When I am discussing money with clients, the elephant in the room is “inheritance.” For the generation above, this means how much they want to leave to heirs and how they want the assets divided. For the generation below this involves how much an inheritance could affect key choices they make about where they live, college for their kids, and retirement.
Talking clearly about expectations for inherited assets should be high on everyone’s list of priorities. Unfortunately, for a variety of reasons, it is not.
For many of my clients it is tough to talk about inheritance. Attitudes range from:
- We have helped out the kids enough. Now they are on their own.
- We’d like to help our grandchildren go to college, but we don’t know how to make it up to our son/daughter who has no children
- I don’t want my child to know how much money I have (especially if I am concerned about his/her ability to handle money).
- My sister and I disagree about what kind of care is best for Mom
- Our parents are so private; we don’t want to interfere.
- My parents are starting to lose their memories; I worry they can’t make sound financial decisions anymore.
You don’t have to be Prince, Abraham Lincoln, Jimi Hendrix, James Brown, Stieg Larsson or Pablo Picasso to know that leaving an estate without your intentions known can be expensive in a number of ways. Even those of us with far fewer assets and less complexity in our financial lives can get into trouble for not talking to ones heirs or taking action. Because failure to communicate about inheritance and estate plans can add up to some pretty high costs.
The Cost of Confusion
Estate plans, trusts and wills are complex documents. Not just because of the legalese they contain, but because few benefactors—particularly affluent benefactors—are able to divide their assets into neat, equal piles. Your heirs may not understand the value of what you’re leaving them, how to leverage that value, or even why you made the distribution choices you did.
In addition, if an inheritance is tied up in trust, understanding how the trust will work in practice, and how much control you have imposed from the grave can be difficult for the heirs to comprehend. “What were Mom and Dad thinking? And why did they structure their estates this way? Did they not believe I could handle my own money?” Talking about the structure of the estate before you die and why that structure could be financially advantageous is important in confirming to your heirs that you have their best interests in mind.
The Cost of Contested Estates
I don’t run into a lot of contested estates, but when I do, they tend to cost thousands or tens of thousands of dollars in court and legal fees. That means your estate or trust assets could be significantly eroded in the process of defending your final wishes. For example, if you’re gravitating toward a revocable trust for the privacy it affords (versus a will, which becomes a matter of public record), keep in mind that litigation may cancel out that benefit. You can avoid the hefty costs of a challenged estate by openly sharing your intentions and communicating any plan changes that you decide to make.
The Cost of Fractured Relationships
During the grieving process, the potential for hurt feelings and irrational responses is further elevated.
For one thing, family disputes over healthcare decisions or end-of-life wishes may have already marred relationships even before Mom or Dad passes away (another area where clarity on the part of parents can be helpful).
Then there is the issue of who gets what. Did your estate divide your assets equally or according to each heir’s needs? Most of my clients choose the equal distribution, but some then expect the children to further divide the assets among themselves, according to who helped Mom the most, or who needs the money the most, thereby creating an unnecessary burden on one heir to become the decision maker and appeals court. Parents often want to keep peace in the family before they die – they like to see everyone getting along, but their inaction can potentially create more conflict than it avoids. It’s a mistake to downplay the effect these estrangements can have, and how they work against everything you wanted for your children and your heirs.
We have found it makes sense to talk to your children and other heirs early. Make a point to understand their financial needs/goals and to clarify your priorities, concerns, and intentions when it comes to the transfer of your wealth. Our recent guide offers advice on how and when to begin inheritance conversations. There are too many unintended consequences and costs to remaining silent.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.