by Frazer Rice
When to Communicate Your Plans
Good communication is the foundation for a good organization, and as unromantic as it sounds, a family is an organization. When communication is poor or nonexistent, it ultimately leads to mistakes, distrust, and pain. However, when it comes to communicating your wealth planning to your loved ones, there are appropriate times and stages for people to receive the information. Telling a child too early can affect their ability to develop a strong work ethic or create future self-esteem issues. If you tell your son that he’s worth $30 million when he’s only sixteen years old, he may not have the ability to process or manage that information the way an adult could.
When it comes to the goal of developing productive and motivated children, I’m not against parents who decide to withhold information until they feel their child is ready for it. However, “ready” is a subjective label. The parents will have to decide when their children have the ability, maturity, and mindset to take that information and use it productively.
For most families, my preference is to withhold this information from children until they are out of high school or college. There are some high school or college kids who can handle that kind of information, but most can’t. Many college students are dealing with their own challenges in personal development and identity. They’re figuring out why they’ve been put on this earth and exploring what they’re good at. Adding money and potential entitlement and self-esteem issues to the mix only confuses the issue.
Another Approach to the Timing of Communication
As a prerequisite to communicating with their children about their wealth, it’s common for my clients to want their child to demonstrate the ability and desire to row their own boat. “Rowing your own boat” can mean different things to different people, but it generally means having the ability to be financially independent, understanding the value of a dollar, and having the motivation to make their own way in life. When any or all of those ideals are achieved, it’s often a good time to begin explaining the resources available for their current and future benefit, which can allow the child to use these resources in the planning of their own lives.
In many trust structures, wealth is distributed regularly at certain ages. It could be one sizable distribution every ten years, starting at the age of twenty-five. This distribution schedule won’t diagnose someone’s readiness for the wealth, but it tends to align well with future life milestones. At twenty-five years old, hopefully, the recipient is out of college or finishing up grad school, and a distribution can help them land on their feet. At thirty-five, the odds are that they’ll be married and have families. At forty-five, their families may still be growing, or the oldest children might be heading to college.
Regular distributions can ensure resources are there for children throughout their lifetime, but what if your child is the next Elon Musk and needs $500,000 at the age of twenty to start the next Tesla? Do you want the once-a-decade distribution structure to hinder their access to resources? There are ways to get around that issue and structure wealth accordingly, if the flexibility is important to you. Defining your goals for your children will lead you to the best structure for distributing wealth.
In defining financial goals for children and determining when to communicate your message about wealth, it’s important to consider each child’s maturity level and the unique issues affecting their ability to manage themselves and their wealth. If they’re not ready, their motivation level or self-esteem could be in serious jeopardy, and a sense of entitlement will take root. Worse yet, from a financial standpoint, those kids could develop extreme spending habits and be governed by a structure that they don’t understand or (ironically) trust.
I find that it’s good for children to have an appreciation for how the wealth was created. People become worse public citizens when there’s no connection with the wealth that’s been generated and no sense of the history of their family’s success. Many of my clients take great pains to educate their kids about the family’s legacy, where the money came from, and who currently works to manage the wealth. An appreciation is gained for the family members who manage and drive the wealth, as well as the employees who work hard to keep the family trusts healthy and funded.
There is no perfect scenario, because every family will have members who make mistakes. However, when everyone in the family has a baseline level of respect for where the wealth came from, it helps them become more involved as family members as well as public citizens within their own communities.
What If the Children Aren’t Interested?
What if you have a solid plan and well-timed communication, but upon presenting it to your family, the kids are more interested in their iPhones? Perhaps one is trying to become the next Wayne Gretzky in the hockey world, and another wants to become a social worker. They’re not concerned about the family’s legacy, where the wealth came from, or managing it. That’s okay. Kids will be kids. I wouldn’t lose hope in the education process. Interest in the legacy will come when it comes. Keep the door open and continue communicating around your legacy plan and goals, because you never know when it will click with your children later in life. Maybe it will be a change in jobs, a recent engagement, or the birth of a child that triggers the interest.
Patience is a big part of communication. The recipient isn’t always ready to receive the message, even if you are ready to send it. With patience, your family will end up in the right place, even if it doesn’t go according to your original plan and schedule. Patience will be a key part of conveying a legacy because it will also be a big part of creating a culture around wealth that lasts over generations. Ongoing, patient communication enables your children to go out into the world, find themselves, and experience life in their own personal journey. They can come back into the fold, with the benefits of wisdom and life experience, and decide, of their own accord, to contribute to the larger family legacy that you have been developing and enjoying over time.
