Wealth transfer: Are your heirs ready?

When it comes to wealth, many families spend a lot of time and energy building it, but far less focus on how it will be passed to the next generation. 

Statistics show a majority of high net worth families fail to successfully transfer assets from one generation to the next, resulting in not only a loss of control of those assets, but a loss of family harmony. 

Lack of trust and communication are to blame, as well as unprepared heirs and a lack of an agreed upon mission for the family wealth, says Roy Williams, founder and president of The Williams Group and co-author of Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values.

The importance of family values

Traditionally, the emphasis on wealth transfer has been placed on the assets, when Williams says more attention should be placed on establishing and maintaining family values.

“The values we have determine the actions we take or don’t take,” says Williams.

Family values may include spiritual, intellectual, psychological, physical and financial issues.

Williams says families need to work together to establish what’s important to them, both individually and as a team, and use those values act as a compass for decisions impacting the family.

“When you start building the family as a team – with roles and performance standards – then all of this mystery, the dogma, the entitlement, the affluenza stops becoming a factor,” Williams says.

He says families must also continuously talk through inevitable disagreements around values and distribution of assets, to build communication and trust.

“You may have the best-laid estate plans in the world, but if they are laying on top of a shaky foundation of family dynamics, then they are destined to fail,” Williams says.

When to start the discussion

Most parents know the conversation about wealth transfer needs to happen: The question is when to start.

Parents are understandably concerned about disclosing the level of their wealth when their children are young, worried it will prevent them from pursuing their own personal and professional development.

“There’s a concern they just won’t try as hard or make smart choices to be successful,” says Leanne Kaufman, head of RBC Royal Trust, RBC Wealth Management.

It could also encourage some children to make ill-advised, maybe even life-changing decisions.

“We see a lot of families where individuals have relied too heavily on knowing that the funds are there to bail them out,” Kaufman says of inheritors.

Parents hoping to avoid affluenza among their children can begin by teaching them about money at a young age, starting with a modest allowance, says Judi Cunningham, a family enterprise advisor, educator and speaker, and founder of the Vancouver-based Institute of Family Enterprise Advisors.

She recommends parents not only talk about how their kids can spend the money, but also save it and give some away to charities. The conversation should focus on why each action is being taken, and their pros and cons, Cunningham says.

“Often I think families think that kids aren’t sophisticated enough to understand some of these concepts,” says Cunningham.

“You can have meaningful conversations about money with children at a young age. Those conversations plant the seeds to provide the foundation for creating meaning so that, when wealth is transferred, it’s a completely different experience for a family. They understand how they want to live and money becomes the tool for them.”

It’s not having the conversations at all that can cause assets to be mishandled and lead to family strife when it comes time to pass along the wealth.

Sudden wealth is often squandered

Too often, Cunningham says parents believe the contents of an estate, which includes money and personal assets, should be kept a secret until they pass away. The problem arises when heirs are read the last will and testament and don’t understand why a sibling or another relative received something perceived to be more valuable – financially or emotionally.

Cunningham says most parents try to treat each of their children equally, but that doesn’t always come across to their kids depending on the type of assets being dispersed.

“People are fighting over their upset of the meaning they’ve place around these items,” says Cunningham. “This usually happens when families don’t have the conversation. They don’t discuss the meaning.”

This can include everything from a family heirloom to a piece of property or investments.

“Parents aren’t putting their love into the money or the stuff, but it’s how people feel,” Cunningham says.

She says many families spend a lot of time earning and accumulating wealth, but not enough time preparing their kids for how to manage it later in life.

“When it’s a sudden thing; that is how wealth gets squandered,” says Cunningham. “If you transfer money and there is no development of human and intellectual capital … that’s when the problems arise.”

Professionals can help steer the conversation

Most families benefit from the guidance and advice of third-party advisors, who have the financial expertise and outside perspective to help steer the conversation.

“One of the most important things a financial advisor can do is talk to families about who they are and what’s important to them,” says Cunningham. “What do they want to do with their money and what’s it for?”

A third-party financial advisor can also speak from experience based on their work with other families, says Kaufman of RBC.

Advisors also have financial planning skills and asset management acumen that can help guide the financial decisions being made from one generation to the next.

“These advisors are not just looking at one piece of a family’s pie,” Kaufman says. “They really try to get a full picture by understanding what all the components are around the estate, the family business [where applicable] and the family dynamics. That involves pulling in the relevant family members and the next generation so there is a lot of transparency. That helps to make the transfer so much easier.”

Kaufman is a firm believer in having advisors host regular family meetings to help facilitate and/or mediate conversations about the wealth that will eventually be transferred.

“We’ve certainly seen success with it,” she says. “Even if it’s something as simple as handling the family cottage: Don’t make the assumption everyone knows how you want things to be handled. Have a meeting, and we’ll help you.”

Kaufman says the financial services industry can also do a better job of helping clients understand the importance of talking about wealth, and starting the conversation early.

“As advisors we need to figure out how to make it easy for the clients to engage us in that role, because we cannot assume it’s something they’re going to ask for,” she says.

“We need to make them aware and then help demonstrate to them how it could be facilitated given their own family situation. I don’t think most Canadian families, even with modest family net wealth that will be passed on, have really talked about what is it they intend to achieve as a family.”

Having this conversation today will benefit all family members, from each generation, well in the future.

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