My job as a financial planner and wealth manager is to help clients create the most wealth and help them make smart tax, legal and financial decisions. Implicit in this advice is the goal to help clients create richer, more meaningful lives. However, in working with clients over the years, I have noticed one issue that has created a great deal of anxiety. It's one of the biggest fears affluent parents have -- leaving their kids money. Let me go through some of the numbers and then we're going to talk about some ideas as to how we can help the parents and also the kids.
Here's what else we know. In a separate survey that was done just last year of 206 parents with $5 million dollars or more of investable assets, 91% of them said they were leaving all of their money to their kids. What we have here is a bit of a problem because nearly half of the parents in a separate study said that they were concerned about leaving them too much money. In fact, 46% said they were quite concerned about leaving their children money.
What’s more, in another survey [opens PDF] that was done with 2,900 investors, researchers asked parents, "Are you talking to your kids about money?" And sadly, 25% of the parents said they have not talked to their kids because they don't want the kids to feel entitled, and another 33% said they haven't told their kids because they don't want their kids to count on the money.
This is the familiar ostrich approach of sticking your head in the sand and hoping that the problem goes away. Unfortunately, the problem doesn't go away, and often it gets magnified.
The following is an abbreviated and edited transcription of an audio interview. You can listen to the full interview.
Robert Pagliarini: "I'm very grateful to have Todd Angkatavanich in this discussion. Todd is a partner with the international private client law firm Withers Bergman LLP, and he co-heads the firm's Trusts, Estates and Charities group in the United States."
"Todd, you've heard me go through some of these statistics and I know you're very familiar with some of the research that's been done as far as how much money is being transferred and the parents' reaction. But did any of these statistics surprise you?"
Todd Angkatavanich: "There is a real disconnect, where you have a lot of the senior generation folks who plan to, in some sort of manner, leave all or most of the assets down to the children and the younger generations. But at the same time, they're very concerned about what that money is going to do to those children, and trying to strike that balance is really what is at the heart of what we do as planners. The balance here is trying to enjoy the fruits of your labor while at the same time being able to instill some sense of a feeling of stewardship versus a feeling of entitlement at the next generation and the younger generations thereafter. It's a constant struggle."
Pagliarini: "I think that's absolutely key. I think you really nailed it there. One of my favorite quotes -- and I share this a lot with clients -- it is, of course, Warren Buffet's quote where he said he wants to leave his kids "enough money that they can do anything, but not so much that they can do nothing." The last thing that they want to do, and this is what keeps them up at night, is give their kids money and have it "ruin" them. That's often the phrase that I hear, is that it will "ruin" their lives. And so with your work with your clients, what is that first discussion that you have with a parent who has a tremendous amount of wealth, and yet is a little concerned about passing it on to their kids?"
Angkatavanich: "It's an initial conversation, but it's an ongoing conversation. Because a lot of times, this planning involves tax efficiency, but it's layered on top of these sort of personal dynamics. Particularly in the situation where you have, let's say, the parent who has built this wealth primarily. Let's call it first generation wealth. Now, through a combination of factors where they've built the wealth at this generation, where maybe for the past five generations or ten generations or even more, the family line may have been of relatively modest wealth. Now, in one generation you've changed the family's financial footprint, potentially forever, or at least for hundreds of years, perhaps. That's a very meaningful thing. And while in some sense it's a nice problem to have, at the same time it's a lot of responsibility."
"Now, trying to strike that balance to try to make sure that the next generation, and then the generations that come after that, have some sort of governance structure in place so that they can benefit from the family largess, but at the same time benefit from it in a way that it's going to be protected and the spigot's not going to be turned on at such a rapid rate that it's going to end up destroying them."
Pagliarini: "That's often the big fear, that having too much money will allow the kids to basically do nothing. The thought is if they let their children know how much they have, they may not want to go to college, they may not want to study as hard as they would, because they know that, at the end of the day, they're going to have this inheritance that's going to come in and save them. Do you find that you, in working with clients, they have those similar fears?"
Angkatavanich: "I think it runs the gamut. Quite honestly, I think the approach of saying, "We're not going to start a conversation with the children and we can always do it down the line. We'll do it in five years or so," I think you're just putting off the inevitable. I think the earlier you can start that dialogue with your children, the better. And I think that dialogue starts not with talking about specifics of the money, "We have this trust and we own this entity or that entity," but rather, starting early with, again, going back to the notion of instilling values and a family vision."
Pagliarini: "What have you found in working with your clients that has been beneficial in instilling those values and that sense of responsibility?"
Angkatavanich: "I think the ideal situation is where the family has meetings and they start to introduce the children to some of those meetings, maybe even the meetings with my colleagues and myself and other folks on the team. Hopefully, what you have is a situation where the children have been instilled with these kinds of responsible values from inception, or early on, so that this is really more of a natural extension. I've been in a number of these discussions where the next generation is very interested in being involved in these discussions. They get the sense of responsibility and preservation and stewardship. I think a lot of times you do have a very positive experience starting to introduce these concepts to the next generation."
