow on trees!  If charitable giving is part of your plan, that sends a message and leaves a legacy. Use this as a teaching moment. 

People don’t share their estate plans with their heirs for various reasons: they’re embarrassed they haven’t saved enough, they can’t face their mortality, they worry their kids will slack off if there’s an inheritance in their future. Sometimes, they plan to deal with it “later,” and later never comes. Sharing your estate plans can be uncomfortable, but your heirs will find out eventually, so why not control the process and deliver the news on your terms? At the very least, let them know where important documents are kept and introduce them to your attorneys, CPAs, or investment professionals. Under ideal circumstances, heirs would have access to all relevant documents and critical information, such as passwords. This is another chance to leave clear instructions on what and how your estate plans should be executed and why you carefully crafted these instructions. Use this opportunity to further educate your heirs about good financial habits, values, and the practices that led to the accumulation of assets in your estate. Let them see behind the curtain. This education can help them avoid mistakes and appreciate not just the wealth they’ve left behind but the knowledge to sustain that wealth into the future. $36 trillion is about to exchange hands; make sure you do as good a job transferring wealth as you did accumulating it.  

Stay in touch, 

brian