Financial advisors often have the opportunity to take part in important lifestyle conversations with clients. Whether discussing a vacation home or a child’s wedding, there are plenty of positive experiences in which to share. There are also critical and potentially anxious moments, and few are more important than the conversation about the transition of assets from one generation to the next.
Having “the talk” about wealth distribution with the next generation can be daunting, especially when parents are unsure of how their children will react. Anxiety often provokes uncertainty and procrastination, but deferring the exchange usually compounds the difficulties.
Financial advisors who have close relationships with clients should be a part of this sensitive process. It is an opportunity to act as a true partner by preparing, guiding and following through on themes covered. It is not an event to be taken lightly, and advisors should be ready to demonstrate the considerable value they can bring to the family.
Parental concerns about the wealth- transfer talk are understandable, given the many risks associated with inherited wealth. Most common is the notion that access to money will steer their children in the wrong direction, focusing them on material pleasures at the expense of their happiness.
Superstar musician Sting famously demonstrated the commitment to values over an inherited fortune, announcing in 2014 that he would not leave any of his $300 million estate to his children. “I certainly don’t want to leave them trust funds that are albatrosses round their necks,” he said at the time. “They have to work. All my kids know that and they rarely ask me for anything, which I really respect and appreciate.”
The singer is by no means alone. According to a recent survey by UBS, 27% of benefactors do not want children to feel entitled to wealth, and 32% of benefactors do not want kids to count on an inheritance.
The power of the wealth-transfer talk, however, is underrated when it comes to ensuring that strong ethics stay central, even when wealth is handed down.
In this respect, advisors have the opportunity to play a pivotal role in the preservation of values, relationships and wealth—the real difference between a transactional practice and ongoing counsel. The latter is part of the ideal relationship, and it goes beyond financial order-taking and limited estate planning. Family members should know they can look to their advisor for support on both financial and emotional levels.
Focus On Family Values
In considering when parents and children should start talking about the family inheritance, advisors should note that children have the worldly context they need to relate to the issues at hand when they are nearing independence and hope to understand how their financial situation will affect their future. Events such as college graduations or a marriage proposal often trigger the conversation, especially if a prenuptial agreement is under discussion.
Regardless of when the talk happens, a family’s value proposition should be the primary focus. The family’s philosophy, lifestyle and ethics are the most important parts of any talk about family wealth. In a nutshell, the proposition is usually that money can’t buy happiness, and that living a good life of service in one form or another is the road to contentment.
In this sense, the talk is part of a sustained period of formation to instill values by example—particularly during the child’s adolescence. Indeed, a survey by consultant Russ Alan Prince of ultra-wealthy inheritors showed that “90% of respondents point to their families and the environments they grew up in as being the source of their core values.”
As parents consider how to guide such a talk, it is helpful for them to consider what they would want their child to say to them in the decades that follow. A common goal is to strive for children who appreciate that they were given the backbone, the sense of responsibility and accountability and the prudence to succeed regardless of the wealth at hand.
Advisors should keep those values as the centerpiece and apply a few central guidelines to make the inheritance conversation an effective and positive experience.
Know The Family
The ground covered by parents and children will be vastly different from family to family. Advisors must have a thorough knowledge of their client in order to generate an agenda that will help steer the conversation in the right direction. They should also be certain that they and the parents understand details such as the family’s financial situation, the work it took to generate and grow the assets and the distribution plan. Each of these elements can have a profound impact on how children react.
Certainly, there is the potential for uncomfortable situations. For example, parents may believe their children are not aligned with their values and fear additional money will hurt them more than help. Children may be surprised to hear that nothing is coming their way—or that they will receive assistance but it will not be a “life changing event.”
The talk may also broach sensitive issues, such as substance abuse or lifestyle concerns. While the parents handle the emotional connection in these matters, an advisor can provide a more formal look at how financial distributions can be tied to behavioral benchmarks.
Before the meeting, advisors should outline with the parents any potential issues and have a clear strategy for how to address them, with agreed-upon phrasing and information during the meeting and the right follow-up in subsequent weeks.
Emotional And Practical Preparation
The talk should be developed as a formal meeting—it is not a conversation best served with a holiday dinner. Advisors can work with the parents several weeks before the talk is scheduled to establish goals, an agenda and a strategy.
Walking through the process and potential pitfalls based on known family dynamics is a useful practice. In fact, role-playing with the parents to test their responses and level of comfort is an excellent way for advisors to identify sensitive areas that may not readily appear on the surface.
Projecting a sense of confidence and organization also goes a long way to setting minds at ease. Families will want to demonstrate that plans for their wealth have been well thought out, professionally drafted and are part of a multigenerational strategy.
Advisors can offer to share the strategy behind trust arrangements that stage distributions of income and principal to beneficiaries while mitigating taxes. Parents can lean on these trusts as a guide to the terms of wealth distribution, and young adult children will see that thoughtful planning was part of the process. They will also begin to understand that managing wealth is more complex than it may seem and that the process deserves their respect.
Stick To The Plan
The wealth-transfer talk can often take on a life of its own. When tensions lead to extended, anxious moments, advisors can relieve anxiety by talking about objectives. This introduces objectivity into the equation and gives participants a rest from emotionally taxing subjects.
Advisors can also serve as translators. It is no mystery that parents and children sometimes do not communicate with each other as smoothly as they would hope. With a carefully tuned ear, advisors should be ready to lend their perspective if messages are being misconstrued.
Perhaps most importantly, advisors may be called upon to referee if the conversation escalates into a tense exchange. Seasoned advisors have a distinct advantage over the family in this situation, as they will have experienced such talks a number of times in a number of different ways. They can use that knowledge and keep their antenna raised. If the meeting is going in an unproductive direction, they should suggest the rest of the talk be deferred while the family works out other details. The advisor can then circle back to talk about the next steps with the parents.
Advisors should know when they are needed and when they are not. Not every client needs to have this type of conversation, and not every family needs an advisor present when talking about inheritance issues. Families that have been fortunate enough to live their value statement and instill it strongly in their children may want to discuss wealth transfers on their own. They may also be well versed in the estate plan and know how to articulate its structure and the benefits it provides for the next generation.
Advisors should not be afraid to lend support in more subtle ways, however. Parents who do not fully grasp the strategies used in their estate plan may find it helpful to have you walk through their plan before they talk to their children.
Bridging Generations
Whatever course these conversations take, they should mark the start of a long-term process. Children, parents and advisors often learn a great deal from the discussion, and it can set the stage for more complex planning. Advisors who bring their knowledge and a keen ear to the wealth-transfer talk will create a bond that goes beyond financial advice. They will show that their guidance can cross over to the next generation as they help a family extend their values and wealth.
Brian Broderick is a partner at Hemenway & Barnes LLP.
