Is Your Family Inheritance-Ready?

According to a 2016 study by Benjamin Tal of CIBC, over the next 10 years, Canada will experience the largest intergenerational wealth transfer in our history with an estimated $750 billion changing hands. The wealth that many Canadian families have accumulated over the last few decades has come through hard work, combined with prudent spending, and regular investing while proactively managing overall risk. So how long does wealth usually last in families? Unfortunately, not that long. According to the Williams Group, 70% of wealthy families lose their wealth by the second generation; by the third generation, it is 90%. Several well-known sayings refer to this issue including “Shirtsleeves to shirtsleeves in three generations” and “the father buys, the son builds, the grandchild sells, and his son begs.” Today, given that Canada will face our largest ever intergenerational wealth transfer, a key question that all families should discuss is “how do we increase the probability that the wealth we have worked so hard to accumulate benefits multiple generations of our family, rather than being squandered away?”

When I am working with families facing these challenges, there is a three-step process that, when used successfully, can help to prepare your loved ones to receive their inheritances:

#1 Understand What Can Go Wrong

Intergenerational wealth transfer can have many pitfalls – it is important to understand what can go wrong and identify areas of risk for your family. Most often, when inheritances are squandered, it is due to excessive spending and poor investment decisions. I suggest thinking about how this applies to your own family and answering the following questions: How well do your children manage their money? What is their mentality when it comes to dealing with money generally? Are your children prepared with the knowledge to invest wisely? Answering these tough questions will provide some direction as to which areas to focus on.

#2 Create A Culture Of Financial Education In Your Family

Educating your family about financial issues is critical, and I cannot overemphasize the importance of this. Today, most people’s lives are busier than ever, and as a result, it is difficult to set aside the time to review their finances on a regular basis. Ideally, you (and your significant other) would sit down and review your financial situation on a quarterly basis – once your children are at an age where they can begin to understand finances, I suggest getting them involved in these meetings, say semi-annually to start with. Have a family finance session and make it fun by incorporating a family activity or meal afterward. These sessions are a phenomenal opportunity to begin passing on your financial knowledge to your children. If you work with a financial advisor, you can ask your advisor to provide some age appropriate teaching materials, or even have your advisor facilitate a session for you and your family. Some suggested topics include budgeting, compound interest, investing in stocks and bonds through mutual funds and ETFs, the role of diversification, and some of the common mistakes investors make. You could also discuss some of the best (and worst) financial decisions you have made, and what you learned. I am a firm believer that a terrific way to learn is through the mistakes of others! Eventually, aim to provide each child with some capital to invest (the dollar amount does not matter as much as the experience). Have them make the decisions, invest the money (feel free to provide some guidance if asked), and follow the investment regularly. Allow them to experience the joy of making a return, but also the consequences of making a poor investment. No matter the return of the investment, this experience will be invaluable for them and go a long way towards teaching responsible financial behaviour.

#3 Effective Family Communication Through Regular Family Meetings

In today’s busy world, regular family meetings are a critical part of sharing knowledge and wisdom, and staying connected. These meetings are a wonderful way to promote communication in an open manner, review family values, and discuss important long-term issues. In my experience, open and proactive communication is crucial to an effective intergenerational wealth transfer plan. Be bold and talk about your will and wishes as to what your children will do with the wealth they will receive. A terrific book to help you with developing an intergenerational wealth transfer plan is Willing Wisdom, written by Dr. Thomas Deans. In his book, Deans provides seven thought-provoking questions that families should ask and discuss. Amongst others, Deans suggests discussing how the family’s wealth has been created and asking children how an inheritance would help them, the family, and the broader community. At its core, the family meeting is an opportunity to pass on your values, wisdom, and experience to your children while also getting across the message that with wealth comes responsibility.

By following the three-step process discussed, when your children do inherit, they will be well prepared to be effective stewards of the capital that you worked so hard for. To enhance the probability of success for your family, be a good financial role model and be open to talking about money. Make sure your children learn to develop and stick to a budget, as well as invest successfully. If you can, give them some capital to steward with your guidance so they have that experience. In general, communicate proactively about your wishes so that there are no surprises when the inheritance event occurs.

Feel free to also lean on your financial advisor to help you through this process. In my experience, many consumers don’t realize that financial advisors can deal with more than just investments. While many advisors focus solely on investments, there are advisors who aim to provide a comprehensive wealth management experience that includes guidance in many areas like investments, insurance, retirement planning, legacy creation, and intergenerational wealth transfer. Such advisors are really focused on making sure that every room of your financial house is in order. Advisors can even initially facilitate your family meetings or meet with your children to educate them about financial issues. Advisors are there to help – the key is finding the right advisor who can help you achieve your family’s goals and objectives.

Successful wealth transfer across generations is possible with long-term planning. If you need help with this, make sure you seek out the appropriate professionals. While it takes significant work to create wealth, it also takes significant work to keep it.

Shamez Kassam, MBA, CFA,Financial Advisor

Raymond James Ltd. Author of Your Money’s Worth – The Essential Guide to Financial Advice for Canadians

References:

Tal, Benjamin (2016). The Looming Bequest Boom – What Should We Expect?

Williams, Roy and Vic Preisser. 2003. Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values. San Francisco, CA: Robert Reed Publishers

Raymond James Ltd., member – Canadian Investor Protection Fund