It’s inevitable, so why are you holding your children back?
Is it ok to assume everything will be fine? Or should you take the steps to ensure it will be when you pass on?
Technically you are all set: you’ve created an estate transition plan designed to control how your legacy is to be distributed over time, ensuring that when wealth makes its way to the next generation they will be ready to accept it and the responsibilities that accompany it. But providing insight into how, how much, and when you intend to distribute your wealth to your heirs today just might risk entitlement, laziness, or a distorted sense of your family values into the future. Giving your children transparency into your financial picture could also prove to disincentivize them to go out and make their own impact on the world. But, if you spend the time and money to create a well-designed estate plan today, you can help ensure that your financial legacy will have a positive impact when you’re gone, right?
Wrong.
Research conducted with over 2,500 families in the United States[1] found that fully 70% of estate transitions failed into the next generation – failure being defined by estate litigation, a breakdown in family unity, depletion of capital, or a loss of self-confidence or quality of life cited by heirs. The leading cause of these breakdowns? A breakdown in trust and communication across generations was cited in 60% of cases; while a failure to prepare heirs was noted 25% of the time. Interestingly, specific technical issues however, such as tax planning, proper documentation, or poor structuring accounted for less than 5% of poor estate transitions. In other words, despite excellent technical preparation across the scope of family advisors (no doubt at considerable costs), the lack of communication within the family as well as inadequate education of the next generation were the overwhelming factors that resulted in estate transition failures.
Ironically, a large proportion of family leaders feel that bringing the next generation into the conversation before they are “ready” would represent the greatest risk to ensuring that their financial legacy would have a positive impact on their heirs. But how do heirs become ready in vacuum? And how does one build trust within a family framework when one of the most significant issues that a family will face is not on the table for family discussion?
“70% of estate transitions failed into the next generation…”
What does success look like?
For most families, a successful estate transition is characterized by continued family unity, a strong individual and collective sense of self-worth, and a financial or business legacy that continues to provide opportunities and comfort for subsequent generations. Typically, the glue that binds these elements is a shared family vision, or a unilaterally agreed upon set of values which provides the framework for family interaction and decision making. For families that have navigated the pitfalls of poor estate transitions, coming together to frame a collective vision as a unit helped build a foundation of trust, communication, and confidence – key elements in helping ensure that the family unit can continue to function through difficult emotional transitions and build into the future.
But agreed upon family values need to be just that – collectively determined and adopted. A unilateral imposition of values from the current generation only serves to create more alienation within the family. Allowing all members of the family the opportunity to articulate and participate in the process means building consensus and creates a more solid foundation for collective decision making into the future.
On the job training
Engaging heirs early in the management of the family’s financial assets serves as a training ground for the technical skills that will be needed later on. Understanding how the family’s assets are structured, how pools of financial capital are managed (and why), and who the key advisors are, all serve to pave the way for continuity down the road. Engagement with technical advisors also builds knowledge and confidence.
While building technical expertise is one of the primary reasons for engaging the next generation, the act of involving heirs also builds a framework of trust and collective decision making – critical elements of determining success down the road. If siblings can develop these skills and embrace a collective vision now, the odds that they will continue to work closely into the future increase significantly.
“Agreed upon family values need to be just that – collectively determined and adopted.”
Family Support
Part of your estate planning should include bringing the next generation into the conversation today. Keeping children out of the conversation risks sending the message that you lack both trust and confidence in their capacity to understand the full spectrum of your affairs, or their ability accept financial responsibility.
Fortunately, families today have a breadth of support options available to them to help navigate the complexities of a family enterprise strategy. Family advisors can offer a wide range of expertise to coach families through self-discovery, provide a constructive framework for conflict resolution, and help keep all family members engaged and accountable.
In the end, investing in your family today will help maximize the odds that your legacy will be a positive force in the future.
Wealth Transition Checklist
Created by the Institute for Preparing Heirs, the Wealth Transition Checklist[2] provides an indication of the odds of a successful estate transition relative to families who have identified themselves as having had successful transitions in the past.
Answering in the affirmative to seven or more questions suggests high odds of success; less than three affirmative answers correlates highly to situations where estate transitions failed, often resulting in outright conflict across family members and/or wealth depletion.
- Our family has a mission statement that spells out the overall purpose of our wealth.
- The entire family participates in most important decisions, such as defining a mission for our wealth.
- All family heirs have the option of participating in the management of the family’s assets.
- Heirs understand their future roles, have “bought into” those roles, and look forward to performing in those roles.
- Heirs have actually reviewed the family’s estate plans and documents.
- Our current wills, trusts, and other documents make most asset distributions based on readiness, not heir age.
- Our family mission includes creating incentives and opportunities for our heirs.
- Our younger children are encouraged to participate in our family’s philanthropic grant-making decisions.
- Our family considers family unity to be just as important as family financial strength.
- We communicate well throughout our family and regularly meet as a family to discuss issues and changes.
Discussing the statements listed above and engaging in constructive conversations with your family can help ensure preparedness and stability for your legacy’s future, and your family’s future success.
The Williams Group. “Bridging The Generations: What Families need to know before transferring wealth to heirs”, January, 2016.
“Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values” p. 57; Roy Williams and Vic Preisser, 2004.