Leaving an Inheritance – A blessing or a curse

Written by Ryan Ponsford | September 15, 2014

Ryan Ponsford provides counsel to families to help them mitigate the risks associated with multi-generational wealth transition. He is a sought-after speaker, thought-provoker, and facilitator at events and family retreats across the United States and Canada. Making the trek from San Diego, California, he’ll be joining us this month as the keynote speaker for our T.E. Wealth Speaker Series event, Sweet Successions.  Don’t miss it!

Leaving an inheritance: A blessing or a curse?

While Susan sat in the waiting room to meet with her parents’ financial advisors, she was nervous, excited, sad, curious, overwhelmed, and anxious, all at the same time. She knew these people had worked with her parents for a very long time. Mom and dad had spoken very highly of them, but she had never met them in person. Neither had her brother nor her sister.

Receiving the call that her father had passed away, just four months after losing her mom, had come as a pretty big shock. He had seemed so healthy, so vibrant, so alive just a month ago, and now he was gone. When she was informed that she had been selected as the executor of the estate, the person who would have to “handle all of the affairs,” she felt even more overwhelmed. She knew her parents had done pretty well by planning, saving, investing, and even owning a few properties, but she had no idea where to begin to fulfill her responsibilities as executor.

Her brother and sister had been a little surprised when they found out that Susan had been selected to manage the estate. In fact, they didn’t just seem surprised; they seemed a little skeptical. Susan had been the one to care for their mother in her final year. What did she know that they didn’t? Had she had some input in determining who would get what? Did she encourage mom and dad to put her in charge so she could have control over the distribution of the estate?

As Susan waited to meet with these financial professionals who were unknown to her, her nerves began to kick in. Would she even understand what they were talking about? Should she trust them? Would they be able to answer the flood of questions that filled her mind every night as she lay awake in bed?

Susan couldn’t anticipate what would happen in the next two hours during the meeting with her parents’ financial advisors; and she certainly had no clue what would happen in the coming months as she attempted to settle her parents’ estate. She had no idea about the complexity in understanding the legal documents that defined what she could and couldn’t do. She had no idea what she would do with the funds she would inherit. But most importantly, she was completely unaware of the strain that would be placed on her relationships with her brother and sister.

Even though they had always gotten along well, over the coming months, making financial decisions together, discussing who would get which assets, what was fair, what would be kept, what would be sold, what mom and dad would have wanted – every one of these decisions would come to end in disagreement. In the coming months, their relationships would fracture in ways that would become irreparable. And in the coming years, each of them would have challenges maintaining the wealth they had inherited.

Susan and her family were not a rare, unfortunate case – they were just like 70% of families

When wealth transfers from one generation to the next, the odds of failure in maintaining that wealth and the probability that family relationships will fracture are astounding. If you’re losing sleep when your portfolio declines by 9%, try considering addressing the 70% risk that it could be depleted completely!

To make matters worse, while the loss of assets is certainly disappointing, the destruction of family relationships is a tragedy. Siblings no longer talk to each other, in-laws become out-laws, and everyone loses sight of what their parents wanted most.

What’s interesting is that we all know this happens. If this hasn’t happened in our own family, we know someone who has had a negative experience with an inheritance. The money was squandered; the kids now hate each other. We don’t think this is possible with our family, but not only is it possible; it’s likely. Even more interesting is that we take no proactive steps to avoid these issues.

The problem here is that when asked, most families think the cause of the conflict will be bad investment decisions, a flawed or non-existent trust or estate plan, economic downturn, taxes, or a myriad of other technical or planning breakdowns. Examining the characteristics of families that have failed in transfer against those that have been successful, it’s quickly apparent that these are rarely the issue.

In fact, in a study of 3,250 families over several generations, less than 5% of the time the family failure was attributed to poor estate planning, taxes, or any of the other technical solutions that we all focus on. [Williams & Preisser, Preparing Heirs, 2003] That doesn’t mean we shouldn’t address those aspects of our plan, in fact one could argue it means that most legal and financial advisors do a pretty good job of preparing our assets for transfer. However, here’s the rub – the problem isn’t the positioning of your assets; it’s the preparation of your heirs. This requires communicating those desires before it’s too late.

What are you doing to prepare your heirs for the decisions they’ll face?

Do your heirs have a shared purpose or vision of the future that will help them get through challenging situations? How often are they making joint financial decisions where they share in the benefits or consequences of the outcomes? Would they know how to evaluate and select qualified advisors? Can they communicate effectively in emotionally charged situations; like when mom and dad die? Has your plan, and the reason for your decisions, been communicated to them?

Overcoming the issues associated with the transfer of wealth is not rocket science. Many of the solutions are very simple and can be implemented by a family on its own. Others require facilitation or coordination. Regardless of how you approach or solve the issues, addressing them and getting started will make a world of difference.

Families looking to protect a generation’s hard work and earned wealth should seek to understand the risks. Evaluate your own family situation with honesty. If a better outcome is important to you, seek assistance from those who can help.

Ryan Ponsford is the Founder and Principal of Akili Capital, a firm that partners with families and their advisors to provide financial confidence and peace of mind. He supports philanthropic efforts and education through Main Street Philanthropy. Ryan can be reached by email at rponsford@akilicap.com



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