Successful wealth transfer is becoming increasingly important now that one of history’s most significant asset handovers is underway. Baby boomers across North America are expected to pass down an estimated $30 trillion in assets to their heirs over the next three to four decades.
“The worst thing you can do is not have a plan,” said Joseph Sicchitano, senior vice president in charge of wealth planning and advice delivery for SunTrust Private Wealth Management. “People often put off planning because they are waiting for a perfect time to start. There is no perfect time, and there is no perfect plan.”
Between 2031 and 2045 alone, 10 percent of total wealth in the United States will change hands every five years, according to Accenture. To navigate this transition, Sicchitano said, families need a road map that is flexible enough to change as circumstances change.
He recommends that a family begin by taking an inventory of its assets, its liabilities and anything that could potentially go wrong.
Life is full of change and uncertainty, even for the very wealthy, Sicchitano said. “A well-designed, flexible wealth management plan is the best way to secure the family’s financial well-being no matter what happens,” he said.
Why Benefactors Worry
Hesitations about heirs’ preparedness for managing their wealth are the biggest obstacle preventing high-net-worth individuals (HNWIs) from initiating intergenerational wealth transfer planning, according to a SunTrust/Forbes Insights study.
Three-quarters of HNWIs surveyed said they didn’t start planning until they felt their heirs were ready or they saw a financial need. But why wait?
Families should start talking with their heirs early in life to better prepare them to manage their incoming wealth, according to Stewart Koesten, a board member at the Investments & Wealth Institute. In fact, Koesten believes discussions should begin as soon as children are old enough to understand the conversation. He started talking with his kids about wealth management basics when they were 10 years old.
“The most successful families share their financial situation with their heirs when they are young and educate them about investing, goal setting, responsible spending and legacy planning — and that’s the best approach to securing the financial future of generations to come,” Koesten said.
Many benefactors start planning wealth transfers too late and need to improve communication between generations. According to the SunTrust/Forbes Insights survey, only 41 percent of HNWIs are “very confident” that their heirs have a wealth management plan. Fewer than a third encourage heirs to draft a long-term plan, to periodically review investment strategies or to hire a professional wealth manager.
“High-net-worth individuals often have conversations in their heads about their own situation, but many have not had this conversation with their heirs,” said Frank Goins, a client advisor with SunTrust Private Wealth Management.
Heirs Worry Too
Heirs also have room for improvement when it comes to planning, the SunTrust study shows. Nearly three-quarters of heirs say they have a “high or very high” interest in wealth management, but only 54 percent say they have a “high or very high” ability to perform it.
Also, while 59 percent of heirs say their priorities are using wealth to support their families and lifestyles and 53 percent cite preserving wealth with smart money management, only 17 percent say their benefactors have advised them about the importance of engaging an investment management professional.
Professional wealth managers can help beneficiaries manage their wealth, which in turn allows them to pass it down to future generations. “Historically, great wealth is often created in the first generation, but there’s a 90 percent chance the wealth will be greatly dissipated by the end of the third generation,” said Angelo Robles, founder and chief executive officer of the Family Office Association. When choosing a wealth manager, experts say, investors should seek out professionals with experience, skill, integrity and strong communication skills.
To sustain wealth, benefactors also need to share family values that extend beyond money, such as a commitment to entrepreneurship and to giving back. “If heirs understand that, they will do a better job of managing their wealth in the future and use some of it to benefit society,” Robles said.
One of the best ways to ensure a successful wealth transfer is to distribute inherited wealth over time, according to Goins. “This gives the beneficiary time to gain some real-life experience in managing wealth before they receive their full inheritance,” he said.
Start As Soon As Possible
For many benefactors, the most difficult step in transferring wealth is getting started.
Sicchitano recommends they figure out first how they want their children, and their children’s children, to benefit from the money they’re passing down. Then act on it.
To help heirs prepare to manage their future wealth, here are some steps to get started:
- Make wealth management and legacy planning part of the family culture so all decisions can be based on shared values and goals.
- Encourage heirs to take an active part in managing family investments.
- Regularly share information about your own financial situation.
- Share mistakes made and lessons learned — and how to avoid those mistakes.
- Teach heirs to periodically review investment strategies.
- Help heirs learn how to create a long-term wealth management plan.
- Consider hiring a professional wealth manager.
Managing wealth often seems daunting, Sicchitano said, but it can be quite simple if you let go of trying to make the process perfect and focus instead on effectively executing many of the basics.
“You must know yourself, identify your goals and develop a long-term wealth management plan, no matter how imperfect it may seem,” he said.