While Susan sat in the waiting room to meet with her parents’ financial advisors, she was nervous, excited, sad, curious, overwhelmed, and anxious, all at the same time. She knew these guys had worked with her parents for a very long time; Mom and Dad spoke very highly of them, but she had never met them in person. Neither had her brother or sister.
Receiving the call that her father had passed away, just four months after losing her Mom, had come as a pretty big shock. He had seemed so healthy, so vibrant, so alive just a month ago, and now he was gone. When she was informed that she had been selected as the successor trustee of the estate, the person that would have to “handle all of the affairs,” she became even more overwhelmed. She knew Mom and Dad had done pretty well in their years, saved well, planned, invested, even owned a few properties. But she had no idea where to begin to get everything figured out and finalized.
Both her brother and sister had been a little surprised when they found that Susan had been selected to manage the estate. In fact, they didn’t just seemed surprised; they seemed a little skeptical. Susan had been the one to care for Mom in her final year. What did she know that they didn’t? Had she had some input in determining who would get what? Did she encourage Mom and Dad to put her in charge so she could be in control?
As Susan waited to meet with these unknown financial people, her nerves began to kick in. Would she even know what they were talking about? Should she trust them? Would they be able to answer the flood of questions that filled her mind every night as she lay awake in bed?
While Susan couldn’t anticipate what would happen in the next two hours meeting with her parent’s financial advisors, she had zero clue what would happen in the coming months as she attempted to settle her parent’s estate. She had no idea of the complexity in understanding the legal documents that defined what she could and couldn’t do. She had no idea what she would do with the funds she would inherit. But most importantly, she was completely unaware of the strain that would be placed on her relationships with her brother and sister.
Even though they had always gotten along well, over the coming months, making financial decisions together, discussing who would get which assets and personal possessions, what was fair, what would be kept, what would be sold, what would Mom and Dad have wanted – every one of these decisions seemed to end in disagreement. In the coming months, their relationships would fracture in ways that would become irreparable. In the coming years, each of them would have challenges maintaining the wealth they had inherited.
Susan and her family were not a rare unfortunate situation. They were just like 90% of the families in the world. When wealth transfers from one generation to the next, the odds of failure of maintaining the wealth, and the probability that family relationships will fracture, are astounding. If you’re losing sleep when your portfolio declines by 9%, try considering addressing the 70-90% risk that could deplete by 100%! To make it a little worse, while the loss of assets is certainly disappointing, the destruction of relationships is tragedy. Siblings no longer talk to each other, in-laws become out-laws, and attorneys seem to end up benefiting the most.
What’s interesting is that we all know this happens. If this hasn’t happened in our own family, we know someone who has had a negative experience with an inheritance. The money was squandered, the kids now hate each other. We don’t think this is possible with our family, but not only is it possible; it’s likely.
Even more interesting is that we do nothing effective to solve this issue. The problem here is that when asked, most families think the cause of the fracture will be bad investment decisions, a flawed or non-existent trust or estate plan, economic downturn, taxes, or a myriad of other technical or planning breakdowns. Examining the characteristics of families that have failed in transfer, and those that have been successful, it’s quickly learned that these are rarely the issue. In fact, in a study of 3,250 families over several generations, less than 5% of the time was the family failure attributed to poor estate planning, taxes, or any of the other technical solutions that we all focus on. That doesn’t mean we shouldn’t address those aspects of our plan, in fact one could argue that it means that most legal and financial advisors do a pretty good job of preparing our assets for transfer. However, here’s the rub – the problem isn’t the positioning of your assets; it’s the preparation of your heirs.
What are you doing to prepare your heirs for the decisions they’ll face? How often are they making joint financial decisions where they share in the benefits or consequences of the outcomes? Do your heirs have a shared purpose or vision of the future that will help them get through challenging situations? Would they know how to evaluate and select qualified advisors? Can they communicate effectively in emotionally charged situations (like when Mom and Dad die)? Has your plan, and the reason for your decisions been communicated to them?
Overcoming the issues associated with the transfer of wealth is not rocket science. Many solutions are very simple and can be implemented by a family on their own. Others require facilitation or coordination. Regardless of how you approach or solve the issues, addressing them and getting started will make the world of difference. For families looking to protect your hard work and earned wealth, seek understanding of the risks that you face. Evaluate with honesty your own family situation. If a better outcome is important to you, seek assistance from those that can help.