A well-considered, gradual process can help you convey knowledge and values.
The concept of wealth communication is daunting to many parents, but also critical to empowering the next generation. Given the unique qualities of each family, no single solution can apply to all. However, with the proper framework, you have the opportunity to realize your own communication path with your children.
Wealth Disclosure: An Urgent Concern
Few parents dread any task more than discussing their wealth with their children. Often, they worry about the impact of this knowledge, and may try to keep their kids from “knowing too much” about the family’s wealth, especially when a significant liquidity event results in a dramatic increase in that wealth. Parents often want to avoid spoiling their children and diminish their motivation to succeed and become self-sufficient.
That said, children may be able to discover family wealth details on their own, and receiving perspective from a parent first could add important context. Parents may proactively explain the obligations and expectations that accompany wealth; their silence, in contrast, may suggest distrust of the child’s capabilities. Accordingly, we favor a delicate balance between protective instincts and the need to groom successors.
A Process, Not an Event
As opposed to making one single announcement, families generally benefit more from ongoing dialogue on the responsibilities associated with wealth. Regular conversations have helped many families instill judicious money habits and core values in the next generation. That’s to be distinguished from a single act of wealth disclosure, which constitutes only one of many parts of an ongoing process.
First, Know Thyself
Before communicating any wealth message to your children, it's important to clarify your own intent around wealth, based on your core values and vision of long-term success for your family. Only then can you distill what you wish to communicate to your family on the purpose of family resources. Instead of focusing on disclosing the “how much” and “when” aspects of wealth transfer, clarify first the “why”—the purpose of your family resources, what you hope and aspire for your descendants, and your definition of long-term family success.
Pondering some initial questions may help to elicit your vision for the impact of wealth on your family. These aspirations may change over time, as wealth accrues and circumstances change, so revisiting your intent on a periodic basis helps to align your core values with your current perspective. Along these lines, the questions below can help.
Key Questions in Looking Ahead
- What values define my priorities and how I lead my life?
- Beyond financial assets, how do I define wealth or prosperity for my family?
- What would gratify me in the use of the wealth we have? What purpose does it serve?
- Does my view of wealth differ from that of my own parents and grandparents, and if so, what messages regarding wealth would I share or adapt for my own children and descendants?
- If everything works out as I hope in the future, what picture will I see? How would our wealth be used, and by whom?
- Whom do I wish to benefit from my wealth beyond family members, if any (e.g., non-family members, charities)?
- For how many generations do I wish our family wealth to last?
Communicating Your Intent in Writing
As you clarify your values and the purpose of family resources, you can begin to communicate your principles in effective ways that do not entail immediate wealth disclosure. Capturing these principles in writing can help to frame and anchor family discussions.
Such documents, often known as “letters of wishes,” typically accompany specific trusts to guide discretionary distributions. In contrast, “ethical wills” generally serve as a broad expression of values, without reference to any specific entity. Either way, such documents can convey values (as opposed to property) from one generation to the next, and complement the estate planning process by sharing your intangible wisdom and feelings in seeking to transfer wealth. Without imposing legally binding obligations, they can change with your perspectives, and thereby provide valuable flexibility. (Nonetheless, you should always consult with counsel to check for any conflicts between such a document and other estate-planning documents already in place.)
While letters of wishes and ethical wills may ultimately provide valuable guidance to trustees and other fiduciaries, they may also provide a more immediate and significant benefit: to provide a written blueprint for communicating your intent to children in the present. In addition to written text, creating a video or audio recording may also be effective.
Key Questions in Guiding Your Family
- What personal values or core beliefs do I wish to impart to my children? What specific examples illustrate how they guided me through life?
- How did certain events or challenges forge my identity and principles today?
- What experiences and mistakes have I learned from and want to share with my children? What lessons have I learned about managing wealth that I wish to convey to my beneficiaries?
- What dreams or hopes for the future do I hold for my family and beyond?
- What suggestions would I share to guide family members going forward?
- What feelings of love, gratitude, appreciation do I want to express?
- What phrases ring true or have always inspired me?
- Of the gifts that I have received, which meant the most to me, and why?
Defining Your Intent for Specific Trusts
An estate plan often consists of multiple trusts with different attributes, sometimes with varying purposes. Whether planning new trusts or reviewing existing ones, conveying your intent in writing not only provides critical context for your estate planning attorney and fiduciaries, but can also help to communicate your governing principles of family wealth to future recipients, as some trust beneficiaries may otherwise never receive any such insights.
Key Questions for Specific Trusts
- Beyond tax savings, what is the most important reason for creating this trust (or trusts)?
