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Having the wealth transfer conversation

June 20, 2014

If you haven't discussed wealth transfer with your loved ones, you're in good company. Kristin Barry of Vanguard Financial Advisor Services shares details about how many of us haven't had these conversations, explains the demographics that make the topic so important, and offers suggestions about how to get things started.

Conversations about money can be awkward, and they're particularly challenging when a transfer of wealth is involved. You've looked pretty deeply into the demographic data. What trends have you observed?

Kristin BarryWhile the youngest boomers are still in their forties, the generation as a whole is shifting from one of net savers to one of net spenders. And what that leads to is the fact that over the coming decades, wealth is expected to transfer between generations at only an increasing rate.

So by 2018, Generation X and Y, or those folks in their twenties, thirties, and forties, are projected to hold 28 trillion dollars in collective net worth; nearly three times what it was just ten years ago. And those two generations also represent 105 million people, 30% more than the massive baby boomer generation.

Generally, how many people are actually talking about wealth transfer?

For the transfer to go successfully, communication is so critical. But what research shows us is that more than two-thirds of boomers have disclosed little to no information about their wealth to their children. And for those working with financial advisors, only half intend to introduce their family to that financial advisor. And perhaps that's, in part, due to the fact that two-thirds say their advisors never asked.

Now people have worked so hard for the wealth that they've created through the lifetimes, and a financial advisor is a great person to help ensure that those assets stay with the family through the generational transfer; a huge opportunity here for better communication, both within the family and then also with the financial advisor in those cases.

Why is it so important to have a conversation about inheritance with your family members and your heirs, especially if you plan to leave them significant amounts?

These conversations are critically important. A study by the Institute for Preparing Heirs found that 70 percent of wealthy families lose a significant portion of their assets during the wealth transfer. And the number one reason is not faulty documentation or estate planning but, rather, communication and trust within the family itself. So for those investors wanting to ensure that their assets are passed down according to their plans, the single most important thing to focus on is the communication within the family.

What are some of the things that people might struggle with when they're trying to get those conversations started?

The top three reasons we hear for families not initiating these conversations are, first, fear of a negative effect on the work ethic of their heirs. If my heirs know what level of wealth they stand to inherit, will they continue working as hard as they do today?

The second is that we were never really taught to discuss wealth. It hasn't been a topic that we bring to the dinner table dialogue. So it's just that upbringing of never being taught to discuss this topic.

And the third is a fear that the heirs aren't mature enough to handle this conversation. And I do want to mention here that it's not a question of whether the heirs are old enough for the conversation but really that level of maturity. The actual age fell much further down on the list.

How does financial education play into that concern about emotional maturity?

Well, I think for those who have these reasons to not start the conversation, two ways that you can overcome that concern is, first, to have the conversation without the dollar figures in particular. Have the discussion about family roles, have the discussion about the family wealth but not involving those dollar figures.

The second is to start with an educational conversation rather than a discussion of an inheritance at all. With Generation X and Y, these individuals are facing so many of life's exciting firsts—career, marriage, children, first home. Think of all of the great educational opportunities there that can help them improve their financial acumen and be better prepared for some of these conversations on wealth.

Some specific ideas around educational topics could be getting the most out of your 401(k), combining finances and marriage, or buying a first home.

What recommendations do you have for helping people discuss inheritance?

The biggest suggestion that I would share is to hold a family meeting. It provides that great venue to get this conversation started. Now a family meeting should really include all heirs, all members of the family. So having both spouses present, having the children there, the grandchildren, if appropriate. A great way to do this might be around the holidays, when all happen to be together anyway.

In those meetings, you can use it as a great time to define family roles. Perhaps someone's in charge of the personal finances, another could be in charge of the, perhaps the social direction in family vacations and get-togethers. And if you are involving perhaps those grandkids, maybe one of them could serve as a secretary or timekeeper, even to engage those younger generations.

A great activity within that meeting, to provide some structure to the conversation, would be to create a family mission statement, collectively coming to agreement on what the purpose of your family's wealth might be, whether that be philanthropy, maybe it's education for yourselves and your heirs, or it might be family fun and having some vacations as part of those family plans as well.

What role does a financial advisor play in these conversations?

For some of these family meetings, I think financial advisors can play a very important role as a facilitator of that discussion. It provides that neutral, third-party perspective and helps the conversation both get started and get to the important topics that it needs to.

You've offered some suggestions for getting the conversation started, but how do you keep it going?

I think you can have these conversations on an ongoing basis. Perhaps you agree as a family to come back together on an annual basis or whatever frequency feels right for you. But to have that time dedicated to these conversations.

What final thoughts do you have?

The one thing that I would share is really to stress the importance of getting these conversations started. It's not the most fun conversation. I'm certainly the first to admit that. But I think the research shows us that it's so important that it's worth working through that discomfort.


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