Wealth is undoubtedly a privilege, but when it comes to family dynamics, the presence of wealth can be either a productive or a destructive force, and communication can make all the difference.
Research shows that many families have no formal structure or rigorous process in place to communicate effectively about family wealth decisions, and many wealth holders have never discussed how or why they intend to pass on their assets to their heirs. Conversations about wealth can be complicated and emotionally charged, and some families feel apprehensive and ill-equipped to manage those discussions.
This is where a trusted financial advisor, a non-family member who understands both the technicalities of wealth management and the dynamics of their clients’ unique family situations, can help high net worth families tackle the challenge of talking about wealth. In particular, financial advisors can support clients in these discussions by helping them establish a family mission statement, encouraging healthy boundaries and planning for generational wealth transfer. We were lucky enough to gather recently with 60 of our younger clients and children of clients in Montreal to discuss these issues. (The Annual Private Wealth Management (PWM) Next Generation of Leaders Event is designed to educate, connect and empower UHNW millennials. This year, the event was attended by the children of approximately 60 UHNW clients and prospects from 13 countries, with an average net worth of $230M. Speakers included Ndaba Mandela, Co-Founder and Chairman of the Africa Rising Foundation; Wes Moore, CEO of Robin Hood; and Tom Scott, Co-founder, Chairman and CEO of The Nantucket Project.) Here are the biggest themes that resonated.
When families argue: Creating a family mission statement can help prevent family in-fighting around wealth
Often, family disagreements around money are not about the ultimate objective or purpose for the wealth, but about how to get there. A family mission statement can serve as a set of guiding principles to remind everyone about the family’s agreed-upon intentions for their wealth. The process of coming up with the statement is just as important as the statement itself, because it serves as an exercise in healthy communication.
Mission statement discussions can help families address issues and challenges that may be lurking beneath the surface of their everyday interactions. They also help prevent situations where children or heirs attempt to interpret their family member’s intentions after he or she is gone. How frequently a family chooses to discuss and amend the mission statement is up to them, but the most important thing is that they view it as a living document, and revisit it periodically to make sure everyone is still on the same page.
When Millennials get awkward: Younger generations may need help understanding their feelings about wealth in order to establish healthy boundaries in their relationships.
Boundary issues around wealth tend to arise when individuals are harboring negative emotions like guilt, resentment, or fear. For young people, the connection between their emotions and their behavior may not be readily apparent. A college student who feels ashamed of her wealth may pick up the check at dinner with her roommates out of guilt, even if she doesn’t want to, which leads to resentment.
Attitudes and feelings about wealth are often subconscious. Messages that children perceive about money may not align with the principles their parents aim to instill. For this reason, financial advisors should encourage parents to be transparent with children about their own mistakes made and lessons learned. Teaching kids to self-examine and reflect on how their family’s money makes them feel can help them establish a healthy, productive relationship to their wealth, which in turn enables them to set clear boundaries with the other people in their lives.
When the baton gets dropped: Planning for wealth transfer across generational lines is about both purpose and process.
Transferring wealth effectively from one generation to the next is a complex challenge. Families tend to “drop the baton” in one of two ways: technical problems and process failures. Fortunately, both pitfalls are preventable.
Technical problems happen when an individual lacks understanding or makes errors in judgment around the mechanics of transferring wealth. For instance, establishing a grantor trust--for which the grantor pays the taxes instead of the beneficiary--without properly calculating liquidity needs in order to meet the resulting tax obligations.
Process failures arise when an individual’s estate plan does not account for the relationships and feelings of the people involved. A high net worth individual can establish an estate plan that is tax-efficient, charitable and complete--but if it breeds resentment or fails to meet family members’ expectations, the process has failed. For example, transferring assets to two siblings and making the older one a trustee for the younger without taking into consideration their feelings about the arrangement is a process failure. This includes finding solutions to divide shares of the family business equitably; children who are active in the business should receive shares of the business that reflect their commitment to running it. At the same time, the feelings of the children who are not active in the business - and therefore receive fewer shares - must be accounted for, to avoid breeding resentment among family members.
Family finances are complicated, even among families with considerable wealth. Whether it’s facilitating the discussion around purpose and values to craft a mission statement that resonates with the whole family, or empowering parents to talk openly with their children about their own feelings and experiences, a knowledgeable and trusted financial advisor can provide guidance that supports families for generations to come.
David Bokman is Head of Family Offices Resources at Morgan Stanley.
