Encourage clients to discuss estate plans with their families to avoid negative consequences
Many wealth management professionals spend a large portion of their time and energy designing elegant, tax-efficient estate plans for their clients. This service is a key component of any comprehensive financial management portfolio. All too often, however, advisors omit a vital part of the service — assisting clients with the sensitive task of discussing the plans with their families. In many cases, negative consequences result. While there are reasons for this phenomenon, there are ways to mitigate the negative outcomes and seize an opportunity to serve clients more broadly and deepen the advisory relationship.
Shirtsleeves to Shirtsleeves
It's a sad fact that, despite the best intentions, most families fail to sustain wealth across generations. While it's easy to assume this failure results from poor or no planning, the reality is that lack of communication and trust, as well as lack of proper preparation of heirs, are the primary causes of wealth disparities across generations. In Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values (2003), authors Roy Williams and Vic Preisser found in a study of 3,250 families that 70 percent of them failed to sustain wealth across generations. Errors in financial planning or taxes accounted for less than 3 percent of the failures. This is often surprising to wealth management professionals who devote their careers to designing technically sound estate plans.
Fear and Worry
Clearly, the stakes are high. Why, then, is communication so difficult? The answer, most often, is fear. Clients worry that informed heirs will feel “entitled” to the wealth and become spoiled, unmotivated or isolated by envious peers. They're concerned that children will reveal details to outsiders who will exploit the knowledge to harm the family or that disclosure will trigger conflict, such as sibling rivalry, years before the estate plan is even relevant. Clients also worry that disclosure today will limit their flexibility to make changes in the future.
Sadly, these fears aren't entirely unfounded. Stories abound of children who know about an estate plan and try to have a client declared incompetent before he can change the estate plan (for example, to favor a charity) or make even more dastardly attempts to accelerate their inheritance. No less chilling are tales of second spouses who manipulate or exploit clients to the detriment of uninformed children from prior marriages. The point isn't to compare horror stories, but rather to call attention to some of the more common, nonsensational ways in which lack of communication can create lasting problems.
Two Common Scenarios
In our experience, failing to communicate takes two very different but equally troubling forms. The first is when failure to communicate leaves highly responsible children with an inadequate understanding of their parent's desire that the children use the family wealth to make their lives more comfortable for them than it was for their parents. The client in this case might be sympathetic to John Adams' famous quote: “I must study Politicks and War that my sons may have liberty to study Mathematicks and Philosophy … Commerce and Agriculture, in order to give their Children a right to study Painting, Poetry, Musick ….”1 A client who fails to clearly express this intention allows each generation to underestimate its ancestors' generosity and unnecessarily repeat its hardships.
The second involves clients who are determined that children don't use their potential future wealth as a justification for laziness. These clients are often surprised by the extent to which uninformed children overestimate the amount of the wealth. In these cases, disclosure provides a reality check for children who are waiting for an inheritance as a lottery that never quite materializes.
Discomfort With Wealth
Yet another problem caused by lack of communication regarding wealth transfer intentions is the perpetuation of feelings of embarrassment and discomfort with wealth. Wealth can be a very sensitive topic for people and discussing it honestly with others is often extremely uncomfortable.
Lack of communication reinforces negative messages that children receive about wealth. These messages begin at a very early age and can come from anywhere, including less fortunate peers, other family members, politicians and the media. Without open communication about the social and emotional implications of having wealth, inheritors may feel ashamed of or embarrassed by their wealth. Children's self-esteem is at risk too, as parents' secrecy about the family's wealth may imply distrust.
Interestingly, children aren't the only ones who may have negative feelings about wealth. Clients themselves may not have a healthy sense of wealth ownership, which makes it even harder to break the silence. They may not be clear about the underlying motivations for their estate plans; as a result, they may not be willing or able to clearly communicate with their advisors. The resulting plan is likely not fully aligned with the client's true intentions, leading to even more ambivalence about discussing it.
To understand how feelings of embarrassment can cloud estate-planning decisions, consider how uncomfortable clients can be when discussing the underlying reasons for estate planning. Some motives, such as the desire to make a positive difference in descendants' lives or giving based on family tradition, are easy to articulate and share. Others, such as a desire to control the decisions of heirs, are less readily claimed. In the case of reasons not to give or to do so with strings attached, it's often easier to talk about concerns over spoiling children than to admit an inability to confront one's mortality or overcome persistent and deep-seated financial insecurities. A thoughtful advisor can help clients honestly assess these motives without judgment and assist the client in developing a plan that better aligns actual giving behavior with those motives.
The Advisors' Dilemmas
Wealth management professionals must also consider their own hesitations to engage clients in conversations about open communication. Advisors are often attracted to the field of estate planning, at least in part, because of their own attitudes concerning wealth. The estate planning attorney's focus on confidentiality and attorney-client privilege raises understandable anxiety about encouraging and participating in intra-family discussions. Given the nature of their training and sometimes their personality types, many advisors are more comfortable focusing on ascertainable results rather than process and on analytical subjects rather than feelings.
In addition, the pressures of modern professional life — applicable to attorneys and wealth managers alike — often discourage advisors from initiating conversations about communication issues. Advisors who charge by the hour may have concerns that it will be difficult to bill for time spent resolving “softer” issues. Advisors who charge fixed or asset-based fees may have concerns that introducing more open-ended communication issues might bog the relationship in an unprofitable morass. These fears are generally unfounded. Advisors are in a unique position to help clients see that a well-crafted plan is only the beginning of a successful strategy for multi-generational estate planning. Clients who overcome their hesitations and help their clients to do the same will reap better rewards.
How to Help?
