November 2018

Four Lessons of Successful Wealth Transfers

What happens after you die? Your grief-stricken heirs—some of whom may have complicated or fraught relationships—must execute a complicated transaction involving precious heirlooms and prized assets, all under the “direction” of a deceased grantor. It’s no wonder that wealth transfers can be such a challenge.

Indeed, research shows that 70 percent of wealth transfers fail, in the sense that a beneficiary loses control of a bequeathed asset and/or squanders the money, and the inherited wealth is depleted. More than 80 percent of the time the cause is a breakdown in trust or communication or a failure to prepare the heirs. Taxes were involved less than 15 percent of the time1.

The key to successful wealth transfer is careful planning and close collaboration between all parties—and both must occur well before death or disability occurs. Here are four key steps to follow.

Use a document location system. Too often, heirs are left to rummage through attics or guess at passwords. This can be avoided if you maintain a simple recordkeeping system for all your important documents. Whether documents are kept in an old-fashioned file folder or a computer server, the important thing is that they’re safe, secure, and easy for your family to access, when necessary. You may want to keep a duplicate copy in an alternate location like a fireproof safe, a safety deposit box or your attorney’s office.

A good document organizer should have tabs or sections for information about insurance, banking, credit, loans, investments, employment and key assets. Medical records, key contacts—including your attorney, accountant and financial adviser—and estate documents such as a will, power of attorney or post-mortem letter of instruction should also be included.

Electronic “vaults,” increasingly offered by life insurers or financial advisors, can make it easy to store and access documents. Some of these repositories allow you to customize access levels for different individuals. If you use an electronic vault, make sure it is encrypted for security.

Appoint the right agent, executor or trustee. Many people automatically designate family members as an executor or trustee. But that’s not always the best decision given the demands of the role. Your executors may have to make many complicated and time-consuming decisions, and they must be comfortable carrying out your wishes, even if that means standing up to family members or going to court. Executors often have considerable leeway over how assets are spent, which can create family friction. To avoid this, you may want to consider an institutional executor, such as a bank or attorney.

Whether or not your representative is a family member, they must have the time and competence to direct a process that can take years. It’s also helpful if they’re available for face-to-face meetings to handle your affairs. The age of your representative is another important factor. It’s wise to choose someone who is likely to outlive you and be a competent adult at the time of your death. You may want to name a single appointee for all your legal documents (like your health care proxy or durable power of attorney) to avoid conflicts and minimize confusion. Most importantly, make sure your representative can access your documents, understands the responsibilities involved, and understands your wishes and intentions.

Rationalize amounts, timing and structures. Families spend much of their time on the big questions: Who gets what? What should go to charity? A key question is whether to establish a trust. A trust can increase the grantor’s control over assets—even years after the original will is executed—and may reduce the ultimate tax burden. But trusts carry their own costs and can spark resentment on the part of beneficiaries.

Prepare your heirs. Some people don’t tell their heirs anything about their estate. They fear the knowledge of a sizeable inheritance will reduce their heirs’ motivation to achieve. As a result, heirs may find themselves with complicated assets like investments, real estate or even businesses without knowing how to handle them.

There’s much you can do to prepare your heirs even if they never see a full tally of your assets:

  • Draft a written mission statement about the wealth you’re passing. Let it express your values regarding family lifestyle, business decisions, and charitable contributions and activities.
  • Bring heirs into the family’s financial life through regular family meetings or discussions with the family’s financial advisor.
  • Help your heirs build their financial literacy and give them a basic understanding of how to manage the most important family assets.
  • Let your heirs “practice” with your wealth. Gift them with a significant asset—cash, investments, real estate or even a business—and coach them on how to manage it.

Gifting to your heirs has many advantages. It generally reduces the size of your taxable estate, and gifts up to $15,000 (or $30,000 for couples)2 can be granted per year without incurring a gift tax. You get the satisfaction of watching your heirs benefit from your assets—and a preview of whether they can handle them responsibly once you’re gone.

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Sources

1 FUSE Research Network, 2015; Janus Henderson Retirement Strategy Group
2www.irs.gov