Mastering the Art of Communicating With Heirs

This article by Lance Lehman, MBA, CFP®, CIMA®, CPWA® was originally published on TheStreet's Retirement Daily here.

When and How to Talk with Heirs about Your Wealth

“I found your business card in my father’s wallet.”

Not an ideal introduction; however, Mary* shared that her father, Bill*, had recently passed away. As heirs often do following a death, she had begun going through Bill’s possessions and discovered my card.

Bill had divorced long before I knew him over our brief relationship but talked fondly of his daughter and minor grandson. However, he was also a very private person, having not disclosed his terminal illness to me or his family. He passed away after a hospital stay that could be counted in days, not weeks.

Mary, being an only child, was correct in assuming she was the sole heir. However, she was unaware he had left her an inheritance of over two million dollars – significantly more than most. Today, the average inheritance is over $700,000; however, the median is far lower at $69,000. Retirement accounts comprise a sizable share of most inheritances, with a typical IRA/401(k) balance of approximately $190,000 for those aged 65-74.

Grieving the loss of her father, we began advising her on her overall wealth, including how best to incorporate the substantial inheritance. Mary was in her late 30s, divorced, and earned over $100,000 annually. Partly due to the divorce, she had significantly underfunded her retirement, having only recently begun meaningfully saving.

Since it was before the SECURE Acts, Mary utilized the ‘Stretch IRA’ approach – only having to satisfy a modest RMD on her inherited IRA assets but otherwise continue to grow tax-deferred – a considerable advantage over today’s beneficiaries. Mary also benefited from a stepped-up basis for Bill’s taxable investments – meaning the unrealized profits passed to her with no capital gain taxes.

Initially, we evaluated her overall cash flow needs, and she agreed to focus on funding her retirement – possibly an early retirement – and her son’s future college expenses. However, within a few months, she began spending her inherited wealth at an alarming rate. Within a year of her father’s death, Mary had spent over half of her inherited assets on discretionary or illiquid assets, including travel, upgrading her late-model vehicle, and purchasing and renovating a beach house well beyond its market value. Planning for an early retirement was replaced with conversations about how her aggressive spending was jeopardizing her standard of living throughout retirement. 

In my experience, many clients often share intimate aspects affecting their lives with their wealth adviser – their wealth, health, family, careers, hobbies, etc. While Bill kept his medical diagnosis to himself, he was clear about his desire for his wealth to provide financial security and comfort to his daughter and grandson – not just for a brief period following his death – but for their lifetime.

Like many professional athletes, performance artists, lottery winners, and others who suddenly experienced exposure to wealth, Mary succumbed to the well-documented pitfalls of mental accounting bias. This bias occurs when the person assigns a different value to money based on how or where it was acquired (salary earned from employment vs. inheritance), leading to irrational decision-making.

Every day across the US, heirs learn of their inheritances in manners similar to Mary's, with similarly unfortunate outcomes. I often wondered how Mary would have approached the windfall of her father’s wealth had Bill discussed it with her while he was still alive. Perhaps there would be no change in the outcome, but having better understood what Bill envisioned his wealth to do for her, I’d like to think she would have made different choices.

Successful wealth transfers often happen when the wealth creator and heir(s) expectations are aligned and communicated. I recently witnessed this through my client, Joe*, whose mother passed away after battling dementia. His father disinherited his late wife’s Roth IRA assets so their adult children –her contingent beneficiaries – could inherit their mother’s Roth IRA assets. The father communicated the intentions of this decision, allowing the heirs to prepare for receiving this substantial wealth.  

Discussing Money Shouldn’t be a Taboo

Talking about wealth is considered by many to be ill-mannered or uncouth – akin to discussing politics and religion at family dinners over the holidays.

Many wealth creators assume that their will or trust documents are sufficient to tend to this when the time comes. While having proper estate planning documentation is critical and superior to dying intestate (i.e., without a will), relying solely on estate documents assumes that the heirs are A) knowledgeable about wealth and B) capable of handling substantial newfound wealth. As Mary and untold others have shown, that is often not the reality.

Contrary to the assumption of poor estate planning advice or transfer structures, studies show that over half of wealth transfers fail due to inadequate family preparation, trust, and communication issues.

