Navigating the upcoming wealth transfer: How to discuss family finances with your adult children
The great wealth transfer has finally arrived.
With the youngest boomers now turning 60 and the oldest nearing 80, many are starting to transfer their wealth to the next generation. Globally, $84 trillion will get passed down over the next two decades, including investments, real estate, businesses and other assets.
Talking about wealth can be an uncomfortable topic for many families, but passing down assets shouldn’t be left to just happen. Recipients may not be prepared or want to take on the responsibility of managing the assets, be it a family business or property. And it is particularly important to have conversations before drafting legal documents.
With that in mind, here are ways in which we encourage families to have discussions with their adult children regarding large inheritances.
Create a script before the first family meeting.
Most parents, particularly those in ultra-high-net-worth families, tend to avoid conversations with their adult kids because they fear confrontation or a loss of privacy or worry about their children becoming entitled and losing their motivation.
One way to start the process is to meet with an adviser before any conversations and develop a script, which can be an actual document that is referenced during the family discussion.
When developing that script, think about what the key messages are. Be clear about what you see as the purpose of your wealth, and set your intentions early to ensure an open dialogue.
Set the stage for conduct at meetings.
Each family will conduct these conversations differently, but it’s a good idea to develop a code of conduct that everyone follows. The code could include how people should speak to each other — in a respectful, nonconfrontational tone, for instance — as well as the importance of confidentiality, expectations around participation and more.
Setting goals for the first meeting and subsequent discussions is also important. Set an agenda with conversation topics, outline the purpose of the meeting and talk about what you want to work through. Consider creating a schedule of future meetings, too. While frequency will vary based on family relationships, geography and the complexity of the assets, monthly, quarterly, or biannual meetings are common. If the family is big enough, an annual family retreat can be another worthwhile approach.
Words matter — choose wisely.
As anyone who has ever been in any sort of argument knows, words matter. One wrong phrase can derail a conversation and, depending on what’s said, even harm relationships. Stay positive and keep the greater good of the family in mind. Keep the language in the initial scripts neutral, avoiding any accusatory words that could hurt a relationship.
Language is important, as everyone has a different definition of certain words, and this is where an adviser can add a lot of value. They’re an objective and neutral third party who can tell parents what words to avoid in a script or help tone down any heated discussions.
Discuss philanthropy opportunities.
Conversations around charitable giving are a great entry into discussions about family finances. Philanthropy is usually something everyone can get behind, which can open the door to broader money discussions. You’ll get used to meeting together and having conversations, learning together, working out disagreements and making decisions together.
Ideally, you’ll talk about the importance of giving when the kids are young so that when they’re older, you can be open about your legacy intentions and how philanthropy might be incorporated into your plan. Children, even adults, will gain a lot of financial skills by going through this process, and the life lessons they’ll learn from a charitable-giving perspective can segue over to how they choose to manage the inherited wealth.
Another key part of a wealth transfer discussion is financial education. It’s one thing to say you’re going to receive an inheritance; it’s another to figure out what to do with that gift. While parents can set up trusts and have trustees oversee the allocation and investment of funds, you’ll still want to make sure your children understand the stock market, what it means to own real estate, the implication of taxes and so on.
Using an adviser to help educate family members on the nuts and bolts of finances is often a smart approach, especially if it’s an adviser who is already part of the process. They’ll not only be able to impart general financial knowledge but also contribute insights specific to the family’s situation. Advisers can also direct family members to other experts who can help with more pointed education.
There are a lot of moving parts to these conversations, but the key to a successful wealth transfer discussion is to be open, honest and patient. There’s no one-size-fits-all for every family. Being able to have some of these conversations can go a long way toward helping everyone come to a common understanding and see the ‘why’ behind the wealth.