Transitioning Wealth to the Next Generation through Intentional Inheritance Planning

It’s an issue wealthy families have dealt with for centuries: How do I structure transferring sizable wealth through an inheritance so that wealth enhances rather than curses the next generation and beyond.  While it's impossible to avoid all potential negative outcomes, there are financial planning and estate planning best practices high net-worth families can implement to decrease the probability of disaster and curb the curse of entitlement.  

Reframe an Inheritance Away from Just a Financial Transaction.

The biggest step is to reset your mindset away from viewing the inheritance as a financial transfer to viewing inheritance as a tool for which positive long-term outcomes are made possible.  While the last step of the inheritance process is to whom and how much, a lot of thought and effort should go into what the desired eventual outcomes are and why.     

Define Your Family’s Values and Legacy.

Oftentimes, families focus on the assets and tools needed to complete estate planning.  However, we recommend that your family’s “why” be a substantial part of the inheritance process.  Before deciding what your estate should be used for, you need to understand what your family truly stands for.  It may make sense to formally go through an exercise where you lay out 50 value cards on a table with your spouse.  Then whittle them down to the 20 most important and then find the 10 most important. 

Once you have formalized what values are important to you, you’ll want to give thought to what your ongoing legacy will be.  At its core, a big part of legacy may be what your children and grandchildren will think and feel about you and the stories they will tell about you when you are mentioned years or decades from now, but there’s another important component of it.  Legacy will also be the potential actions they will take inspired by your planning and impact, so it’s important to be intentional about what you want that legacy to be.

Prioritize the Relative Importance of Safety Nets, Direct Gifts, and Opportunities.

For wealthy families, there could be an endless number of ways to direct a sizable inheritance, but it’s probably best to define to the extent possible how important it is to provide a safety net for children and what that safety net means.  For some, that may mean providing perpetual access to a home and free higher education, while for others, that may mean support for only healthcare in times of need.  While there may be concerns that providing some of this safety net may result in funds being siphoned away through potential creditor issues, divorce, or substance abuse problems, with the right estate attorneys and financial advisors, trust structure protections should be able to address many of these types of potential pitfalls.

After thinking through a safety net, you might want to think through specific, meaningful gifts.  For example, you might want to give a sizable gift when a child graduates from graduate school or set aside a specific amount for a child’s wedding.

You’ll also want to give serious thought to what sort of opportunities you’d like to fund for the next generation and beyond.  Would you like to fund potential business ventures for your children and grandchildren? What about their graduate education? What about global travel experiences?  You might want to think through which of these are consistent with your values and your desired legacy. One way to align your plan with your values is to consider which of things you would have wanted personally earlier in your own life.

Consider What Sort of Charitable Impact You’d like to Make.

Many wealthy families already have a charitable planning strategy, but reevaluating what it means to give and giving for maximum impact during the estate planning process is a must.  We recommend ranking the relative importance of an exhaustive list of social impact missions, so all the family stakeholders and advisors have a sense of intended philanthropic mission. Obviously, the relative importance of each mission for the family will change over time, so it’s important to build in flexibility in the estate plan to address that.    

Implement Your Estate Plan intentionally.

We recommend working with your advisors to create trusts with a mission statement and terms that will incorporate your values, and your views on the relative importance of funding the four areas: safety nets, opportunities, large specific gifts, and social impact. 

We recommend an ongoing process and governance to evaluate potential disbursements.  You could have a general form that will allow a future heir to describe the funding needed for a potential opportunity or charitable impact disbursement and why it’s meaningful to them.  Perhaps it’s best that the disbursement would be evaluated by the trustee in the context of how well they’ve prepared and researched the business venture or the charitable mission. Over time, the heir could be required to have detailed reporting requirements.  A rigorous process could be beneficial to their personal development.   

Consider Steps to Prepare Future Heirs.

While many of the above steps are necessary to maximize your impact, perpetuate your values, and minimize negative outcomes, you should consider doing many of these steps during your lifetime to help prepare heirs ahead of time.  For example, a family bank could be used to facilitate skills in entrepreneurship, financial management, due diligence and research during your lifetime. An allocated philanthropic budget for your children could be a way to help them develop their passion for various causes and maximize long-term impact.  Failing to prepare your heirs can have a devastating impact as sudden inheritances to unprepared heirs can have devastating effects.

David Flores Wilson, CFP®, CFA, CEPA is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Managing Partner at Sincerus Advisory. Click here to schedule a time to speak with us.