Richard English, J.D., Managing Director-West Region, Commerce Family Office
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Key Highlights
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For high-net-worth families, preparing heirs to receive the significant wealth that will be handed down to them begins with educating children on the family’s attitudes towards money, including the value of work, providing for your family, saving, spending, philanthropy, and continuing the family legacy. Educational conversations may begin before fully revealing to your children the extent of wealth they will inherit. Your approach to addressing financial values with the next generation of your family can be tailored to fit your family’s unique dynamics, priorities, and long-term goals for wealth transfer.
Start educating heirs early on family wealth values
Instilling your family values before transferring wealth to your children is crucial to providing them with a foundation for how they too can approach money matters while being stewards of the family wealth for successive generations. Often this starts with age-appropriate efforts to educate the next generation on the values and financial knowledge that helped you build and preserve your family’s wealth within your own generation.
For example, teaching your children the value of working for money can build a work ethic that persists throughout their lives. In childhood, this could mean setting an allowance that rewards your children for completing chores. In adolescence, you could encourage them to get a part-time job, and as they become young adults you might share personal stories about how your career choices impacted your life or begin to involve them in the family business.
Involving your heirs in work with charitable organizations or a family foundation for purposes of giving back to the community can help them identify their philanthropic interests and instill a sense of purpose. Many families find being actively engaged in philanthropy can help promote the value of humility and awareness of the needs of others.
Consider establishing a dialogue about finances and family values with your children as early as you deem appropriate. Introducing concepts that promote financial literacy and reinforce your family’s principles can be an effective starting point to position the next generation for success.
Communicate with your family regularly
Many high-net-worth families with lasting generational wealth can attribute their enduring affluence to effective communication. Conducting regular family meetings to talk about topics like the importance of financial security for themselves and the family they may one day have, or living within their means normalizes talking about finances among family members.
Regularly discussing family finances offers younger family members the opportunity to ask questions and allows them to learn. When more difficult conversations on family finances arise, heirs with practice discussing these matters will be better prepared to handle them as they will have some familiarity with the topics and a foundation for understanding the situation at hand.
Discussing financial principles and family financial matters in family meetings can be a way to ensure continuity of communication around these topics. Some may be concerned about family meetings opening the door to difficult questions or revealing too much information regarding inheritances. It may not be necessary, or in your heirs’ best interests, to disclose all the details of your estate plan. Consider involving a trusted third party, such as a member of your wealth management team, to help you navigate what specific information should be shared and when.
Prepare heirs for an estate tax liability
Part of preparing your heirs for an inheritance is ensuring they are not burdened by an estate tax or other liability when the time comes for your wealth to be transferred to your beneficiaries. Without sufficient liquidity to cover such costs, the next generation may not receive the full value of the assets you intended them to keep.
Sharing with the upcoming generation how your assets are currently allocated may inform their investment strategy. For example, if the assets in your taxable estate are mostly illiquid assets such as closely held business interests, real estate, collectibles, or other alternative investments, it is important to inform your heirs about potential liquidity challenges that could arise from an estate tax liability. If you expect a large portion of your liquid assets will be used to pay estate taxes, your heirs may focus their current investment efforts on more liquid assets to ensure they have sufficient cash flow to support their lifestyle.
You may want to prepare your heirs for the settlement of your estate to ensure they understand the key points of what will be a detailed and potentially lengthy process. Depending on the complexity of the estate, a significant period of time may be required before heirs can receive the assets that will make up their inheritance.
Consider other recurring liabilities your heirs may inherit. For example, assets like real estate may have ongoing mortgage payments if there is an outstanding loan as well as real estate taxes, maintenance, and insurance costs.
Engaging your private wealth management team to incorporate estate planning strategies that mitigate costs and communicate the corresponding responsibilities your beneficiaries will assume can ensure both you and your beneficiaries know what to expect.
Pay attention to spendthrift beneficiaries
Parents in high-net-worth families with a spendthrift beneficiary such as a child who spends money irresponsibly or in an extravagant manner face a critical challenge given the complexity and level of wealth the beneficiary may inherit. Proactively instilling family values or family governance practices that encourage living within your means may be enough to course-correct excessive spending behavior. Other times, the reality of changing someone’s behavior can be difficult and may require strategies built into your estate plan to mitigate the financial risks posed by a spendthrift beneficiary.
If you have assets in a trust, developing a sustainable spending plan accounting for a spendthrift beneficiary could involve engaging corporate trustee services to protect the inheritance from being spent in a way or at a rate you did not intend. An independent third party such as a corporate trustee can also take steps to oversee the distribution of assets, relieving the family of the responsibility and potential sensitivities involved in overseeing an adult sibling or relative’s spending habits.
A spendthrift beneficiary would likely benefit from a designated fiduciary serving as the trustee of the beneficiary’s trust. Checks and balances within the trust document, such as setting conditions on how and when funds can be distributed from the trust, can be implemented to establish healthy barriers that protect family wealth. Your private wealth management team in conjunction with your estate planning attorney can help balance safeguarding family assets while still providing the level of support you intended for your beneficiaries.
Preparing beneficiaries as part of comprehensive estate planning for high-net-worth families
Ensuring your heirs are adequately prepared to inherit wealth requires proactive and comprehensive estate planning.
At Commerce Trust, your private wealth management team comprised of specialists in estate planning, trust administration, and tax management* can assist you with developing an estate plan that will accommodate your vision for the inheritance. Your team can support the necessary education, conversations, and execution with your estate planning attorney and tax advisor to prepare your heirs for this significant wealth transfer event. Through a team-based approach, our professionals can also facilitate family meetings, administer trust assets, and manage your portfolio of investments and special assets, to accomplish your financial goals.
Contact Commerce Trust today to learn more about how we can ensure you and your heirs are fully prepared for future wealth transfer.
*Commerce does not provide tax advice to customers unless engaged to do so.
The opinions and other information in the commentary are provided as of November 8, 2024. This summary is intended to provide general information only, and may be of value to the reader and audience
This material is not a recommendation of any particular investment or insurance strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified tax advisor or investment professional. While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. Commerce Trust does not provide legal advice to its customers. Consult an attorney for legal advice, including drafting and execution of estate planning documents.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Commerce Trust is a division of Commerce Bank.
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