Prudent Strategies for Successful Generational Wealth Transfer

People often daydream about how inheriting a large sum of money could solve their most pressing problems. Less often do they think about how such wealth can complicate their lives and negatively impact future generations. But wealthy families the world over have experience with generational wealth transfer and know that not all stories have happy endings.

We hope the following discussion helps you begin the process of planning carefully so your heirs—and you—can have peace of mind about your wealth transfer process.

Generational Wealth Transfers Gone Wrong

The Williams Group, a consultancy aiming to help wealthy families transfer assets well, defines a successful wealth transfer as “wealth remaining under the control of beneficiaries.” So a failure would then be any course of events which robs your beneficiaries of their wealth. Expanding the definition of wealth to include family values, good work ethic, and a sense of purpose allows a deeper discussion of those failures.

Bad follow through

It’s relatively easy to hire an attorney to draft your estate documents and then transfer your assets into your trust. There is always the risk that “your buddy’s attorney” isn’t that good at drafting documents, for example. So you need to choose your professionals well. But even if you do, mistakes can occur during execution that require your diligent attention. For example, if you create a trust and then fail to put your assets into it, they won’t transfer according to trust terms. Or if you fail to vet and select a competent successor trustee, the trust can be mismanaged or even embezzled from after you are gone.

Family infighting

Anyone who has read King Lear understands that siblings do not always agree on who should get an inheritance, and heirs are not always what they seem. Families who live independent lives can drift apart and cease communicating about important issues such as legacy goals. If your will and trust do not divide assets in a way that meets their expectations, your heirs could engage in legal battles against each other and eat up much of that wealth in costs. In addition, it would be hard to imagine how your family values would survive such turmoil. Human nature is such that even well-meaning gifts can breed resentments and competition.

Secrecy

Older generations seem to value their privacy more than today’s Facebook culture. This secrecy can extend to financial matters and prevent healthy communication between those leaving an estate and those receiving it. If the first time your heirs hear about their inheritance is in the attorney’s office after your death, anything can happen. Worse, you won’t be there to straighten things out. Your heirs may even begin to blame and resent you if you set up the conditions for their confusion, disappointment, or strife.

Unprepared heirs

When heirs haven’t been trained throughout their lives to be the next stewards of your wealth, they can end up entitled, lazy, and spendthrift–or worse. You have to question whether it makes sense to give a large financial bequest to someone who will spend it in two years and end up penniless. Yet this happens frequently in wealthy families; thus the saying, “Shirtsleeves to shirtsleeves in three generations.” Not preparing heirs is one of the biggest mistakes you can make when transferring wealth across generations.

Bad investments

It bears mentioning that if your financial assets have been invested improperly (e.g., overly concentrated, not suited to the timeline, entrusted to a self-interested financial professional, etc.), then the assets you leave behind can lose value quickly. Not all financial advisors are fiduciaries, meaning they are legally obligated to put your interests ahead of yours. Brokers and annuity salespeople are not always fiduciaries, so you need to ask. In this day and age, there is really no valid reason not to use an advisor who is a legal fiduciary.

Generational Wealth Transfers Gone Better

You never have any guarantees in life beside the two obvious ones, but all the above issues can be tackled intelligently to increase your odds of a successful generational wealth transfer. We treat each one in turn:

Correct follow through

First and foremost, have good documents. It’s worth a little money to have a competent estate attorney draft your estate documents in light of your state’s laws, family circumstances, and their own experience with case law. Alpha Fiduciary can refer you to several if you are unsure who will do a good job for you–but don’t skimp on the initial documents! Also review them and keep them up to date. Your heirs will thank you.

Next, if you form a trust, you need to fund it. We have seen cases of families never properly titling their assets after good documents are in place. If the grantors die before retitling assets, it’s as if the trust never existed for those holdings. An excellent way to ensure proper titling is to work with your advisor or financial planner to list all your holdings and then to check their legal titles one at a time. (If you don’t choose to employ a trust, you can still add beneficiary designations to financial accounts and file such documents as a beneficiary deed to make it clear who gets these assets when you die.)

Finally, choosing a competent trustee to administer the terms of your trust is key. This may be you, the grantor, during your lifetime. But if you become disabled or die, then the successor trustee will be responsible to oversee trust investments and distributions. Just picking a family member to do it might be a big mistake if that person is unprepared or lacks training. Alpha Fiduciary works with professional third-party trust companies who offer fiduciary trust administration and can serve as an independent corporate trustee as well.

Family harmony and communication

Many successful wealth transfers have involved family meetings, clear communication, and even third-party-facilitated sessions to get important issues out in the open. If you bring your attorneys, CPAs, and financial advisors to these sessions, you can get expert advice in real-time and develop your best game plan. Alpha Fiduciary not only willingly participates in family meetings but can help arrange them to ensure they include professional family consultants and/or financial and legal professionals as needed. Getting issues resolved up front will greatly increase your family’s comfort with the wealth transfer process and may even improve family relations after you are gone.

Heir preparation

Probably the most important part of a successful wealth transfer, in our opinion, is to ensure your heirs are ready to handle it. We all know stories of the lottery winner who blows millions of dollars in a short time and ends up with nothing. This happens because the recipients simply aren’t psychologically or socially prepared for such a windfall. Families can begin heir preparation now by identifying the like heirs, examining their character, and making intelligent strategies to train those heirs or otherwise overcome known weaknesses. This make require relationship building, a family mission statement, conditions and restrictions in your trust to mitigate destructive patterns caused by irresponsible spending, etc. And if you feel that the heirs’ deficits cannot be overcome by training and must use restrictions to protect them from the adverse effects of unearned wealth, you can turn trust administration over to a corporate trustee who has no obligation other than to follow the trust terms strictly.

Wise investments

The best laid transfer plans can come to nothing if your investments are not handled well. If you rely on a financial advisor, you should understand how that person or company is being compensated. If the “advisor” is actually a broker, compensation can be based on what you buy and how often you transact. Much financial literature decries the inefficiency of frequent trades. And brokers aren’t held to a fiduciary standard but only have to demonstrate that an investment is “suitable” for your account. Insurance salespeople pushing variable annuities also do not have to conform to a fiduciary standard and often don’t even know much more than their own firm’s products. Finally, a trust company that uses proprietary products could be conflicted at the corporate level from building you a custom portfolio that really suits your needs.

Hiring an independent, fee-based fiduciary financial advisor gives you the peace of mind that the advisor’s compensation does not conflict with your goals. Alpha Fiduciary only receives fees from our clients and no kickbacks, commissions, or referral fees from our partners, and we feel this helps us eliminate the most common conflicts of interest among investment professionals. We also partner with independent trust companies who can administer the terms of your trust according to your wishes, while we independently select the investment products and portfolios most suited to your current and future needs.

About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.

Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).

Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.

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About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.