Why is it so important to discuss inheritance with your family members and your heirs, especially if you plan to leave them significant assets?

Many studies show that 70% of multigenerational wealth transfers—passing assets down not just to your children, but grandchildren, great grandchildren, and beyond—aren’t successful, meaning your intentions as the initial benefactor aren’t met.

There’s a phrase that quite often applies: “Shirtsleeves to shirtsleeves in three generations.” The first generation creates the wealth, and then transfers it to the second generation, and it’s gone by the time you get to the third generation.

One of the biggest reasons wealth transfer succeeds or fails is communication. How a family communicates these decisions is very personal; each family has to decide what’s going to work for them.

It’s also important to consider the family’s place in the generational cycle. Is the family in the first or second generation (closest to when the wealth being passed down was created)? Or are they more generations removed? Families four or five generations removed from when the wealth legacy was created—the Rockefellers are a well-known example—have a different dynamic than first-generation wealth creators. Those dynamics shift again as additional generations are born and those wealth creators start to plan for grandchildren, great grandchildren, and perhaps even beyond.

What are some of the things that people might struggle with when they’re trying to start those conversations?

Some of our clients say they don’t want their heirs to know much about their inheritances, while others want to prepare their heirs, but they’re not sure how much they should share. A big concern is if children know they’ll receive a large inheritance, they may lose their drive to be successful in their own right.

Other clients talk to their children about financial matters almost as soon as they’re born. They may not show their five-year-olds bank or investment statements. But they’re talking about the fundamentals of saving: if kids get an allowance, for example, encouraging them to put some away, maybe give some away, and, as they age, to consider how, in addition to saving, they might budget their spending based on expenses for things like their cars or phones.
Some people have more complicated family dynamics to consider. There may be divorces, children from multiple spouses, family members struggling with addiction, or perhaps children with special needs that have to be taken into account. A family member may even decide to give more assets to a child if there are special circumstances, putting the money in a trust where more control can be implemented.

The key again is communication—making sure family members understand why certain decisions are being made.

What recommendations do you have for helping people start discussing inheritances?

We’re big advocates of family meetings. It’s important for families to sit down once a year. It can be as informal as a family dinner conversation, provided there’s a purposeful intention to discuss family wealth and expectations about how it’s to be transferred.

No matter how a family comes together, they should talk through what’s important to all of them, what they value, and what they want to stand for as a group. Being open to everyone’s thoughts—and respectful of everyone’s opinions—helps all the family members build trust in each other. And trust is crucial for successful wealth transfer.

Some families hold their meetings during a group vacation each year. For example, one family I know, including the parents, children, and grandchildren, travels somewhere interesting; most recently it was Mexico. There’s an expectation that every family member will attend. During the trip, the parents have education sessions about the money being passed down. The parents take advantage of the gift-tax exclusion ($14,000 per gifter to each giftee), but they want to know what each recipient is going to do with the gift. Is it being invested? Is the recipient thinking wisely about the long term? The parents are committed to having their children and grandchildren educate themselves about smart financial practices.

Many families focus on family well-being, not only from a wealth standpoint, but to ensure the connections and care continue long after the wealth transfer is complete and loved ones have passed on.

What final recommendations would you like to share?

I love the saying, “You’ve prepared your assets for your heirs, but have you prepared your heirs for your assets?” The preparing heirs piece is so important. Often clients say, “My kids don’t have any interest in investing; they don’t have the inclination.”

There are a few steps you can take to get past that resistance. Educate your loved ones—and yourself—on the basics of financial literacy, setting up your estate to make wealth transfer easier, communicating with your heirs in a way that’s sensitive to your family dynamics, and, for many families, working together toward philanthropic goals. Financial experts, such as those in Vanguard Personal Advisor Services®, can help you with that education.

Notes:
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Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.