Financial advisors and estate attorneys in the US are currently being deluged with requests by high net worth families deciding to gift family members varying sums of financial or other assets. Citing the uncertainty surrounding future US tax laws, HNW families are frequently electing to gift family members rather than potentially pay higher government taxes (Source: BYN Mellon, Entrances, Exits, and Mid-Course Corrections for Wealth Transfer Tools). Many families focus on financial assets. Upon further reflection, however, most family leaders recognize the significance of also imparting their family values, history, and traditions – their social-emotional legacy to their children.
When considering their unprecedented opportunity to give, family leaders frequently confront conflicting emotions. Many family leaders fear that their children may squander the financial wealth that they inherit due to a lack of financial discipline or a lack of professional ambition. Other family leaders want their children to develop themselves and achieve financial independence on their own prior to receiving these gifts.
Due to the 2008 financial crisis, some family leaders are now concerned about having sufficient funds for themselves (source: Peter Orszag, Bloomberg). Adding to the complexity of the decision, grantors are aware that the transfer of financial wealth is often compromised by (i) interpersonal conflict and incompatible narratives among the inheritors, (ii) disagreements on mutually-required decision-making, and (iii) the lack of maturity and development of individual family members. As such, it comes as no surprise that 70 per cent of intergenerational wealth transfers fail, according to Forbes.
The role of advisors
What can financial and legal advisors do to facilitate the successful transfer of family wealth? Trusted advisors, often with the assistance of family systems experts, incorporate the concept of wealth transfer on multiple occasions as they work with the family, noting that financial and social-emotional wealth are intertwined. Both elements of the transfer of family wealth must be part of the ongoing conversation between the advisor and family leaders over the years that they work together.
The transfer of wealth between generations is a multi-year process, not a momentary event. Just as achieving financial goals requires careful and strategic planning, so too does the achievement of social-emotional wealth goals. According to research conducted by Barclays, whether transferring financial wealth of a family business or other assets to the next generation, the planning is frequently not started early enough. To ensure success, family members need to be accustomed to incorporating and using the tools and processes that promote effective family relations (source: Dennis Jaffe and Jane Flanagan, The Best Practices of Successful, Global, Multi-Generational Family Enterprises, Family Business Network and Family Office Exchange).
HNW families are distinctive from one another in various ways. Before earning trust and building confidence in their role, advisors need to understand the intricacies of each family with whom they work. Most importantly, advisors must identify how the elder generation defines the family, and who is considered to be a part of the family. This is often a complicated and fragile process as some families have gone through multiple marriages, divorces, disinheritance decisions, inclusion of family-of-origin decisions, and adoptions.
Although family leaders have multiple expectations for the next generation, frequently their thoughts have not been shared with family members or integrated in parenting practices. Family members have a much greater opportunity to succeed when they know others’ expectations of them. Further, the earlier individuals learn about their roles and responsibilities within the family system, the less likely they are to grow up with a sense of entitlement. As a result, family wealth and financial advisors are increasingly introducing family systems experts into the transfer of family wealth process, particularly at early stages.