"I think you take your time, generally, in introducing more specifics, so that it's a gradual thing. The other thing that we can sometimes get involved with is certain family entities, for instance. A lot of times, families might have different investment partnerships or LLCs or things like that. Maybe they'll have trust structures where they have committees. They'll have trustees. They'll have protectors. They'll have investment advisors. Those are often opportunities to introduce children or perhaps grandchildren to some of these by undertaking some sort of a role. Maybe some sort of a role involving making investment decisions, for example, or perhaps in connection with the family's charitable endeavors. Maybe the child can be involved in some sort of committee that decides what charities to support. That's a general and gradual way to get the next generation involved with notions of preserving and managing the wealth. Being involved in distributions to other folks, perhaps charities, is a way to also instill that thought that it's not just about your entitlement. It's about sharing, to a certain extent, and responsible management of it."
Pagliarini: "What I've found, in working with clients, and their kids, specifically, is that they've expressed that they just feel out of their place in certain meetings. They understand that there is a certain amount of wealth, but it's not a visceral connection. They don't have a visceral connection to it. It's almost elusive to them. And so I think, if you can get them involved, get them participating in one way or another -- like you suggested, maybe on a committee."
"I had a client who had a personal foundation and they had to donate 5% of the balance each year. Each child got one percent and each parent got one percent that they could donate. And this got them involved. They knew they had X amount of dollars and they had to find charities to give the money to. It allowed them to have ownership and to connect the dots a little bit, rather than just seeing numbers on paper."
Angkatavanich: "I think whenever you can start to get buy-in from a big-picture perspective of the next generation, that's going to be all the better. I do think that a lot of times, people are maybe hesitant to start going down this path because they're not exactly sure what's going to be involved and where it's going to lead. I think there's complexity involved in this type of planning, because there are tax implications that often get worked into the conversation. There are nuances and decisions and things like that. I think sometimes people can get into a state of what we might call "analysis paralysis" and just say, "This is pretty complex. We'll put it on the back burner until next year, until five years." I think that can be a mistake, because this is an ongoing process."
"For better or for worse, when you have successful families that have generated significant wealth, just by virtue of "financial gravity" alone, those assets are going to make their way down to the second generation and perhaps the third generation, unless you end up leaving the overwhelming bulk of it to charity or you lose it. Right? The assets are going to make their way down. I think a lot of the folks that we represent, people are very well-intentioned and they're very thoughtful about trying to create governance structures. And doing it sooner rather than later is always going to be better."
"Because the Analysis Paralysis problem is, if you get stuck because of all the complexity and say, "We'll just put this off," it's really not going to solve anything. If there's some sort of triggering event -- if someone passes, for instance -- and the assets make their way down, one, it's going to be less tax efficient in most cases. Half of it might end up going to the government. But two, and perhaps more importantly, if you haven't affirmatively created some sort of governance structure ahead of time, those assets are just going to make their way down to the children, probably in a significantly less protected sort of way. And when I say "protection," I mean tax protection, protection from creditors, protection from divorcing spouses potentially, and, perhaps most of all, protection from the child's own indiscretions. Being able to be proactive in advance and create some kind of governance structure is always going to be a better thing. Failure to do that really just ends up creating the very type of negative circumstance that you're hoping to avoid altogether."
Pagliarini: "This is the area that I have focused on for many years, and that is the sudden wealth. I often see what happens when parents don't have the conversation and they don't have that structure in place. I think the concern for a lot of parents is that, "If we have this conversation or if I pass the wealth down, it might ruin our children." The fear is it will ruin their ambition so that now they don't have to work for it. All I can say is that, by not having the conversation, you are not helping the children because the money through financial gravity will ultimately reach the children. They're either going to be prepared or they're not going to be prepared. By postponing the conversation, it's not helping them in the long run."
"I would say, "Get help!" Parents who may be listening might think to themselves, "I just don't know how to approach this. I've never had this conversation with anyone before." What I would suggest is, work with your advisors who have these conversations every single day."
Angkatavanich: "I wholeheartedly agree. And again, that whole notion of financial gravity, the assets will make their way down at some point or another. At this point, you can create the sort of governance mechanisms, through trusts and entities and other types of related types of structures, so that you can have some measure of control about how those assets pass down, rather than just by default. So, again, planning ahead of time is always going to be better."
Pagliarini: "Todd, thank you so much for coming on, sharing your wisdom."
The following was an abbreviated and edited transcription of an audio interview. You can listen to the full interview.
Robert’s latest book is The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth Into Lasting Wealth.
Connect with me on Twitter @rpagliarini, my financial planning blog, or email me. This discussion is not intended as financial, legal or tax advice, and cannot be relied upon for any purpose without the services of a qualified professional.
