Some parents spend more time preparing estate documents than preparing their children for the wealth. This is not wise.
There is a Yiddish proverb that "with money in your pocket you are wise, you are handsome and you sing well too."
Similarly, data and research studies illustrate that children who inherit significant wealth often fail to develop the necessary skills, drive and tenacity to succeed in their own right but rather develop a false sense of entitlement based on the wealth that they inherit.
They only have the illusion that their pockets are full; the wealth actually hinders their ability to be successful.
CPAs and financial advisors can work cooperatively as part of a team (often with a client's estate attorney) to help clients better prepare their children for inherited wealth. The principles summarized in this article apply just as well to ordinary parents and grandparents who want to help their children become responsible citizens with prudent money skills as they do for parents of true "heirs" who stand to inherit several hundred thousand or more.
Research evidence outlined below suggests that inherited wealth is often more a curse than a blessing. In this context, "preparing heirs" involves teaching them skills which will help them to lead an independent and fulfilled life immune from the dependence and resulting ills and loss-of- initiative which inherited wealth often creates.
Based on conservative estimates, $40.4 trillion will pass to heirs by the year 2052, or about $800 billion per year plus an additional $11.6 trillion will be donated to charities. So preparation to help heirs and families improve their effectiveness is essential.
Research data indicates that approximately 70 percent of estate transitions "fail" where failure is defined as the second generation involuntarily losing control of the family business or a significant part of the family's wealth. More importantly, several of these research studies illustrated that the primary cause of failure in wealth transitions is a high degree of splintering, divisiveness and lack of communication within the family.
One of the most comprehensive studies on wealth transitions and preparing heirs was completed in 1994 by family coach and author Roy Williams and professor Michael Morris, PhD, of Syracuse University's Whitman School of Business.
The study was summarized in William's book For Love & Money: A Comprehensive Guide to the Generational Transfer of Wealth. They studied 3,250 affluent families between 1973 and 1994 and confirmed the 65-75 percent estate transition failure rate and isolated the following causes:
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60 percent of the failures were due to breakdowns in trust and communication within the family unit
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25 percent of the failures were caused by inadequately prepared heirs 6
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Less than 3 percent of the estate transition failures were caused by incompetent advisors, lawyers and accountants
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Approximately 12 percent of the failures were due to lack of a family mission or purpose that clearly defines the use of the family's wealth
The evidence is strong that even a sound estate plan will fail if steps are not taken to prepare heirs.
Even if communication within a family is less than ideal, the family's family office advisor, investment manager, attorney and CPA working as a team can help lead a family meeting that encourages mutually productive dialogue. If necessary, experienced family coaches with training in psychology can be brought in to break down barriers and facilitate discussion.
