The Inheritance Relay

The Inheritance Relay

Passing the Baton

At school I wasn’t really an athlete, but the relay race was something I always enjoyed. Unlike many other events, the relay is about teamwork just as much as individual performance – the collective ability of a team to achieve a common goal.

In most cases the strongest runner goes first. He is quick off the mark, sweeps around the first bend, approaches his teammate, the baton is stretched out towards the receiver… but there is a slip up, the baton falls to the ground, and the team falls to the back of the field.

For all training and preparation, no one actually bothered to coach the receiver on how to effectively take the baton. Everyone was focused on the first runner and getting ahead as quickly as possible, but failed to properly prepare the receiver. As a result, the race is lost.

This scenario plays out time and time again in inheritance and wealth transfers. Of the three main elements in wealth transfer – the parent (first runner), the wealth (the baton), and the child (receiver) – most strategies are overwhelmingly targeted on the first two.

In a relay race you may all be excellent athletes, but if you don’t learn how to effectively pass the baton, you always run the risk of losing the race.

Training the receiver generally doesn’t happen because of our anxieties around talking to those who are to receive and carry the responsibility of someone else’s wealth. This leaves the outcome of an inheritance down to pure chance, and too often this results in a missed opportunity to create a lasting legacy for future generations.

Compare this to a successful relay, where athletes haven’t just trained the take off and their individual leg, but also planned, communicated and practised together until they are satisfied that each party knows what the other will do.

The conversation over inheritance

Academic research has found that 70 percent of wealthy families failed to sustain their wealth across the first generation of wealth transfer, and 91 percent failed to sustain it to the third generation.

The main causes for such a high level of failure in transition isn’t due to poor investment performance or bad estate planning. Sixty percent of the time it is due to a lack of communication and trust within a family, and 25 percent of the time, it is due to poorly prepared inheritors.

Most families don’t have a plan on how to have productive conversations about wealth. Talking about money, particularly how much we have, is a cultural taboo and for most families is the elephant in the room.

  • Senior family members may struggle with how to make estate planning decisions that are equitable, since their children are often in different situations and stages of life. This requires a rethink of what we typically think of as ‘fair.’
  • Adult children stay silent despite their natural interest, assuming that if their parents wanted to discuss their wealth, they would take the initiative.
  • The next generation doesn’t want to appear greedy or entitled, yet they may have very realistic needs that they need to plan for.

Families often struggle with how to open the dialogue, how to handle the discomfort of talking about money, and how to work through the conflicts that may arise.

These families need guidance and support to get started. At KLI Group, we are familiar with our clients’ long term goals and strategies, particularly in relation to their family’s future. This makes us perfectly placed to help clients take the first step in having these difficult conversations and opening up the possibility for communication and better decision making.

Working with clients to encourage family conversations

When discussing estate planning, clients can face an array of confronting thoughts. This can include coming to terms with the meaning of their lives, the purpose of their wealth and the enduring legacy that they want to leave their children.

The following are common areas of concern our clients have, and how KLI’s advisors may be able to open up the much needed conversation with the family:

“My children don’t seem interested, if they know what’s coming, they’ll lose all motivation”

From my experience, this fear is usually exaggerated. If we run a critical eye over each new generation there are always concerns, questions and issues raised. Those passing on inherited wealth were once the ‘next generation’ and I’m sure their parents would have had similar concerns.

If the next generation are too free with money, this issue should be raised early, and not put off until it’s too late. Train the receiver before he has to start running with the baton, not the moment the baton is almost in his hands.

“They can sort it out between themselves when I am gone”

The view that ‘My kids can fight it out once I am gone,’ usually leads to conflict, mismanagement of family wealth, expensive litigation, and ultimately, the settlor’s true wishes not being followed after death.

“We don’t talk about money”

It is assumed that, if the technical aspects of the wealth transfer are in order, the plan will be executed properly after death. The reality isn’t always that straight forward, and the evidence does not support this belief.

“Talking about inheritance and my plans for when I am dead is morbid and uncomfortable – I’d rather not deal with it now”

Talking about wealth transfers can mean venturing into territory that can be unknown and scary, particularly when it involves engaging with younger children.

It’s natural to be anxious about what feelings will be expressed during family meetings, particularly if wealthy parents are not comfortable themselves in facing longstanding stresses that aren’t necessarily money-related.

Having the conversation

Family conversations about wealth transfer allow wealth holders, senior family members and their beneficiaries to begin the kind of teamwork that makes for success between the runner and the receiver. How can families begin this process?

Family meetings facilitate teamwork in many ways. When wealth holders share stories about successes, failures, and lessons learned about making and managing wealth, beneficiaries increase their understanding of their role in the family’s legacy.

Preparing the Beneficiaries

Beneficiaries need to be financially literate and emotionally prepared if they are to receive and manage wealth successfully. People who’ve managed to create wealth over their careers often assume these skills should come naturally. Sometimes they need to be reminded that their financial and business acumen was built over years of success and failure.

This is where the link between family conversations and financial education comes into play. Family meetings can go beyond the mere disclosure of a family’s estate, and focus on planning for beneficiaries having the right skills to deal with future wealth transfers.

One of the most overlooked parts of estate planning is preparing your children for the psychological impact of inheriting wealth. Even under the best circumstances, inheritance can produce a complex set of conflicting emotions, at a time when beneficiaries are grieving and having to make lots of difficult decisions.

The stress associated with a large influx of wealth under these circumstances can be difficult to manage if they are emotionally unprepared, and this can lead to poor decisions being made at critical junctures.

The long run

By working with KLI, families can not only better prepare for the transition of wealth to the next generation, they can help increase the likelihood the transfer will be well handled by the beneficiary. When all members of the team are coached properly so the receiver of wealth is ready to receive the baton, the likelihood of a successful wealth transfer is greatly increased. Although opening the discussion can be a daunting prospect, the advantages of getting an early start are worth it in the long run.