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Preparing Heirs for Their Inheritance

Posted on: July 1st, 2020

Inheriting money comes with plenty of benefits. From being less worried (or no longer worried at all) about paying for life’s necessities to enjoying the advantages of affluence—more spending on luxury goods, affording a top-tier education for the kids and so on—inheritors often find that some of life’s key stumbling blocks are no longer in their paths.

That said, an inheritance—even a huge one—doesn’t automatically mean a worry-free life of ease. The reality is that inheriting wealth can create unique challenges and conflicts, both internal and external. A windfall can be the root of significant problems for your heirs—and, therefore, for you too.

With that in mind, here’s a look at some of the inheritance-related issues that often crop up among the Super Rich—those people with a net worth of $500 million or more—and how they tend to address them.

Their strategies can potentially inform your own action plan regardless of whether you’re the one giving the money or receiving it.

Mixed feelings about wealth

Inheriting a sizable fortune can be confusing to some inheritors. Very often, significant wealth goes hand in hand with status and power, which sometimes leads to heirs abusing their positions. For example, they can become narcissists and bullies, using their inherited wealth as justification for cruel or boorish behavior.

Some inheritors feel trapped and isolated. The find the money has set them apart, and they have difficulties building trust and dealing with other people.

Often, inheritors who think they don’t deserve the money end up feeling guilty. They ask themselves “Why me?” and feel the family money is an anchor holding them down.

Transferring wealth

In our experience, we find that most Super Rich wealth creators want to pass the results of their hard work and commitment to their children and other loved ones. Doing so involves a number of considerations:

  1. Financial matters. The aim here is to be tax-efficient in transferring the wealth. For instance, there are different tax strategies that can be employed to mitigate intergenerational loss of family wealth—a key concern of many of the Super Rich. This aspect of transferring the family wealth is the most straightforward for most wealthy families.
  1. Ensuring heirs will be smart about the money. A major concern of Super Rich wealth creators is that inheritors will misuse the wealth they are given. They believe, rightly so in our opinion, that being given control over a large amount of money and being able to make wise decisions do not always align.

But it’s not just the Super Rich wealth creators who are concerned about the ability of heirs to manage their inheritances—it’s often also the heirs. It can be easy for inheritors to mismanage their fortunes, and we find that many inheritors recognize that. That means heirs need to be well prepared for the day when they receive their inheritances.

Money’s impact today

So where do you begin if you want to foster financial intelligence among heirs who may one day inherit wealth?

A good starting point for understanding how inheriting wealth might affect heirs’ lives is seeing how the money is impacting them today. When they get into their teens, the majority of inheritors have some idea that they are wealthy. Today, attempts by parents to hide or downplay their affluence are not realistic.

Heirs should consider their answers to questions such as:

  • Is wealth a source of terrific possibilities, a source of horrific problems or some combination of the two?
  • How is money affecting your life?
  • Is wealth the cause of serious relationship problems? If so, what and with whom are they?
  • To what extent do you define yourself by your family money? What would happen if the money vanished?

In addition, parents should assess the ability of their children to manage their inheritances. If the children are not up to the job, what steps need to be taken to ensure they are capable and will not waste their inheritances?

Inheritor education a must

Chances are, there will be a range among heirs in terms of their ability to intelligently and prudently handle significant wealth That means different heirs will probably need different approaches to “wealth education” in order to best handle their inheritances. It can be detrimental to hand over control of assets without taking these factors into account.

Not surprisingly, there are many different ideas about how best to teach heirs to manage money. For example, some professionals strive to educate heirs on wealth management—teaching them fundamentals such as the difference between stocks and bonds as well as methodologies such as asset allocation. The lessons also tend to deal with different possible estate planning strategies, including how trusts work. This approach is generally appealing to those inheritors who want to handle the mechanics of wealth management. However, we find that most inheritors are not interested in these types of details.

An approach we find to be much more effective across all types of inheritors is to focus on how to be responsible for their wealth. This means giving them a good understanding of the bigger picture. By knowing what they want to achieve financially and being attuned to what is going on with their money, they can make more informed decisions.

One important aspect of being responsible for their wealth is giving heirs the ability to effectively select and work with professionals such as lawyers, accountants and wealth managers. Part of that means empowering heirs to know how to avoid the “pretenders”—professionals who may want to do a good job for their clients but lack the requisite skills. Pretenders can be detrimental to heirs’ financial well-being.

More problematic—especially if heirs receive significant sums—is the possibility of being exploited by predators, grifters and the like. Significant wealth is a magnet for all manner of financial predators, so having the skills to identify such people before they do harm is really a necessity for most inheritors.

Even if the assets are in trust, heirs are best served if they understand how the trusts have been set up and what they’re designed to accomplish. That way, heirs can better ensure that what is going on in the trust is what is supposed to be happening.

Increasingly, wealthy families are making concerted efforts to teach future inheritors how to evaluate and oversee the work of the professionals they will rely on. For example, being asked to sign hold-harmless or nondisclosure agreements with professionals is a red flag that it is likely time to find new professionals to work with. Likewise, a statement such as “Don’t worry, just trust me” from a professional should prompt the inheritor to get a second opinion from another professional.

Ultimately, there are all sorts of indicators and red flags that inheritors (and almost everyone else) should be aware of when it comes to the professionals they work with.

Another area where inheritor education efforts can help is how inheritors potentially can use their money to better the lives of others. This is part of the stewardship of an inheritance, and it may involve a deep discussion of values.

Additionally, there may be a need to discuss issues of money and self-esteem—as new wealth can produce feelings of anxiety and even worthlessness among some inheritors. This is often seen when inheritors’ self-worth is too tied to their wealth, which fuels an intense fear of losing wealth (and therefore losing self-esteem). Delving into ideas that help separate people’s wealth from their overall sense of self can help foster a more comfortable relationship between an inheritor and his or her inheritance.

Lessons for all of us

Of course, you don’t have to be anywhere near the Super Rich level of affluence to benefit from getting your heirs ready to receive an inheritance from you someday.

The key is to get going well before the day comes when assets are transferred. Encourage heirs to think about their views, values and attitudes toward money and wealth—and how those might change if their bottom line suddenly had additional zeros. In particular, help them understand some financial basics and smart ways to size up any professionals they may encounter down the road.

Armed with self-awareness and a strong foundation of financial knowledge, your heirs potentially can get the most from their inheritance.

This report was prepared by, and is reprinted with permission from, VFO Inner Circle.  AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.

Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.

Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures

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