A new study suggests poor wealth planning accounts for just a drop in the leaky bucket of lost inheritances
There are plenty of reasons why wealth transfers fail among high-net-worth families; those with professional wealth management in place may believe that they’ve safeguarded their assets adequately.
But according to a white paper by BNY Mellon’s Pershing, only 3% of family fortunes are lost due to poor wealth management, while 60% of wealth transfers fail because of a lack of communication and trust. According to the paper, which focused on families with between US$5 million and US$25 million in investable assets, the risks from lack of communication are particularly severe in four areas.
First, there’s a universal tendency for third-generation wealth inheritors to squander their fortunes. The first generation usually earns and accumulates the assets through fiscal responsibility; when the wealth goes to the second generation, they tend to be very respectful of the sacrifice that their parents made. But it can all fall apart with the third generation, to whom money is given rather than earned.
Another issue comes from a lack of family delegation. Matriarchs and patriarchs who do not want to relinquish control over their assets tend to keep a tight hold over everything. When they pass away, that leaves the surviving family members without good judgment or intentional decision-making processes to fall back on.
“One of the big reasons wealthy families tend to blow it is that the kids aren’t prepared or the parents haven’t talked to them about it,” said Rod Zeeb, CEO and co-founder of the Winconsin-based Heritage Institute. As he put it, high-net-worth clients with heirs should be thinking about “preparing them for the road of life, rather than preparing the road of life for them.”
Having unclear reasons behind a particular intergenerational transfer could also be an issue. Clients can make a purely transactional choice to gift wealth and mitigate tax without regard for the beneficiary’s needs or wants; this could result in problems down the road, particularly if the heir being named is young or hasn’t even been born yet. Giving equally rather than fairly to different heirs may also be problematic, since they will most likely have different priorities – one may want to continue the family business, for example, while another may have more philanthropic leanings.
Finally, a lack of communication between the family and the advisor could be disastrous when it comes to death and divorce. Failing to update beneficiary information, especially in cases involving second marriages and blended families, could result in the biological heirs of the original wealth accumulator being shut out. In addition, advisors who don’t know the history behind family heirlooms and other emotionally-laden assets may also lead to internal resentment, conflict, and costly legal battles.