As workers, business owners, investors, and diligent savers, you may have amassed a nest egg of resources which could outlive you and your partner. In most cases, your heirs will likely be children. As parents, the inheritance that you leave behind can be viewed as a blessing and a curse. Surely, you’ve heard the horror stories of heirs running amuck with the assets they receive; putting themselves in more difficult financial positions than when they started. In our experience, this is one of a parent’s greatest fears. However, as advisors, we’ve seen and heard amazing success stories of how heirs go on to do something truly remarkable, as a function of having a significant inheritance. So, the simple question arises, how do we know if our heirs are ready to inherit our wealth?
The short answer, we don’t.
A better question to ask is, how can we provide an environment for our heirs to succeed after they inherit our wealth? Admittedly, there is no clear-cut way to do this, but having the privilege of working with many families facing this similar financial dilemma has provided us an opportunity to implement strategies which we believe have set up the next generation with the greatest chance to succeed.
This is part-one of a multi-post series on dealing with the largest intergenerational wealth transfer that the world will witness over the coming decades. Our topic today is called Giving Back Together.
John and Jane Doe are both in their late fifties, they have two children in college, and while reviewing the family finances, they’ve realized that between having a paid-off house and around $2 million in liquid investments, their net worth has become pretty sizeable. Once the children come off the family payroll, and they account for usual expenditures in retirement, it becomes evident that there is a high likelihood that the two children stand to inherit a substantial amount of wealth once John and Jane pass away. They are certain that one child will be perfectly able to manage their inheritance, but the other child they just aren’t fully convinced will handle the influx of wealth appropriately.
Another critically important part of John and Jane Doe’s life is their philanthropic endeavors. On an annual basis, they contribute roughly $20,000 to several charities.
With the recent overhaul of the tax system, the use of Donor Advised Funds (DAFs) has been on the rise in coordination with a strategy called Charitable Lumping. Basically, this strategy involves contributing a large amount to a DAF in one year, and then parsing out grants to charities over time to maximize charitable deduction benefits (while still making annual donations to charitable organizations). Tax benefits aside, this strategy can also offer a family a chance to not only learn about investments and compound interest but also share the reigns of handling large sums of money with the next generation, all for the purpose of giving to charitable organizations.
Say John and Jane decide that it would be financially feasible to contribute $100,000 to a DAF. Now may be the perfect time to sit around the table with their two children and explain that, as a family, they will parse out which organizations to distribute this money over the 3 – 5 years. Suddenly, the two children have some control over a meaningful amount of money, in an environment where John and Jane can serve as mentors to their children. Additionally, they can be fully confident that the money will go to a charitable organization (per the rules of a DAF).
Psychologically and emotionally, the hardest part of the exercise is the fear that the next generation just might not see the world in the same way that we do. One child might just say, just give my attributable share to a charity and be done with it. In moments like these, we may be pushed to impart our own values onto someone else or even just revoke the child’s ability to make a charitable grant (because ultimately this authority will rest with whomever funded the DAF). However, this could also be an opportunity to donate a nice sum of money to that well-known charity in line with the child’s wish and move on with the knowledge of how they actually handled having some direction of a meaningful sum of wealth.
Remember that the goal of this exercise is to build a better environment for the next generation of asset-holders to succeed. Seeing first-hand how they react can provide a good basis of information regarding how to proactively structure an inheritance. John and Jane may want to consider some protective guardrails on how the assets are distributed to prevent one or both of their children from having too much control all at once.
At the end of the day, you can’t take it with you when you go. Sharing in philanthropy can be an excellent way to introduce heirs to having some control over meaningful sums of assets, and it can open the door for dialogue between generations about money (which frankly are conversations that aren’t being had enough).
If you would like to have a conversation about managing your current wealth or figuring out a solid strategy for passing it on to the next generation, please reach out to one of our advisors at GBB. We look forward to hearing from you!