The $35 Trillion Mission: How to Prepare Heirs for What's Their's

The greatest transfer of wealth in modern history is upon us. Because of a relatively recent surge in general prosperity, millions of families have become savers during the most productive years of their lives. Eventually, most of these savers must consider passing the surplus assets to the next generation. This issue raises important considerations – some financial, some not. Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.

Golden Era

Older Americans have spent their productive years – including in retirement – accumulating a massive portfolio of wealth. According to the Federal Reserve, senior Americans (70 years and older) are worth $35 trillion, to say nothing of the rest of the world’s wealthy. With their own golden years safeguarded, it’s likely that most if not all of this parental surplus will be left to adult children, or perhaps, to charity.

The sticky wicket is how to best approach and prepare adult children for this pending avalanche of good tidings. Consideration should include how much each offspring will likely inherit; how this manna might affect each child individually; and most importantly, how parents can effectively communicate information about generational wealth.

Rich History

Today’s population includes the most prosperous humans to ever roam the perilous hills and valleys of Mother Earth. That can’t be true, you might be thinking. Yes, the early Roman emperors were quite wealthy, as was Mansa Musa of Timbuktu who once controlled half the world’s gold. But a study of “more recent” macro human history indicates that humans are more prosperous in general.

Until roughly 250 years ago - the dawn of the Industrial Revolution - most "Joe Averages" lived not just in poverty, but in extreme poverty. Think about it in these terms. Humanoids have roamed the planet for 500,000 years or so, but most quality-of-life progress has taken place within the lifetimes of old codgers like me. No, I’m not 250 years old, but the visible enhancements that began about 2+ centuries ago have continued to improve at an accelerating pace. Consider the inconveniences of life your grandparents endured…and their grandparents…and theirs.

So, what’s my point, you ask? I think initiating a dialogue about a tricky, sometimes uncomfortable topic - inheritance - helps prepare family offspring for a passing of the torch.

The Wealth Factor

Probably the easiest factor to address during inheritance discussions is how much the estate is worth. Most parents can determine the value of an inheritance with some precision by starting with a current estate valuation, and then include less precise estimates of future earnings and outlays.

A solid history of good money management should help most parents accurately predict future asset growth and liability shrinkage. Other predictable factors include charitable giving, the number of kids (and other recipients) involved, and whether or not estate taxes (federal and/or state) are major issues to be considered. In short, although asset accumulations won’t be exact, they can be somewhat accurate based on educated guesses.

And why is an accurate estate valuation so important? Knowing whether an inheritance is large or small is crucial to addressing another important consideration – the impact of an inheritance on prospective beneficiaries.

The Inheritance Impact

How will an inheritance – depending upon its size – affect the beneficiaries individually? For better? For worse? Not at all? The answer, of course, depends upon the characteristics…and age…of each person involved.

If a prospective beneficiary is older – perhaps approaching retirement – an inheritance will likely represent additional financial security. If a recipient is in those expensive middle years - perhaps facing a new business challenge, or a child's college expenses, and maybe lacking adequate Rainy Day funds - then an inheritance might be viewed very differently than by an older beneficiary. Or if the prospective recipient is a younger adult facing college debt repayments and/or has a growing family needing more space, that, too, might represent a wholly different attitude about an inheritance.

This “level of needs” continuum might include a prospective beneficiary who severely lacks money management skills, or is plagued with poor habits and/or substance abuse issues. Another child might have already achieved financial success in life. With regard to the former, an inheritance might well add to the problem; with the latter, there likely would be no positive or negative impact at all. Communication is very revealing when discussing inheritance. In short, parents, know thy kids.

Quality Communications

The communication process presents opportunities to discuss with heirs how to be good stewards of inherited funds.

Generally, total transparency with adult children regarding family wealth is the best approach. Inform them of the value of the inheritance; how and where it is currently invested; what are/were its sources; and most importantly, what are the parents’ “druthers” when discussing the allocation of assets upon death. When prospective heirs are “ready” to receive this important information it should bring comfort to parents, knowing that their children will use an inheritance to improve the circumstances of their own families and community.

Peace of Mind

Take comfort when - or if - your offspring indicate they intend to live within their means - that owning frivolous assets isn’t a primary goal in life. In short, for them money is a means to an end, and not the end itself. It's good feeling when you learn that, when faced with the choice, acts of charity take precedence over your kids' own self-interest. On the flip side, if there was a history of judicious credit cards use - or other worrisome spending habits - find out if that has that changed or if there are there still challenges to overcome.

During the communication process, parents likely will find that an heir just might be better at managing a major change in their finances than they thought. On the other hand, an heir struggling with current finances could be sending signals that receipt of additional assets will require assistance to avoid future money management miscues.

How parents communicate their own monetary values could be a major force in whether beneficiaries will prove to be good stewards of their inheritance. Because heirs, generally speaking, are recipients of “unearned” assets, the display of a sense of gratitude about a pending inheritance is often indicative of an intent to be a good steward of said funds.

Transparency becomes increasingly important as the size of an inheritance grows. If parents are blessed with the comfort factors mentioned above, then inheritances of a smaller size should expect to be absorbed by most recipients with little problem. Large inheritances could raise bigger issues.

Trust Fund Babies

If a sense of entitlement evolves and persists with certain heirs, view it as an opportunity to rethink how to divvy up assets among beneficiaries with the goal of attempting to offer children inheritances that best fit their unique abilities to manage additional wealth. If it means an uneven distribution of assets to certain children, that’s okay.

An unwise allocation of assets often results in the waste of hard-earned assets. Avoid creating resentment if possible but do the right thing. An “entitled” beneficiary, or one without management skills, is likely not a good steward of unearned assets. Some parents used trusts to maintain “fairness” and control waste but it’s often a one-way ticket to both donor and beneficiary resentment.

$35 Trillion Question

Communication with adult children about what parents have and about their ultimate distribution intentions will likely result in additional knowledge about those children that will inform and aid parents on how best to structure their inheritances.

That $35 trillion needs to wind up in good hands. Don’t leave it to chance.