Relatedly, more than 70 percent of heirs are likely to change advisers after inheriting their parents’ wealth. Typically, this occurs for the wrong reasons and results in mistakes by heirs – particularly those not well-versed in properly managing wealth. A common reason is simply a lack of relationship with or knowledge of the adviser’s capabilities and value-add proposition.

While not intended to be an exhaustive list, the following presents a blueprint for actively and positively engaging with heirs about a subject often avoided – when and how to talk with heirs about wealth.

The very-high-net-worth (VHNW) investors ($5 million to $30 million of investable assets) and ultra-high-net-worth (UHNW) investors ($30 million-plus+ of investable assets) often address the issue of family wealth through multi-day family meetings. Such lengthy and costly retreats are likely unnecessary for the millions of high-net-worth (HNW) investors with $1M to $5M of investable assets. Instead, an HNW wealth creator can coordinate an initial half-day or, if needed, a full-day meeting, followed by a ‘closure’ meeting to:

• Outline their overall wealth
• Plans for it over their lifetime
• Emergency measures for it should they be incapacitated (i.e., health care proxy, power of attorney)
• Desires for it upon their death

When to Have the Discussion

First, the wealth creator must decide what they want their wealth to accomplish and for whom – both while they are alive and after death. Ensuring heirs have a thorough understanding of the purpose and priority of the wealth ensures everyone is ‘on the same page.’ Many HNW and some VHNW investors prioritize the distribution of their wealth in the following order:

1. Fully funded retirement (including health care and long-term care coverage)
   
2. Education funding (children and grandchildren)
   
3. Charitable donations (supporting their favored causes and reducing their taxes)
   
4. Disposition of remaining estate to their heirs
   

As a function of the size of their wealth, demographics, and reasonable capital market assumptions, along with the impending collision of the SECURE Acts with the Tax Cuts & Jobs Act (TCJA) of 2017, initiating this wealth planning conversation sooner rather than later is recommended.

Some tips for planning the discussion include:

• Limit the conversation to those most likely to inherit the wealth, including the wealth creator’s children (and possibly grandchildren). It’s essential to consider the heirs' ages and stages of life, as having this conversation too early or too late can present unintended consequences.
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• Determine a specific time and location to discuss the wealth. This is crucial to creating a comfortable atmosphere for everyone involved. Taking a cavalier or casual approach is unlikely to be successful. Instead, wealth and the transfer of wealth warrant serious discussions.
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• Coordinate the date(s) and time(s) well in advance. This ensures that all parties are available and signals the importance of the meeting. Once established, the meeting date and time should not be changed, barring an emergency (i.e., hospitalization, death, catastrophic weather, etc.). Further, if an heir(s) discovers that they cannot attend, it’s incumbent on them to inform everyone.

While unnecessary, a helpful approach can be to follow the wealth meetings with a family-only activity or event. For example, the family could go out for a dinner, event, or activity together afterward, but only for the heirs who attended the meeting.

How to Conduct the Meeting

• Hold the meeting at a neutral location, not property owned or associated with the wealth creator. While the wealth creator’s primary (or secondary) home and business location may seem ideal – it’s not. A wealth creator hosting a meeting to discuss their wealth at their property with their heirs risks presenting an authoritarian position. Heirs likely have different feelings and perspectives of these locations (i.e., one heir may be active in the family business, while another is not), reducing openness and engagement.
  
  
• Provide an agenda in advance. Surprises are rarely a positive experience in wealth planning. Providing heirs with an advance agenda can maximize the discussion about wealth by allowing them to familiarize themselves with the topics and prepare questions for the meeting.
  
  
• Secure a non-heir to be the meeting facilitator. Given their familiarity with the wealth and their expertise, the creator’s wealth adviser is often an ideal candidate for this role. If the wealth adviser is selected, the wealth creator must disclose their relationship with the adviser to heirs. In addition to expectation setting and keeping the meeting on-topic and on schedule, the meeting conductor’s role is to educate, ask follow-up/clarifying questions (where appropriate), and define the next steps. Importantly, they must maintain impartiality and not simply echo the wealth creator’s perspectives.
  
  
• Consider including the wealth creator’s tax advisor, estate attorney, and trustee to correct misperceptions and misunderstandings that may arise during the meeting. However, having direct access to the resources of an experienced and expert advisor(s), heirs might be tempted to inquire about their own wealth planning (i.e., how to pay for their child’s college tuition, refinance their house, minimize their taxes, etc.). Again, the purpose of the meeting is to learn about the wealth creator’s wealth plan – not address questions about an heir’s hypotheticals. If the meeting sparks an heir to think more critically about their circumstances, they should seek a separate meeting with the respective professional.
  