Benefits of Third-Party Experts
It’s most useful to have family wealth conversations when everybody is in the same room. If you tell inconsistent stories to two different family members, it’s going to create conflict and undermine the goal of good long-term communication.
I’ve seen wealthy families use a third-party advisor to lead these family-wide discussions. It makes sense to have an experienced expert in the room to answer questions and address common issues that arise during a family’s conversations about wealth. This is valuable because it’s difficult for anyone in your family to be the expert at conducting the conversation and fully understand how you’ll achieve the goals.
Perhaps more importantly, if the message comes from a third party, it isn’t a message that’s been dictated from above. The family values can and should come from the top but not the full planning and communication around the strategies and tactics. When a third-party advisor is in charge of facilitating the conversation and answering questions, it removes internal family pressures and promotes healthy questioning and communication. Usually, everybody in the room will learn something.
Having a third party in the gathering to moderate the family’s communication and manage the proceedings allows the family to observe the strengths and weaknesses of each family member, understand the values held by each person, and to ultimately learn something from one another. This creates a higher level of initial buy-in and will lessen future conflict. Family members will have an understanding of how the wealth was structured and distributed, and why it was done that way.
An entire cottage industry has popped up around this service. It is common with most major financial institutions, and most sophisticated wealth advisors and attorneys have access to this expertise. Some families may need only a few initial sessions to discuss their planning, with the family able to exercise the discipline and organization to handle the maintenance of the culture from there. Others run it like a business with the help o
f outside advisors and schedule ongoing quarterly or annual meetings. Either way, a third-party facilitator can provide significant value in the communication of legacy wealth plans.
Two Common but Complex Challenges
It’s a big event for a couple to have their own child, and the dynamics of taking care of a child has changed. For many people, the expectation has shifted beyond simply getting them through college and into their first house. This is especially the case for children with special needs and also for children who develop drug problems or gambling habits.
Having a child with special needs will affect your thinking about wealth in a detailed and specialized way. For children with special needs that have been present since birth, parents have several years to prepare and plan for those obstacles. With drug addiction, gambling problems, or other issues, however, there can be much less time to prepare and react.
Drug problems and other bad habits often begin in the child’s teenage years, and the progression of problems can be dangerously swift. It’s extremely dangerous if a teenager or adult child has unlimited resources to fund a lifestyle revolving around destructive habits. This can lead to risky behavior, arrest, and excessive spending to maintain the habit and lifestyle. It’s also expensive to quit, as treatment is neither fast nor cheap and often not permanent.
With special needs situations, parents have time to acclimate to a difficult situation. Other situations can be different and involve deceit and inconsistent signs. Addiction is more unpredictable, emotional, and difficult to mitigate. In these instances, people can structure their wealth in trusts, with an intermediary standing between the beneficiary and the wealth. Instead of having unlimited access to $10 million in a bank account (which could easily be spent in a year), the person is required to request the money from a trust committee. They’ll need an explanation of how the money will be spent and the estimated budget. This provides a speed bump before the spending occurs and helps beneficiaries to be more responsible and accountable in their planning.
Another method to mitigate the downstream effects of addiction problems could be the aforementioned strategy of distributing money to a beneficiary every ten years, starting at the age of twenty-five. Many people who struggle with drug addiction in their teenage and college years might be able to get it out of their system by the age of twenty-five and be back on the road to being a functional adult.
Distributions could also be staggered by magnitude, with less money distributed in the earlier years of life. This type of planning is especially critical when there is a sudden inflow of wealth, such as an unexpected inheritance or winning the lottery. If the beneficiary is already struggling in managing their own affairs—whether it’s excessive spending, substance abuse, depression, end-of-life issues such as dementia and other infirmities—then the additional zeroes in their bank account will be dangerous. It’s an environment of difficult decision-making, but problems like these can be mitigated with the help of an experienced advisor.
My Happiest Clients
The happiest people I’ve worked with do not place their self-esteem in what the numbers in their checking account say. Instead, they focus on enjoying their experiences, as well as impacting the people and communities they care about.
I have seen some patently unhappy billionaires who, despite having unlimited resources, seem to flail around in life with little purpose. The happiest people, on the other hand, have clarified their goals and are focused on enjoyable experiences and impactful legacies. They take the time to enjoy themselves, help others, and be global citizens.