- What positive impact do I wish for the beneficiaries?
If additive, such letters may help to clarify the intended use of trust resources, whether by promoting financial literacy and self-sufficiency, supporting physical and mental health and well-being, pursuing passions through talent and accomplishment or learning through travel, to name a few examples.
A note of caution: Because a letter of wishes exists separately from the trust document, it isn’t legally binding. However, depending on the jurisdiction, it may serve as extrinsic evidence of intent. For this reason, counsel plays a critical role in reviewing such a letter, and ensuring that the estate plan references its possible existence.
TRANSLATING INTENT INTO ACTION
Explain the Purpose of Family Resources
Now that you’ve decanted your intent into words to guide conversations, you’re in a position to clarify the purpose of your wealth to your children. As opposed to disclosing the amount and timing of wealth distribution, you may prefer to share your general philosophy on family wealth on a regular basis.
For instance, parents who wish to instill the values of education, entrepreneurship and giving back may explain in casual conversations that their family resources primarily exist to advance the educational and professional growth of their children; support an adult beneficiary’s new business venture, subject to review of a business case and plan; or encourage philanthropic contributions and activity. Note that the emphasis here is on the purpose of family resources, not dollar amounts; this allows the parents to start setting expectations without worrying about disclosure.
Identify Growth Areas of Financial Literacy for Your Children
Concern over the ability of some or all of your children to handle wealth responsibility may be an understandable cause of reluctance to disclose wealth. In such a case, the more you can identify the skill sets needed to cultivate in your children today, the greater the chance of their demonstrating those attributes tomorrow.
Key Questions in Preparing Children for Wealth
- What qualities or behavior reflect managing wealth responsibly?
- If my ultimate goal is to empower trust beneficiaries, how have I shared this intent with them?
Remember the Impact of Modeling
While no single prescription exists for imparting to children the habits and discipline they will need in adulthood, parental example often emerges as the most powerful teacher. For better or worse, these teachable moments are observed by children all the time, on a daily basis. For this reason, the money habits of parents may significantly influence the behavior of their children.
Key Questions in Modeling for Your Children
- What spending habits and lifestyle choices am I demonstrating for my children?
- How do I model desired behavior in my own life?
- What financial lessons or mistakes of mine can I share with my children?
Consider Progressive Wealth Disclosure
Many parents understandably do not want to inform their children of the existence of certain trusts before their children are ready to handle it. Counsel can advise those who establish trusts for family members on any disclosure requirements applicable to their situations. Some states allow “silent” or “quiet” trusts, which limit or delay disclosure to beneficiaries. These provisions require careful drafting, especially if a trust has multiple beneficiaries.
An accompanying letter can help beneficiaries appreciate their responsibilities more fully before taking control of their wealth. In addition, disclosing various accounts in stages, beginning with the smallest ones, may help build children’s knowledge and wealth literacy gradually.
Hypothetical Example: An Incremental Approach
Parents with children in high school decide to share information about their wealth over time. While their children earned money from babysitting, mowing lawns or shoveling snow, the parents fund a custodial Roth IRA for each child’s benefit with an amount equal to their earnings (and up to the annual contribution amount). As custodians, the parents can maintain control of the Roth accounts while they actively share information regarding their growth and performance with the children to help educate them on investment compounding. When the children reach the age of majority, the account assets are transferred to new Roth accounts that they hold directly.
The parents also establish a donor advised fund (DAF) account to introduce a culture and tradition of charitable giving. By disclosing the DAF dollar amount and discussing the investment options with their children, they initiate a discussion of money in a way that aligns with their values, and welcome any questions on how best to grow and deploy the DAF funds.
In addition, the parents transfer their federal gift/estate tax applicable exclusion amount to a trust for the children’s benefit. However, the parents plan to disclose the existence of this trust to the children after the children demonstrate sound judgment in overseeing smaller accounts, and in compliance with any applicable disclosure requirements under state law.
A process of gradually introducing their children to larger and larger pools of capital enables the parents to educate their children in responsible wealth management incrementally, and teach them valuable lessons before they assume oversight responsibility for the remainder of the family’s wealth.
In our view, there is no “one size fits all” when it comes to communicating about family wealth. Much depends on your values, and the potential impact you think that sharing the information could have. Self-knowledge is key, both in understanding what you are comfortable with and what you are trying to accomplish. Finally, a well-considered process around disclosure should take into account your children’s maturity level and knowledge about financial matters.
The ideas provided will hopefully help to shape your approach as you consider your dialogue around wealth. As always, your NB Private Wealth team is available for consultation around these and other wealth and estate planning matters.
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