How can you best balance the relationship-based dynamics of an estate plan with the transactional elements, while maintaining harmony within the family? Experts say it’s less about what you give your heirs, and more about how you handle the estate and their expectations. The process begins with making sure you have a will and it’s been updated so your wishes are communicated as needed.
“It sounds silly, but you’d be amazed at how many people don’t do this,” says Catherine Walker, a trust consultant with RBC Wealth Management.
With her clients, Walker recommends revisiting the estate plan once a year after Thanksgiving, a time when families often get together.
“Sit down and spend three minutes looking at each other and saying, ‘Do we need to change anything this year? Has anyone been married or divorced or had children?’ We see people who haven’t changed their documents in 15 or 20 years. It’s the number one problem.”
Walker says many families see estate planning as a taboo subject, but shouldn’t.
“Remember: You aren’t doing the estate planning for you. You’re doing it for the family,” Walker says. “You’re trying to make their lives a lot easier when you aren’t here to help them anymore.”
Today’s estate plans are also more complicated because of the new, modern family. That can include second and third marriages as well as stepchildren.
Walker recommends trusts as a way to divvy up assets in more detail and over specific time periods. An example is if a husband passes away and wants to ensure his second wife receives some assets now and his kids when they’re older.
“Trusts are great,” says Walker. “With a will you say who gets what. With a trust you say who gets what, when and how. When you are creating a trust account you’re looking at a blank sheet of paper. You can get creative with them.”
Walker is a fan of incentive trusts, where the money is based on a specific achievement such as obtaining a degree, kicking a harmful habit or matching income earned in a given year. That way the children stay motivated to continuously improve themselves, instead of relying on an inheritance to fund their lifestyle.
What’s more, the assets don’t have to be split equally among children, Walker says. However, she warns that could cause a rift between siblings if the decision isn’t explained. For example, parents may wish to give a child with a long-term disability more of the assets to fund the cost of health care, or provide more to a child who is a single mother.
Giving back outside the family
More families are also leaving their money to charities, as well as their children. Consider how billionaire investor Warren Buffett has decided to distribute his assets when he passes away. Buffett is known for saying, “A very rich person should leave his kids enough to do anything but not enough to do nothing.”
He has made it clear his kids will get some money when he dies, but he plans to give the majority of his wealth to charity. Buffett helped to create the Giving Pledge, an organization that encourages ultra high net worth individuals to leave more of their fortunes to non-profit organizations, instead of just family.
Many parents want their kids to understand and appreciate wealth should be shared and/or used to further a business or organization, says Dr. Johnben Loy, a family therapist, founder and clinical director at the Rekindle Centre for Systemic Therapy located in Desa Sri Hartamas, Kuala Lumpur.
For example, some parents may want the inheritance money to be used to further a family legacy, whether it’s a business or maybe a charitable organization. Loy also recommended a trust could be set up with conditions that need to be met before the money is accessed.
“This is about more than just passing down wealth. It’s about what you want to do with your wealth,” says Loy. “It’s about building on a legacy, values, skills and capabilities.”
According to latest China Private Wealth Report, about two-thirds of high net worth individuals in China see "wealth preservation" as their top wealth objective. That is followed by "wealth inheritance," which has risen from the fifth priority in 2013 to the second in 2014, especially among the ultra-high net worth individuals, according to the report developed by Bain & Company and China Merchants Bank.
The report also found wealth inheritance has “taken on new meaning beyond passing on material wealth and financial planning.” For example, the report says 65 per cent of respondents also want to leave a legacy of spiritual wealth, which includes a strong work ethic, the importance of education and family values.
Loy recommends parents start the inheritance discussion with their kids at a young age, making sure the expectations are clear. And, if those expectations change over time, they should be regularly communicated to the beneficiaries.
“That also means having clear boundaries about what can and cannot be transferred,” Loy says.
Ignatius (Iggy) Chong, Managing Director of Greater China at RBC Wealth Management, says the key to keeping the peace with estate planning is clearly communicating your wishes – and not keeping any secrets.
“The worst is where it comes out that something has been hidden. That usually is a recipe for disaster,” says Chong. “Often, it comes down to simple communication.”
He recommends parents communicate the passage of wealth as a duty for the next generation to properly maintain.
“It’s not about who gets the house, the car or the art collection,” says Chong. “It’s coming at it from the viewpoint that your kids are really stewards of your wealth for future generations. They aren’t passing on ownership, but instead a sense of responsibility.”