Over time, experienced estate planning attorneys develop an intuitive feel for advising their clients about when, what and how to communicate their intentions to family members. This intuition is a direct reflection of the diverse intellectual and emotional skills required of an accomplished estate planning professional. Nonetheless, the unique perspective of a multi-family office, whose advice is more general and less technical, provides useful perspectives that may help refine the approach to these issues. At GenSpring, we've found that it's useful for the client and advisory team to take a collective deep breath and a deliberate step back to view the big picture: that open communication is one part of the much broader analysis of the client family's non-financial makeup.
This begins with discussing and gaining awareness about the client's “money history.” Five core issues come into play. First, what were the client's experiences with money growing up and how did this impact him? Second, what's the client's current attitude toward wealth? Third, what are the client's beliefs about how money should be used? Fourth, what are the client's beliefs about how money affects relationships? Fifth, what are the client's initial thoughts about communicating about money to the family?
Determining their “money history” can help clients consider what messages they're passing on to their heirs, consciously or otherwise and whether some of those messages should be revisited. The objective is to learn what has worked in the past and what the client wants to do differently. Clients who perform this exercise will see the importance of direct communication with family members and will look to their advisors to help them determine when, what and how to communicate.
When? Quite simply, the best time to encourage clients to talk to their families about their estate plans is “now.” Ideally, this communication is a process, not a one-time event, and it needs time to unfold. The most effective approach is to introduce basic financial concepts when children are young and then introduce more sophisticated topics at appropriate ages. The nature of familial relationships will affect what's said at any time, but additional communication is usually helpful at any stage. Emotional issues that underlie the entire topic of wealth transfer will need to be identified and fully expressed so that content can truly be absorbed. Technical issues, such as taxes and legal concerns, will likely be unfamiliar to at least some family members and may take time to sink in. Overcoming misconceptions left by powerful negative messages about wealth may require consistency and repetition. The most successful families view the communication process as iterative and learn from the reactions of family members at each stage of the process.
What? Clients who center communication around shared family values have the best experiences. The “money history” discussed above is a good place to start; it's impossible to help a client communicate values regarding wealth until those values are fully understood. Productive discussions about shared values include those that reveal the meaning of money to each family member and celebrate the history of both the family and the wealth, putting a special focus on the hard work and accomplishments of those who created the family fortune. Heirs who understand their family history and values can more readily see the estate plan as a manifestation and continuation of those values. They can accept the plan more authentically and are more likely to adopt the family values in their own subsequent planning.
At any stage of the process, it's always advisable to have clients emphasize to their children that the current wealth transfer plan can, and likely will, change and that heirs' expectations must remain fluid to avoid future disappointment.
How? Once the client agrees to communicate early and often and to center the discussion on shared values, the following guidelines can help to facilitate the process. In most cases, it's best to start with an overview of the plan so that heirs have an opportunity to react, perhaps first emotionally, but ultimately more thoughtfully, to its overall themes. Clients should share details with children as they mature and as they demonstrate, as part of the ongoing dialogue, that they can handle the information responsibly. Formal, structured conversations are typically more productive, especially when the client communicates technical information. Formality also reinforces the importance of family values as part of the wealth transfer plan. Nonetheless, the conversation should be very open and the client should encourage family members to offer authentic reactions and ask uncomfortable questions. Finally, and not surprisingly, it often helps to have the client's advisors present for at least some of the conversation. This reinforces the seriousness of the discussion, permits real-time clarification of technical issues and allows heirs to form their own relationships with the advisors.
The execution of a prenuptial agreement provides an ideal example of both the discomfort and value of open communication. This sensitive topic raises a powerful dilemma for the client and the advisory team. The law favors agreements that are signed sooner rather than later and that make full and adequate financial disclosure to a child's fiancé. Parents who feel strongly that a prenuptial agreement is necessary must promptly make meaningful disclosure to the child who's planning to wed. Parents who hesitate because of potential discomfort don't give the child adequate time or information to consider the topic thoughtfully and risk having the child resist or undermine the process. Worse, the child may reluctantly comply but remain resentful, ultimately damaging the overall family relationship.
Now consider the client who has discussed family wealth throughout the child's life. These parents have carefully considered the impact of messages they themselves received about wealth and marriage and can examine the impact of wealth on their own marriages, consider the impact of any guilt and shame that the child might feel about the family's wealth and understand what gaps, if any, remain in the child's financial education. Such parents may already have become more comfortable addressing the many emotional issues raised by the introduction of a new spouse into the family. In this case, the prenuptial agreement can be a logical and accepted extension of the family's well-established wealth philosophy. It can, in fact, offer a useful opportunity to reinforce the family's wealth values and help carry them into the child's marriage and the next generation.
Not an Easy Process
Successful wealth transfer is an achievable goal, but it takes work. The long-term process involved in establishing a successful wealth transfer plan begins, rather than ends, with crafting a technically effective plan. Clients willing to engage in thoughtful communication of their estate planning intentions to their family can better understand their own underlying attitudes about wealth, consider how their intentions might affect their family and provide explanations or make changes, if appropriate. The process may not be an easy or emotionally painless journey for clients, but the results will be worth it. At best, the communication can strengthen family relationships and facilitate the perpetuation of the clients' values into future generations. Clients will have peace of mind that they have openly and objectively communicated their wealth transfer goals to their heirs. Advisors who assist clients with the process can broaden and deepen their relationships with clients, form relationships with multiple generations of client families and, most importantly, better help clients achieve objectives that they may not be able to express in more conventional estate planning conversations.
- Letter from John Adams to Abigail Adams, May 12, 1780, Adams Family Correspondence: The Massachusetts Historical Society, www.masshist.org/adams/quotes.cfm.
David Bokman is the chief wealth advisory officer in the Atlanta office of GenSpring Family Offices and Jill Shipley is director of next generation education in the Jupiter, Fla. office of GenSpring Family Offices