There are many stories of family wealth being ruined by poor planning and excessive tax bills. One of the most notorious involves the Vanderbilts, once the richest family in the US, who built their wealth from a $100 loan into a $100 million business, and then lost the fortune.
Considering how to transfer wealth to the next generation is an important issue and needs time and thought – there are a number of aspects to consider including the emotional perspective, family wishes, logistics and tax-effective solutions.
Our work with clients over the years has led us to understand that this area of financial planning is one of those which is ‘much easier said than done’. But little or no planning can lead to great problems or disappointment. Indeed most of our clients haven’t inherited wealth but have created it through successful careers, sensible financial planning and determination. As a result, their wealth represents a life’s work; somewhat soul destroying when you take into account that 90 per cent of inherited wealth will be depleted by the third generation*.
Yet it remains extremely hard to find the opportunity to have those important conversations about inheritance and how it should be managed moving forward:
- Less than one in three families has had a discussion with their children about the wealth that they will inherit;
- Almost one in five parents of children over the age of 25 says that they have not discussed the family’s wealth with them because they don’t think their children are old enough or mature enough;
- Four out of ten parents over the age of 70 believe that their children won’t be ready to deal with the family wealth until they are aged at least 40*
As well as leaving beneficiaries in the difficult position of having to make decisions themselves, failing to plan is likely to leave heirs ill-prepared and facing potentially significant tax bills.
There are lots of reasons why it’s hard to begin these conversations. It’s hard to face the concept of mortality, but it remains a sad and inevitable fact that it will come to us all. Time to prepare your heirs, and explain your own perspective, ethics and wishes, provides a greater opportunity to leave a lasting legacy. It’s also worth considering that as well as offering solutions for how to manage inherited wealth, these conversations can offer guidance for how your heirs might be able to deal with issues similar to those you’ve faced.
Ultimately not involving your family into your estate plans can create significant problems and upset. By talking through your wishes your beneficiaries will have a greater understanding of their role as custodians of the family’s wealth, better preparing them to protect and enjoy it for years to come.
To discuss any aspect of your estate planning please do get in touch.
Steve Wright, Operations Manager – Executor and Trustee
*The Williams Group and Forbes