Points to know
- Research shows that only 30% of families transfer their wealth successfully.
- Lack of communication and trust are the leading causes of failure.
- Financial education, beginning as early as age 5, can help prepare your heirs.
Approaching the personal side of estate planning
As one of your goals, you may plan to transfer and preserve your wealth for future generations. But statistics show that's easier said than done. According to the Institute for Preparing Heirs, only 30% of high-net-worth families successfully transfer their wealth.
Families were considered successful if they retained control of their inherited assets. For the vast majority of families in the study, the succeeding generation failed to maintain the wealth they inherited.
In most cases, the failure traced back to a lack of communication and trust within the family.
Make your family part of that successful 30% by taking a holistic approach to your wealth, focusing not only on the tactical side of planning (trusts and investments) but also the personal side—family communication and preparation.
Communicating with your family
Making family communication a part of your overall estate planning strategy could be one of the keys to ensuring your assets pass down according to your wishes.
In a recent survey of investors, however, only 41% of the wealthiest group of respondents had spoken with their families about their wealth.*
Granted, money isn't always an easy subject to talk about. You might be uncomfortable speaking with your children about your finances. And you may prefer to plan privately with your advisors.
When children or other heirs inherit a large sum of money, it comes with tremendous responsibility. If they're not prepared to take on that wealth—and all it entails—even the best-laid plans can go awry.
When you're ready to share information, engage your family to ensure the plans you've worked so hard to prepare come to fruition.
Deciding what to share
Deciding what information to disclose to your heirs, and when, depends on your situation. Various factors can affect your approach, such as your heirs' ages and maturity levels.
In general, though, talking about the following topics can establish a sense of openness and trust within the family and help your heirs understand what you hope to achieve.
Top reasons wealth transfer fails
This graphic shows the reasons families in the study failed to transfer their wealth successfully. 60% failed because of a lack of communication and trust in the family, 25% because of inadequate preparation, and 15% for other reasons, such as tax and legal issues.
The person or entity named in a will and appointed by the probate court responsible for gathering an individual's assets upon his or her death, managing and maintaining those assets, completing the administrative and tax responsibilities of the estate, and distributing assets according to the decedent's will.
Where will your assets go and for what purpose? What roles and responsibilities will family members have within your plan? These are important questions not only for you, but for the family members who will someday receive your assets.
These topics might provoke difficult conversations, but putting them off won't benefit your family. If they don't understand your reasons and intentions, you could be setting them up for painful conflicts down the road—or even a family rift.
What's your mission for your wealth? Having a sense of purpose establishes the foundation on which everything else will be built. Prepare to explain the values that guide you so you can begin to instill them in your family members.
One way to communicate your values is to create a mission statement that summarizes your hopes for your legacy and why it's important to you. You can even involve your heirs in creating a family mission statement, giving everyone the opportunity to contribute ideas.
Share your investment philosophy to give your family a frame of reference as they learn about finances and investing. This can encompass specific goals you're investing for as well as your best practices for managing your investments.
Inheriting significant wealth means your heirs will have various financial decisions to make over time.
A Vanguard advisor can help them along the way—customizing a financial plan, managing their assets, and providing the guidance they need to meet their goals.
But having a solid financial background of their own will make it easier for them to partner with their advisor. And it will enable them to better understand your plan and ensure your goals are being met.
Financial education is best approached as a slow and steady process. If possible, begin to teach your children early, from ages 5 to 10. Use simple exercises like having them divide their weekly allowance among saving, donating, and spending goals.
The adolescent years are a great time to involve your children in philanthropy, and you can also use charitable giving to teach them about investing. As they get older, you can introduce more formal financial education. You can find a wide range of educational resources for novices as well as more experienced investors in our knowledge center.
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*Source: Spectrem Group.