Can kids handle the inheritance?

Wealth is rarely instantaneous. As advisors, we assist many of our clients with putting in a great deal of hard work, sweat equity and time to build up savings and create a legacy for their families. And the greatest fear many financial advisors face is seeing a son or daughter – unprepared to deal with the complexities of their parents’ financial plan – fritter away a lifetime of hard work and careful planning.

A recent study by Ipsos Reid (commissioned by BMO Harris Private Banking) revealed 22% of high-net-worth individuals with a Will in place were very concerned about their children’s ability to manage their estates responsibly. About 31% included suggestions in their Wills on how to care for their assets and 42% intended to create a trust. At the end of the day, however, only 38% – a considerably small proportion – had discussed this issue with a financial professional.

Preparing our clients’ children for the inevitability of inheritance, and the weight of responsibility that carries, is a challenge every advisor must meet.

A colleague of ours was once approached by the two surviving sons of a deceased client for help with settling the estate. Unfortunately, neither had a financial plan – let alone a financial planner – and both were reluctant to take the time to speak with their late father’s advisor. Their father, during his time with this advisor, had taken an incredible amount of care and concern to structure his investments and estate in a manner that was not only tax efficient, but also capable of providing an income for his sons for the remainder of their lives.

In their haste to get access to the funds, the sons requested the advisor liquidate a majority of the accounts (against his recommendations) and withdraw everything. Not only was this the worst way to deal with the estate in terms of tax efficiency, they also insisted on selling the investments during the worst two months the markets have seen since the Great Depression. They ended up losing a significant amount of money because of their haste and lack of understanding. To top that, they took all the hard work their father had put in to both raise that money and protect it for them, and threw it out the window.

Short of tying the boys down and forcing them to see things his way (not a recommended practice in our industry), there wasn’t much our hapless colleague could do. He’s now understandably fearful for other clients – without immediate action, this may very much be the way their estates will be handled by their kids.

What can we as advisors do to help mitigate such a disaster?

Start early

Talk to clients about their estates and determine what kind of legacy they wish to leave behind (if any at all). This will determine how aging clients communicate more effectively with their kids regarding the wealth they have built, how it is currently being handled, and how it can be utilized once inherited.

Let’s assume an estate plan is in place and your client is leaving some or all of his or her estate to the kids. It’s crucial you speak with the client about financial communication with kids early on so they’re ready when the time comes.

Ask your clients if they’ve had time to sit down with their children and speak with them about the family’s net worth or estate plans, about buying a first home, or about how the tax system works. Or about the likely size of the estate they will inherit and how they should manage it. Obviously, if the kids are too young this may not be completely appropriate, but financial awareness even in their teens could help them get off on the right financial foot early on.

Involve them

The client who passed away did the first part right – taking the time to do the financial planning and structure the estate tax-efficiently – but he never passed this planning to his children. Obviously we were not privy to the personal details, but from experience, I can tell that a simple series of meetings with the two sons (likely young adults in their late 20s) would have helped avoid the mistakes they made. These meetings would have informed them why their parents structured their affairs the way they did; they would have been included in the planning process and would have been advised in advance of the best course of action to take in the event their parents passed away.

On a softer note, they would also have begun to form a relationship with their parents’ financial advisor and would have felt comfortable dealing with him when the time came.

Alternatively, there are families who don’t wish to leave any money to their children, believing the idea of a “pay day” for kids will beget complacency and remove any ambition to work hard and earn their own wealth. In this case, financial communication and education are even more important. If your clients plan to assist kids, in their living years, by paying for higher education or funding a business venture, isn’t it even more crucial the kids understand how to handle their own finances?

It’s all about providing experiential learning, facilitating financial awareness, and improving their financial knowledge so they get into the habit of making smart financial decisions long before they need to deal with any inheritance. Working up their own financial plans will help do this and give them the wherewithal to capably manage, and put to good use, the wealth they may ultimately inherit.

Action plan

A general lack of financial education in our school system, and the lack of widespread financial knowledge has caused concern for many of us in the financial planning and wealth management community. Perhaps it’s time to do something about it.

Consider supporting (or even starting) a program that helps advance financial education for young people. It could be as simple as contributing literature or volunteering time to a high school career and personal planning curriculum. Or it could be as complex as creating a series of sessions and inviting a network of young adults to attend. For example, our firm has formed what we call the NWM Financial Mentorship Program.

This program is a series of recurring sessions designed by several of our planners to help young people navigate the road to financial independence. Whether they are a part of an intergenerational business initiative, or just young professionals seeking guidance, the topics covered are essential to basic financial readiness and offer young people answers to questions about saving and investing in an open and accessible forum.

As financial professionals, we understand building wealth is not about how much money one earns, it’s all about how much money one keeps. For families concerned with ensuring their legacy remains safe for future generations, we believe achieving such goals begins with clear communication. By communicating estate plans to children, not only are we performing our duty to ensure our clients’ hard-earned wealth will be well managed and possibly benefit their family for decades to come, we are also educating the next generation and ensuring they are financially better prepared.Paul Gleeson and Warren Miles-Pickup are financial advisors with Nicola Wealth Management, focusing on advising self-employed business owners and incorporated professionals on all areas of financial planning and wealth management.