Managing sudden wealth: Preparing your heirs to inherit

On Behalf of | Apr 9, 2018 | Estate Planning, Trust And Estate Administration |

The Williams Group conducted a 20-year study of high wealth families to review the transfer of wealth from one generation to the next. The study found 70 percent of families lost their wealth by the second generation and 90 percent by the third. Surprisingly, the failure to hold onto the wealth did not occur during the transfer, but rather afterwards when heirs were unable to keep the money.

Avoiding the topic

While 82 percent of Americans report feeling comfortable discussing money with their children, less than half told their heirs what they will inherit. The top reason for not discussing inheritance specifics is fear the knowledge will negatively impact a child’s future choices. Both parents and grandparents worry that the prospect of a future financial windfall will damper a child’s ambition. However, by not preparing an heir to inherit the risk of squandered money increases.

Introducing money management early on

For parents with young children, introducing money early on ingrains lifelong financial responsibility. Simple lessons about spending, saving and giving pave the way for in depth discussions about budgeting and wealth management as the child ages and matures. Starting with a small allowance at a young age teaches the child the importance of living within their means. An early introduction to wealth management teaches the child that money is only a resource and not a substitute for strong core values.

For older heirs, consider using a financial test. If you have concerns about how your heir will handle a large sum, starting them off with a smaller fund is practical. Watching how they use the money will allow you to identify areas of concern and lacking financial acumen.

Alternative inheritance strategies

Instead of leaving a large inheritance outright, consider attaching distributions to incentives or life events. For instance, distribution could reward educational achievements or pay for a wedding or first home. Incentivized distribution pushes the heir to pursue goals and personal success. Another incentive option is for the annual trust distributions to match the heir’s income; distributions would increase as earned income grew.

Worrying about how a large inheritance will affect an heir’s drive for success is natural. While talking about money may seem impolite, the lack of communication leaves wealth transferred into under prepared hands. Instead of just passing down family wealth, an inheritance can be a way to pass on more important things like family values and traditions.