To Prepare Heirs for Wealth, Don't Hide the Truth

For parents in families of multigenerational wealth, there are a lot of perceived third rails when it comes to discussing family wealth with your children. You may be afraid that when your child learns they stand to inherit a substantial amount of money, they will drop out of college and focus full-time on their rock band. Or that if you tell them about the family’s wealth, they will use it against you when you set limits to the help you’re willing to provide when they want to start a business. Another concern might be that an unscrupulous acquaintance or significant other may catch wind of their not-too-distant inheritance and try to take advantage of them.

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The patriarchs and matriarchs in families of wealth have likely lived through many challenges themselves and may seek a middle road between keeping their kids in the dark and spilling the beans too early and without the proper planning. But this assessment is missing one key element — what role do their children wish to play in creating their own futures?

Establishing trust and getting buy-in

I’ve worked with many families to bridge the gap between the different perspectives and needs of heirs, parents and grandparents. And beyond the technical aspects of estate and tax planning and investment management, another crucial component of successfully transferring wealth is clear, two-way communication between parents and their children. This can be valuable on many levels, from getting heirs to buy into the family vision to strengthening personal relationships between parents and children by demonstrating trust through honesty and vulnerability. But in many instances, the benefits of having intentional and honest discussions with your heirs about family wealth are even more straightforward than that.

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Mixed signals can lead to lost opportunities

While some heirs may be comfortable viewing themselves as exactly that, heirs, many others have different aspirations. Consider an individual who was motivated to take over the family business — he excelled in school and spent his summers working his way up the ranks as he earned his MBA. Understanding his parents’ vision for the business would be of critical importance as he builds his plans for his future. If the business was profitable and growing, the plans for it would, nonetheless, be far from a foregone conclusion, even if it seemed logical for the hardworking son to take over when his parents stepped aside.

When it comes to the future of a family business, there are many factors the heir may not be aware of unless he and his parents have made it a point to discuss them. Perhaps the goal for the business was to reward longtime employees and key stakeholders with ownership rights. Or, alternately, the goal could have been to develop the business into an attractive acquisition target so the stakeholders could cash out and walk away. The heir would benefit immensely from knowing what his parents’ plans for the business are, whether they align with his own aspirations or not.

Even if the parents planned on naming the company’s long-standing sales leader as the new CEO, sharing this information would allow their son to finish off his degree with his eyes open, rather than being greatly disappointed should the conversation occur later on, after other opportunities had passed him by.

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Withholding information until the perfect moment means ceding control to circumstance

In a different scenario, one in which the parents had inherited a $25 million estate and their children would be the primary beneficiaries, transparency would be equally important. Perhaps one of the children had dreams of becoming a doctor. Because she grew up in a “comfortable” household with staff to care for the residence and a membership at an exclusive country club, she might assume that once she got into medical school, her tuition, housing, transportation and spending money would be provided, not only during her undergraduate studies, but throughout medical school and her residency.

Assuming her parents were working with a fiduciary financial adviser and had stuck to an integrated planning and investment management strategy to preserve the family’s wealth, the estate would still likely be impacted by taxation, and certainly by division between the heirs, when the transfer of wealth occurred. And prior to the transfer of wealth, there are many other factors that could impact the amount of financial support the future doctor would receive as she advanced through her education and training. Her parents may have unrealized philanthropic intentions, extensive retirement plans, or the desire to set aside significant sums for their grandchildren.

Without having conversations with her parents dedicated to discussing the family’s wealth and how it will be distributed, the support she will receive now, and in the future, could be far different than what she imagined. If her parents had no intention of providing ongoing spending money and housing, their daughter’s plans would be greatly affected. And there may be significant strain on their relationship if this information is revealed as a result of circumstance, rather than through an intentional, two-way conversation about her future. But armed with this knowledge, she could make informed decisions about where she would study, which cities she could realistically target for residency and what her housing options would be during and after residency.

Heirs can have a wide range of motivations to understand their family’s wealth and what they stand to inherit, but in our experience, most of them center around planning for their future. And as a child grows up and begins to exhibit more maturity and responsibility, parents should identify opportunities to not only pull back the curtain, but to learn about their children’s aspirations, and what they wish to accomplish. And while some parents may fret over sucking oxygen away from the fire driving their heirs to be self-starters by talking about inheritance, that’s based on an assumption.

The best way to gauge an heir’s motivation and drive would be to talk to them about it. Not only will it provide an opportunity to learn how things look from the child’s perspective, it will allow you to provide concrete information they can use to plan for their future.

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Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Matt Helfrich is President of Waldron Private Wealth, a boutique wealth management firm located just outside Pittsburgh, Pa. He leads Waldron's strategic vision, brand and value proposition and overall culture of the firm. Since 2002, Helfrich has served in a number of roles including: Chief Investment Strategist and Chief Investment Officer, where he was instrumental in creating and refining Waldron's investment discipline.