High-net-worth individuals (HNWIs) and their heirs can do a better job of talking about the transfer and management of wealth, according to a SunTrust/Forbes Insights survey.
Communication is key. About 70 percent of wealth transfer plans fail in part because of a lack of communication, according to Carolann Grieve, a senior family wealth advisor at GenSpring Family Offices in New York.
“We will talk about sex with anyone, including our children, before we will talk about money,” Grieve said. “It’s really important to keep those lines of communication open and to actually prepare them for the fact that they might be getting an inheritance.”
Good communication helps benefactors teach their heirs how to manage wealth not only for themselves, but also for future generations. Here are some of the most important lessons that wealthy individuals can pass on to their heirs about money management:
Nearly half of respondents in the SunTrust/Forbes Insights survey of HNWIs and their heirs say the importance of goal-setting is the most crucial lesson to pass to the next generation. Grieve recommends a benefactor start by talking about the family’s history, values and shared mission — in short, what the family wants its wealth to accomplish.
She recommends families be inclusive. “Everyone’s opinions and values and perspectives have to be allowed in the room and discussed — and there has to be openness,” Grieve said. “If the heirs aren’t brought into the conversation and they don’t feel heard, the conversation isn’t going anywhere.”
About 4 in 10 benefactors list their heirs’ ability to manage wealth as a top concern, the study shows. But older generations can also learn a lot from younger generations. “Generational learning should be across all generations and not just be pushed down from the upper generations,” Grieve said.
Survey respondents also cited responsible spending as a valuable lesson benefactors can pass down to heirs. Grieve said parents should share with their children some of their own mistakes with money. “It’s really very important to make sure that you are not just telling them about your successes,” she said. There’s value, she said, in showing your offspring the value of learning from mistakes.
Heirs, regardless of whether they’re children or adults, should be given smaller amounts of money to start with, to help teach them to budget. That also reduces the risk of spending the money too quickly. Children as young as 5 can put their allowances into jars for spending, saving, investing and giving — or use the money to buy snacks at school.
Grieve said young adults should also be encouraged to get jobs, to gain some experience with earning their own money. “Going out and working helps them build their self-confidence and teaches them a lesson they can’t be taught any other way,” she said. People who set goals and strive for them are happier and more successful, she added.
A third of survey respondents cited wealth diversification as an important lesson to teach their heirs. When diversifying investments, think about your appetite for risk and what dollar amount you would feel comfortable losing, Grieve said. She said families should also consider discussing their investments with a wealth management professional who can walk them through different options. About 3 in 10 respondents said it’s important to rely on the advice of a professional.
One important factor when thinking about diversifying is how long the money will be invested. Does it need to be available in one to five years for lifestyle needs? Or is it for something further down the road, like a grandchild’s education? Also, consider different types of investments across the portfolio. “Diversification will help to smooth the ride and decrease volatility,” Grieve said.
Estate Planning And Taxes
More than a third of the wealthy individuals surveyed listed estate and tax planning as a key issue to discuss with heirs. One large family surveyed its heirs and asked if they used any estate or tax planning services. The answer from everyone was “no,” even though the fact that the family had used estate planning services was the reason they had received the assets in the first place. The heirs simply weren’t aware of the role that estate and tax planning had played in their inheritances.
“It’s an important lesson, because they need to understand that the government can take up to 40 percent of their assets when they pass away,” Grieve said. Good estate planning, and the professionals who provide it, can help reduce the impact of estate taxes. What’s more, good estate planning can provide an important education for your heirs.
Grieve said benefactors shouldn’t be afraid to talk with their heirs about wealth. “If you don’t talk to them, they’ll think that you don’t trust them,” she said.
Don’t avoid difficult questions, either. Grieve recommends taking some time to think about how to answer. “But don’t shut them down, because if you do, they’ll get the message that this is a topic they can never talk about.”
To successfully transfer wealth to future generations, Grieve recommends keeping the lines of communication open. If your heirs can’t talk with you, they will go somewhere else for advice — or simply make decisions on their own.
Don’t let the fear of telling your heirs about your wealth keep you from providing guidance, she said.