A person’s unique personal beliefs and goals can also drive their strategies around philanthropy and taxes. How much of your wealth would you like to give to your family and your philanthropic interests, and how much would you like to give to the government? A common illustration shows that if you pass away with no type of tax planning, once your wealth creeps over the federal estate tax exemption, you can simply divide your wealth in half. One half of your post-exemption wealth will go to the government, and the other half will go to your family. Alternatively, other examples show that with charitable planning, the tax bite can be minimized substantially in favor of charitable causes that are important to you.
That said, trying to minimize taxes further can be more trouble than it’s worth. I have seen plenty of unnecessary wreckage caused by people trying to play reindeer games with taxes. Certainly, we should have the right to structure our finances to avoid the unnecessary payment of taxes, but being extremely aggressive in tax-avoidance structures can be expensive and annoying for future generations. The administration of aggressive planning can be burdensome, and if changes need to be made in the future, they will be costly and complicated to unwind.
People who go through the exercise of clarifying their goals often find they have enough wealth to accomplish their goals without needing to push the needle on tax avoidance.
It’s perfectly normal to cut out wide swaths of taxes, but at a certain point, administrative complexity causes diminishing returns. If you’re advised to set up an array of legal structures that provide marginal tax benefits (or cost more in administration than the tax benefit), then you’re likely just paying for the accountant’s speedboat or the lawyer’s Camaro.
Getting the Wealth Prepared for the Family
There are two prisms of wealth planning and management. The first is the focus on building, protecting, structuring, and distributing your wealth. After defining your goals for your current wealth and legacy wealth, you’ll then look at the technical aspects of accomplishing those goals.
First, are the assets sufficiently placed? For example, if you decide to have trust funds set up for your grandkids’ benefit, then you’ll likely want long-term growth assets inside those trusts, compared to assets needed for current income. On the other hand, if you have a fund set up to provide the down payment for a house in five years, you’ll want that investment to be less risky and more liquid. When you’re ready to close on the house, you don’t want to wake up to a 30 percent decline in the stock market and have to show up at the closing saying, “I’m sorry.”
Next comes the determination of the best structures to maximize the delivery of wealth to your family, focusing heavily on tax considerations and investment goals. If there is a good understanding of the legacy goals and the values behind your plan and you have input and buy-in from the beneficiaries, it will help the process of getting the wealth into the best structure. From there, you need to decide how future generations will access the wealth without abusing it.
Getting the Family Ready for the Wealth
We have seen that it’s possible for small fortunes to become big fortunes and then get squandered back to small fortunes in three generations or less. Lack of communication can be one of the main drivers of this “shirtsleeves-to-shirtsleeves” phenomenon. Family members rarely do a great job of making decisions together when communication is poor or nonexistent.
Siblings may fight if they don’t understand how the estate was divided, and why it was done that way. It’s valuable to have a dialogue with your kids about why and how the estate will be divided. It’s also valuable to the third generation to have communication and interplay with the first and second generation, as it will help in transmitting your values and discussion points. The impact of not working together can be particularly harsh as each generation develops its own identity.
Take the example of three siblings who inherit equal amounts of wealth. One is single, one is married with eight children, and one is married with two children. Those three beneficiaries will likely have different dynamics in how they spend their money. From an investment standpoint, the assets should be allocated according to the different needs of those three situations.
The Impact of Not Working Together
By not communicating well and sharing experiences, the siblings will lose the benefits of collaboration and scale.
They’ll lose the benefits of brainstorming solutions to problems and the benefits of understanding the different perspectives and needs of different family members. Finally, they’ll lose the mutual understanding of how and where the wealth is generated and the shared sense of family values in managing that wealth.
Establishing solid communication now will help the beneficiaries be more analytical and confident in their future decisions regarding the wealth. Additionally, if there is a family-wide understanding of what constitutes fair access to the wealth, there shouldn’t be any surprises or hurt feelings between siblings in the future (or at least they’ll be minimized). They’ll remember the values behind the decision-making process and understand why tough decisions were made to maintain those values and reach goals in the future. It will create a support network within the family and prevent shortcomings and disagreements. That’s a great situation for a family to be in now and in the future as the family grows and new members are brought into the fold.
Importance of Values in Growing Wealth
A healthy level of communication around your goals and values can also help in growing the wealth. To combat the “shirtsleeves-to-shirtsleeves” phenomenon, growing the wealth is necessary. There should be understanding that resources are finite. While resources may be bountiful for the first and second generation, the third generation grows and the number of mouths to feed, house, educate, and entertain increases geometrically. The family must understand how to grow the wealth to keep up with that increase in spending.