Beyond Succession; Opening a Discourse About Inheritance

Recently we published a post in our blog about succession and the steps necessary to see it through. Having an open, honest, and transparent discourse with family members is one such step. Yet, this is often more easily said than done. A recent study conducted by Wilmington Trust on families with a net worth in excess of $20 million found that many leaders of wealthy families have no plans to share inheritance details out of fear of demotivating their heirs.

If you are a “wealth holder” or an “inheritor,” take comfort in knowing that your concerns are shared by others. The study found that only 10 percent of wealth holders provided a complete picture of the inheritance to their heirs. While necessary, such discourse with an inheritor can be an awkward, messy, and scary experience. What are common themes preventing wealth holders from having this conversation?

“As parents, it isn’t our job to make sure that our children are rich,” says a local family business leader. He then added “after we make sure we have a happy and stable home, support them educationally, and make sure we, the parents, are not a financial burden – then we consider balancing charity with their inheritance.” This seems to be a common theme among wealth holders and inheritors. The Wilmington Trust study noted that “each group believes wealth is not a gift to be squandered, but a vehicle to move the family forward, and help others through philanthropy.” It is understandable that the leaders of multigenerational families are protective of their younger generations. It shouldn’t be a surprise to anyone that they simply want what is best for their future generations and their community. Yet, this protective behavior is balanced against the need for an open, honest, and transparent discourse that pushes the family toward an effective succession plan. Unfortunately, this conversation is not happening soon enough. The study found that, of the families surveyed, most of those who have received less than half of their expected inheritance are over 40 years of age. Of these individuals, half do not have a firm grasp of key components of their inheritance; such as how it is structured or how large it is. This opaque understanding is in part because 70 percent of wealth holders are apprehensive about sharing inheritance details.

Contrary to popular belief, most inheritors of high net worth families do not get the majority of their inheritance from a single “outright bequest” triggered by the execution of a will after a family member passes. Generally, they receive the majority of their inheritance from a combination of trusts and an outright bequest. This makes sense because wills can change in an instant, and wealth holders fear capacity issues stemming from old age may make a succession plan vulnerable. The solution to this vulnerability is transferring ownership before the will is necessary. However, this brings concerns and problems of its own. Below are the top five concerns that wealth holders have identified:

1. Concerns about demotivating or disempowering heirs – 29 percent
2. Inability to decide what assets to leave heirs or how to do it – 19 percent
3. Desire to wait for heirs to get older – 14 percent
4. Fear heirs will rely on wealth that might not materialize – 10 percent
5. Belief that it’s not the heirs’ business – 5 percent

Multi-generational families have many issues to grapple with, but one of the most difficult issues that is entirely under their control is when to have a discussion with their heirs about inheritance. Wealth holders understandably want to wait until they have a plan, know what they’ll give, and make sure that their children won’t be demotivated by the inheritance. Yet, if they wait too long they risk ill-equipping the next generation – or worse still, unravelling a succession plan through their own actions. This is a difficult window to locate, and in a later post we will explore how to best find it.

Keith Baldwin is a business transactions and securities lawyer with a forty year history of serving clients’ legal needs. Keith focuses his practice on business relationships, including mergers and acquisitions, agreements among owner-entrepreneurs, and best practices for corporate governance. Keith can be reached via email at keithbaldwin@dwt.com or directly at 425.646.6133.