Preparing your heirs for the wealth they’ll receive is an important step in your legacy planning.
Billionaire investor Warren Buffett famously said he planned to leave his kids “enough money so that they would feel they could do anything, but not so much that they could do nothing.” His intentions are good. Buffett, like many ultra-high-net-worth individuals, understands that the transfer of wealth to the next generation is a gift, but can also be a burden for beneficiaries if not properly handled.
Parents who pass along too much wealth, too soon, risk demotivating their children from pursuing their own careers and passions, which can be both economically and emotionally harmful to them over time. There is also a risk that wealth transferred too soon, or without proper planning, will be mismanaged, which can have broader economic and social implications.
Commissioned by RBC Wealth Management, The Economist Intelligence Unit (EIU) undertook a study of 1,051 high-net-worth individuals (HNWIs), including 259 respondents in Canada, from March to May, 2018. The new face of wealth and legacy survey explores how the meanings of legacy and wealth are being redefined across regions, genders and generations.
According to The new face of wealth and legacy research, 74 percent of female respondents in Canada believe they have an obligation to transfer values to the next generation.
History has shown transferred wealth may not last long enough to create a legacy for multiple generations; hence the proverbial saying, “shirtsleeves to shirtsleeves in three generations,” which means wealth gained in one generation will be lost by the third.
There’s also the problem of not properly preparing children for the wealth they’ll receive, including any expectations of how it should be spent, invested and potentially donated to philanthropic causes. Those decisions are often based on a family’s values, which may not always be well communicated from one generation to the next.
Given that there’s an estimated US$4 trillion of wealth set to be passed down to inheritors in Canada, the United Kingdom and the United States in the coming decades, there’s a lot at stake.
“If the current generation is able to transfer its knowledge as well as its wealth effectively, it could increase the likelihood that future generations will be better prepared to preserve wealth, drive economic growth and give back to their communities,” states RBC Wealth Management’s 2017 Wealth Transfer Report.
Many families are unprepared to transfer wealth, and receive it. A lack of communication and planning are often to blame.
The RBC Wealth Management report shows only 26 percent of respondents have a full strategy in place to transfer their wealth to the next generation, and only 35 percent of inheritors say they are prepared by their benefactors before receiving wealth.
“Even when a basic discussion did take place, it typically only included being told the monetary value, with no actual guidance for how the giver wanted it to be managed and used,” says Anthony Maiorino, vice president and head, RBC Wealth Planning Services in Toronto.
Maiorino says a big problem is families are uncomfortable talking about inheritance: Parents may not want to reveal their wealth status and/or children may not want to discuss a time when their mom and dad are no longer around.
“For many of us, it’s just not an easy thing to do,” Maiorino says. “Some of us avoid it because we’re uncomfortable with the thought of life’s end, or we don’t want to upset our family members with a discussion of ‘after I’m gone.’ Others may have complex family dynamics that make avoiding these types of discussions seem much easier.”
In some cases, Maiorino says parents believe their kids don’t want to have the conversation, “but I think, if done properly and at the right time, kids would be very open to it,” he says. “I think one of the biggest misconceptions is that the kids don’t want to talk about it.”
Maiorino says parents don’t have to provide specifics about their assets, but can instead discuss generalities about what they have and how they might like to see it managed or used. He recommends a series of conversations that start when the children are old enough to understand and appreciate the importance of managing wealth.
The conversations may not always go well, especially at first, he says. Still, Maiorino believes it’s important to maintain an open dialogue and to keep trying. “If, at first, the discussion doesn’t work out, try again, and again.”
The goal is to clear up potential confusion and prevent future disagreement or hurt feelings about the distribution of the assets later on. For instance, parents may wish for their kids to use an inheritance to fund a grandchild’s education, or to continue to donate to a local charity that is close to their hearts.
“There’s significant value in talking to loved ones and beneficiaries in advance about your intentions and wishes,” Maiorino says. “Doing so helps provide reasoning and guidance, which can be tremendously helpful down the road in providing the inheritor with a sense of direction and in eliminating emotional guesswork.”
It’s not just wealth that parents are transferring to their children, but also the values that can help determine how to best manage the assets, says Sarah Tang, vice chair, Enterprise Strategic Client Group, Royal Bank of Canada.
Tang says those values will vary by family. “Some families may want to pass down the value of hard work,” which may have helped create their wealth, she says. Examples might be using the money to help grow a business or to fund education. For others, it may be important their children don’t have the same struggles and enjoy life more, which may mean using the money for family vacations or to purchase a recreational property.
According to The EIU research, 75 percent of those surveyed say it’s important to lay a foundation to define the legacy for their family and future generations.
“There’s no right or wrong, it’s a preference,” Tang says. “What does it mean to the family? It’s not just about wealth preservation, but also the peace of mind.”
Families – and perhaps parents in particular – should also be prepared to see some of those values change and evolve based on varied life experiences or shifting social norms. “How we feel about certain issues may be different among different family members,” or depending on the times, Tang says.
For example, children today might be more interested in responsible investing than their parents. Or, instead of keeping a vacation property to carry on a family tradition, children receiving the property might prefer to sell it and donate some of the proceeds to charity, or use it to start a new family business.
According to The EIU study, women have different views on deploying their assets. Two-thirds (66 percent) of women believe they have more opportunity to tackle societal issues through impact investing, compared with 57 percent of men.
To establish a smooth transition of wealth and the legacy a family wishes to leave, discussions should be ongoing about how the assets could be used and to ensure everyone understands each other’s’ values and priorities.
“Your kids may not do the same things with the money as you do, but getting them to understand why you do what you do can benefit them when making their own decisions,” Maiorino says.
Successful wealth transfer happens when there’s a “clear division and communication of expectations,” says Tang, who works with a number of families on wealth and estate planning, including wealth transfer. “We need to teach people how to communicate in a trusted and safe environment.”
Wealth management plans also need to be updated regularly to reflect changing family circumstances, such as death or if there are new family members that need to be included. She recommends families take advantage of the expertise and experience provided by wealth management professionals who specialize in wealth transfer.
“Our role is to provide advice and guidance that is completely objective and non-judgemental,” Tang says. They can also help protect families from passing on wealth to people or organizations that may be targeting them for investments or donations, without the best intentions.
Maiorino has seen firsthand, in his role working with families on wealth transfer, the benefits of having a wealth management plan and continuing the conversation around a family’s values and expectations.
“It offers a peace of mind for everyone involved,” Maiorino says. “Sitting down and having these important conversations helps ensure that no one feels overwhelmed by an inheritance or is left with question marks for how best to preserve their loved one’s legacy.”
* The minimum investable wealth of respondents was US$1 million (CAD$1.29 million). The margin of error on the Canadian sample is 6.1 percent with a 95 percent confidence level.
In Quebec, financial planning services are provided by RBC Wealth Management Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.
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