Wealth Transference Failure and How to Avoid It

If you believe that everything has been done to preserve your estate as it passes to your heirs, you may want to think again. Almost 70% of family wealth transference and business succession plans fail, according to studies cited by Victor Preisser and Roy Williams, in their book "Preparing Heirs".

The statistic is sobering; despite considerable time and money often expended on quality financial and legal advice, less than a third of wealthy families are able to keep control as their assets pass to the next generation. Typically with my Santa Barbara clients, assets include a family business, real estate and financial investments, as well as philanthropic foundations and trusts.

That history's largest intergenerational wealth transfer is about to occur makes the concern particularly poignant. Experts project that $25 trillion is expected to pass from elder parents to baby boomers over the next 20 years, $7.2 trillion of which will go directly to boomers (1). The possibility that a majority of these may not occur successfully is mind boggling!

We would expect that estates lacking technically competent transference plans or having plans that are not up-to-date would have issues. It is only natural that discussions of our own mortality are not a favorite topic. As a result, many families will find themselves postponing vital planning activities and discussions that can help preserve their estates. These can vary from making sure proper wills and trusts are in place, to periodically reviewing an existing plan and beneficiary designations to be certain all aspects are current with prevailing tax laws and family circumstances.

But the thought that plans can fail despite being technically sound and up-to-date is surprising to say the least. "Failure" can take a number of forms. Of course there is the obvious; estate erosion attributable to inadequate tax planning, liquidity issues that may force below market "fire sale" of otherwise wanted assets, and lack of specificity that may lead to conflicts between heirs. Beyond that is the probability that "… the heirs will involuntarily lose control of the inheritance left them… not from outside sources, but rather in the values and practices of the heirs themselves." (2)

Key among these are the values and skills the next generation are given to wisely oversee their inherited wealth. Thus the term "values transference" is coined. A common deficiency in unsuccessful transfers is a clearly developed plan or family mission statement, and the presence of open communication.

The fact is, poor inter-family communication is cited as a key ingredient. A 2005 study by Dr. Ken Dychtwald of Age Wave (1) found less than 1/3 of boomers and their parents have had a thorough discussion on all aspects of legacy planning. Factors for this were not surprising, but noteworthy. Personal discomfort with topics of inheritance and death are the biggest barriers to discussion. But it was unexpected that 34% of the Boomers studied were more uncomfortable discussing their parent's situation than the parents themselves (22%). Further, 25% of the Boomers hesitated because they thought such conversations would be upsetting to their parents, whereas 36% of the parents thought it would upset their Boomer children. Both groups about equally (22% Boomers, 20% Parents) thought the talk would cause conflict within the family. The bottom line may be that each generation may be misreading the other.

The solution may lie in our ability to develop a framework for open discussion. It starts by expanding the concept beyond inheritance. Whereas inheritance refers to the physical assets and possessions that we pass, legacy includes the intangibles. Thus the "six pillars of legacy" include not only the (1) Financial assets and/or real estate and (2) Personal possessions of emotional value, but also (3) Value and life wisdom-lessons; (3) Ethics, morality, faith and religion; (4) Customs and traditions; (5) Memories and stories; and (6) Instructions and wishes to be fulfilled.

When facilitating these discussions through family meetings, I encourage clients to begin by speaking of their positive family stories. These tend to unite family members through their shared history and are less likely to be controversial. Not only can everyone be right and have what they want, but this often provides clues as to how other issues might be broached.

Often the "fear" factor encourages us to postpone uncomfortable discussions; however, it does not eliminate the need to deal with the issues sooner than later. When we do, we may find the fears may be exaggerated or unfounded. When and if conflict arises, family members often welcome the opportunity for discussion and resolution. In short, studies show that avoiding the potential for conflict now may result in greater conflict later.

Uncertainty over the economy and financial markets has many people concerned about their financial futures.  For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary, no obligation "Second Opinion" that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth management firm like ours—one that delivers services according to the needs and perspectives of its clients.

This information is not considered a recommendation to buy or sell any investment or insurance. We strongly recommend an advanced tax and estate planning expert be contacted for further information.

Written by
Mitchell E. Kauffman, MBA
Certified Financial Planner^TM
Masters of Science in Financial Planning

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent.  He is one of only five financial advisors from across the U.S. named to Research magazine's prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the 20 years prior.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman's articles have appeared in national publications, and he is often quoted in the media.  He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara, Santa Barbara City College, and Pasadena City College.

For more information, visit www.kauffmanwealthservices.com or call (866) 467-8981. Kauffman Wealth Services is an independent Registered Investment Advisor and serves clients from two office locations: 140 South Lake Avenue, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108.  Securities offered through Raymond James Financial Services, Inc., member, FINRA/SIPC.