  
• At the onset of the meeting, establish and secure agreement on the ground rules and the expectations of everyone attending. For example, setting time limits for questions or statements ensures meetings stay on schedule, cover relevant topics, and prevent anyone (including the wealth creator) from dominating the meeting.
  
  
• Establish confidentiality and everyone’s equality. This encourages genuine discourse, openness, and curiosity. It is paramount to prevent attendees from reverting to their respective family position or social status (i.e., patriarch, matriarch, birth order, etc.).
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• Along with the meeting agenda, provide brief definitions of tools and topics. For example, if the wealth plan calls for trusts (i.e., revocable vs. irrevocable trust, credit shelter trust, special needs trust, dynasty trust, qualified terminable interest property trust, etc.), multiple retirement savings vehicles (i.e., IRAs, Roth IRAs, 401(k), 403(b), annuities, cash value life insurance, etc.), or charitable vehicles (i.e., charitable remainder trust, donor advised funds, etc.) providing a ‘glossary of terms’ can educate heirs, and demonstrate the diligence and attention to detail expended in creating the wealth plan.
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• Avoid specifics on irrelevant aspects, including portfolio allocations or the latest earnings reports, as this likely will trigger confusion and unproductive questions. The goal is to provide the heirs with a foundation of knowledge to build on.
  
  
• Outline guidelines or parameters by which the wealth can be spent once inherited (i.e., health, education, maintenance, and support (HEMS).) This will help set proper expectations with heirs.

Meeting Follow-Up

Scheduling a follow-up meeting is crucial. As with the introduction meeting, providing ample notice ensures prioritizing attendance.

• The wealth creator must remember that their knowledge and familiarity with their wealth came over years, likely decades, of exposure. Having only recently been 'read in' to the creator’s wealth and plans, heirs are often initially overwhelmed with information – much of which is likely foreign to them – and likely will have questions after having time to process the information.
  
  
• The follow-up meeting is for heirs to confirm their comprehension of the wealth plan, including clarifying the wealth creator’s goals and aspirations for their wealth. and resolving any lingering confusion. The follow-up meeting is not an opportunity for the heirs to challenge or oppose the wealth creator’s plans. Remember, it is not their wealth (yet).

Conclusion

The details of all investor’s circumstances are different. However, a commonality among wealth creators who want their heirs to benefit from the wealth is the need to communicate clearly.

Talking with heirs about wealth is the first step in ensuring the wealth accumulated often over a lifetime has the best opportunity to benefit its desired purpose. Like many things, tending to difficult yet essential conversations can be impactful to all involved and increases the likelihood of wealth benefiting heirs – perhaps even more than first envisioned.  

*The above is intended for illustrative and educational purposes and does not constitute an endorsement of a financial advisor, testimonial from a client, or recommendation. The story has been adapted for privacy and context. We have obtained consent to share this store. Please keep in mind that each individual’s financial situation is different and professional financial advice should be tailored to each experience.

For more on this topic, please feel free to reach out directly to the author by scheduling a meeting or emailing him at lance.lehman@compoundplanning.com.  

About the author: Lance Lehman

Lance Lehman, CFP®, CIMA®, CPWA®, is a Senior Wealth Adviser based in Tampa, FL at Compound Planning – an SEC-registered Investment Adviser. He has over 20 years of private wealth management experience advising high-net-worth clients throughout the United States. He serves on the Editorial Advisory Board for the Investments & Wealth Monitor. He earned a BA in psychology and an MBA from Alfred University.

Disclaimer: The views expressed in this article are those of the author, Lance Lehman, CFP®, CIMA®, CPWA®, and do not necessarily represent the views or opinions of Compound Planning, an SEC-registered Investment Adviser. The information provided in this article is for informational and educational purposes only and should not be considered as personalized financial or investment advice.

This article is intended for general informational purposes and should not be considered as specific advice. Readers are encouraged to seek advice from qualified financial professionals to evaluate their specific financial situations and objectives. Investing in financial markets involves inherent risks, and the reader should conduct thorough research and due diligence before making any financial decisions.

For more about Compound Planning, visit compoundplanning.com.