A Comprehensive Approach to Wealth Transfer

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Successful trust and estate planning increasingly rests on building a different kind of intrafamilial trust.

Successful estate planning increasingly rests on building a different kind of intrafamilial trust.

Planning for wealth transfers between generations has traditionally centered on minimizing estate tax consequences so—simply put—heirs get more and the government gets less.

But there is overwhelming evidence that tax strategies, while essential, aren’t enough to satisfy many wealthy families’ primary goal: to sustain wealth across multiple generations. According to a study by the wealth consultancy The Williams Group in San Clemente, California, 70% of families lose their wealth in their second generation and 90% in the third.

“I quote that statistic in presentations all the time, and there’s always a sense of understanding from the audience because families have seen this happen,” says Joan Crain, senior director and global family wealth strategist at BNY Mellon Wealth Management. “All tax planning is for naught if the heirs aren’t prepared. The money can disappear very quickly.”

This is particularly resonant among today’s increasingly complex families, which can span three or more generations and involve second or third marriages, blended families and various nontraditional relationships. When families become complex organisms, they’re more likely to have splintered ideas about how to define family goals and values.

The softer side of wealth transfer

Against this backdrop, what’s needed is a comprehensive wealth transfer plan that tackles what are often referred to as “softer issues” because they can’t always be quantified or referenced in the tax code, says Jere Doyle, senior vice president and estate planning strategist at BNY Mellon Wealth Management. These softer issues generally break down into three separate but related components:

1) Governance

The governance structure is a family’s system of decision-making and problem-solving. It often includes a family council and regular family meetings. Some families establish a constitution that spells out shared family goals and values. 

While most families naturally have leaders and decision-makers, a formalized governance structure can assign roles across generations to help make family members feel involved and more invested in the task of managing wealth wisely. BNY Mellon Wealth Management’s advisors work with families to establish a structure that makes the most sense given a family’s business interests, philanthropies, personalities and various nuances—and stay deeply involved by organizing and hosting family meetings, leading seminars and meeting with younger generations or smaller family units.

 

2) Communication

Strengthening lines of communication is essential for minimizing conflict and maintaining a healthy family dynamic, and easier to do once a governance structure is established, Crain says. “When generations have to work together on joint trusts or as active owners in a company, for example, open lines of communication are no longer just an option. We take this goal very seriously from the start when working with families.”

This sometimes involves exercises in family meetings to acknowledge family members’ different communication styles and how they might change under stress, she says. “Sometimes at the beginning of these exercises, patriarchs sit at the back of the room and don’t want to get involved, but by the end they’re joining in and laughing along with the rest of the family.”

 Working on communication also means helping parents talk to kids about wealth. Wealth-builders are notoriously anxious about this—concerned about discussing wealth too soon or too late in their children’s lives, or giving too much or too little detail, Crain says.

“That’s where we can help, because we can be objective and we know the families well,” she says, adding that how much detail is discussed depends largely on the children’s ages.

3) Education

This is the final critical component of a comprehensive wealth transfer plan and should begin as early as possible so children understand the responsibilities that come with wealth and learn how they can manage assets in line with family values. Education should also get into the nuts and bolts of personal finance, such as the meaning of compounding interest and the benefits of a spending strategy. BNY Mellon Wealth Management offers educational engagement plans and facilitated learning sessions to help with these efforts.

Without explicit instruction, many folks won’t absorb simple concepts, Doyle says. “Some of these young people don’t know how to write a check or finance a car because they never had to handle basic affairs,” he says.

Such lack of proficiency persists despite the fact that wealth levels rose significantly through the bull market over the past decade, Doyle says. Taken alone, a blind spot about finances may not seem like a major issue. But when added together, a lack of education, communication and governance within a family can put wealth at risk over the long term. The three soft components are, ultimately, the muscle behind a successful wealth transfer plan.

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