Talking About Money � The Last Taboo

Warren MacKenzie Sadly, it is estimated that in more than 50% of all cases, a large inheritance is likely to cause more grief than happiness for the heirs. The most likely cause is a lack of communication between parents and their children. Other causes include surprises when the will is read, heirs perceiving unfairness because they don’t understand why the parents wrote the will as they did, heirs not having the experience or maturity to manage investments, or not having the moral values and work ethic necessary to have a happy and productive life — with or without the inheritance.

One of the best ways to avoid causing grief, and lawsuits to challenge the will, is to transfer the wealth to the next generation in stages. This way, the parents can enjoy seeing the good that they can do while heirs receive some help when their kids are young and are most in need of help. A step-by-step transition will reduce the tax burden and simplify the administration of the estate. It also allows parents to see if the heirs are handling the money wisely. If they’re not, the parents will have an opportunity to change the will, thereby protecting heirs from the remorse and the regret that comes if they waste a large inheritance.

The discussion and the immediate help is good for the heirs because they can understand why the parents made the decisions they made, they may receive investment management experience, and they may have more opportunities to create memories with their own children instead of working and saving more than was necessary. In other cases, where the inheritance will be smaller than expected, the discussion will prevent heirs from incorrectly assuming a large inheritance would make it unnecessary to work and save. Giving the inheritance in stages avoids the situation where 50- or 60-year-old heirs receive a large inheritance and say “I don’t need this money now—but I certainly could have used it when the kids were young. I wish my parents trusted me enough to have a conversation”.

Tom Deans, author of Willing Wisdom, estimates that 90% of heirs don’t have a good idea as to the amount they can expect to inherit. For these families, where money is not a topic of discussion, here is an idea for an email to break the ice and start a conversation.

Dear (Children)...

We’ve been reading, and we’ve learned that, in more than 50% of all cases, when estates are passed to the next generation, things don’t work out as the parents hoped they would. This means that after the estate is settled either siblings are no longer speaking to each other or that no part of the inheritance makes it to the 3rd generation.

We love our children and we don’t want that to happen to our family when we’re gone. The experts say that one of the best ways to reduce the possibility of this happening is to talk about it and perhaps distribute some of the estate now - from our warm hands rather than from our cold hands later!

We’ve prepared an Essential Capital / Surplus Capital^™ financial plan and it shows that we do have a ”surplus”. So, we’ve decided it might be a good idea to talk about this and perhaps distribute a portion of the ”surplus” now.

By having a conversation and distributing some of the estate now we’ll reduce income tax and probate fees, you may get some experience in managing money, and by knowing how much you can expect, it will make it easier for you to plan your lives. To get the conversation started you can ask us any questions you like— and we would like to ask you the following questions:

Would it be helpful to receive part of the inheritance now, rather than when we both pass away?
So that you can plan your life— would it be helpful to have an estimate of the amount you might eventually receive as an inheritance? If we use life insurance, we can easily determine this amount.
If we distribute some of the estate now— how would you use it? Would you use it to pay bills, live a richer lifestyle, help educate children, start a business, add to your retirement fund, or something else?
Are you depending on an inheritance for your long-term financial security?
Do you think that to be fair the estate should be divided equally regardless of the net worth of the heirs or do you think it would be fair if the heirs with the greatest need get a larger share of the estate?
How would you feel if we placed your inheritance in a trust fund where you would be able to get an income for life, but you would have no access to the capital?
Do you think we should appoint a corporate executor or will one of you take the job?

We also want you to know why we made the decisions that we’ve made. And, if we can have a good family discussion and if we all agree a different plan will increase the happiness for all concerned, we’re prepared to change our will.

...Signed - Your Parents!

If parents don’t feel comfortable suggesting that they have this discussion with their children, they should recognize that there is a potential problem— either with their relationship with their children or with the children not having a good work ethic and sense of values. This is not a problem that is likely to go away without some work. Parents should be prepared to spend as much money on family counselling and a family wealth transition coach as the heirs might otherwise spend on lawyers to contest the estate. One of the worst things you can do to your children is to die without a will. The second worst thing is to avoid a discussion of something that has the potential to cause unhappiness and tear the family apart.

Some parents will come up with reasons to avoid or postpone this discussion:

They fear that heirs might not work as hard if a large inheritance is expected, or if they expect a large inheritance they might be wasteful and frivolous with their money.
The child is unmarried or under the age of 25 and is too young to have this discussion.
They fear that easy money may make a child more focused on material things than on relationships and developing a work ethic.
They don’t want to provide any help to in-laws or a potential in-law.
In the past, when this topic was discussed it caused arguments and hard feelings.
Parents want control and they believe they will have more control if their heirs are hoping to receive a larger inheritance.
If there is no discussion, parents might have more confidence that their child’s spouse is not there just for the money.
Children might work harder and save more for their own retirement if they have no idea how much they might get in an inheritance.
It avoids what might be a difficult and emotional conversation.

However, if you don’t talk about it these are some potential problems:

Children may work harder than necessary and longer than necessary to achieve their goal of financial independence and they miss an opportunity to enjoy the journey and create memories.
Financial stress and insecurity (which would disappear if the children knew there was an inheritance) may contribute to a marriage problem.
The lack of communication and later the surprise when the will is read may contribute to a ”wealth transition” failure with the children never speaking to each other after you are gone.
Young adults who have not learned the basics of financial management do not get the chance to learn from you some of the lessons you’ve learned about managing money.
The family does not get to enjoy the happiness that can come from a legacy which includes family discussions about the family’s support for different charities.

This is the type of discussion that usually occurs where wealth is successful transitioned to the next generation. In cases where the will is contested or where the inheritance causes more grief that happiness— this type of discussion almost never takes place.

Warren MacKenzie – Head of Financial Planning with Optimize Wealth