What should you tell your children about your estate? How much do you tell them about your personal or business finances? How much do they need to know? How much of it is simply “none of their business”?
These are questions we hear often. Parents want guidance because the answers are tough. Although estate planning is often tax or asset-driven, the most important function of estate planning is to help your loved ones through a difficult transition.
The corollary is that the mistakes to be most avoided are those that do harm to your family. Sooner or later, your family members are going to find out about your finances and estate planning. How and when they find out will play a major role in whether or not what you have done either blesses them or hurts them.
The purpose of this article is to help you resolve that concern. The bottom line is that no matter how inadequate you may feel in this regard, no one else is better suited or qualified to inform your children about your estate than you are. But, you need to carefully consider when, how, and what you tell them. But tell them something. Of course, what you tell them should be age and capacity appropriate. The same child at ages 4 or 9 or 12 or 17 or 40 will need different levels and types of information.
Regular family councils and one-on-one conversations are the best venues for such communication. The input and information your children get from you will have a dramatic effect on whether or not their life choices are healthy or self-destructive. What and how you communicate will determine the consequences of inherited wealth.
Here are five specific communications you can do to help your children and family members have a healthy response to your estate planning and inherited wealth.
1. Let Your Children Know You Have a Plan.
One of the greatest anxieties children face as their parents age is concern that may be no succession plan. Even if your children know nothing about your planning, they know this: the absence of a plan always increases the chaos. conflict and cost. It is never simpler or easier for the survivors when someone dies without a plan.
Obviously, in order to truthfully tell your children you have a plan, you must, in fact, have one. Fix that if you need to. Then, let your children know your affairs are in order. This can be as simple as saying, “just so you know, our affairs are in order.” If you tell them nothing else, at least tell them this.
Part of letting your children know that you have a plan is letting them know how to find it. A helpful tool for this is the Records Location Worksheet that we provide with every estate plan. This is also a reason to introduce your children to your advisory team as discussed below. At a minimum, let them know you have a notebook with documents in it, where the notebook is located, and that they should consult it in the event of your death or disability.
2. Disclose Those Particular Details That Will Affect Their Choices and Actions.
What you do in your planning is going to have an impact on your family members. Your planning (or lack thereof) will result in things they must do. It is generally best to let them know what their role will be in your plan, and how it will affect their choices. For example, if you have named them to a fiduciary capacity in a Last Will or Trust (personal representative, trustee, etc.), tell them. If you have named them as Attorney-in-Fact under a Durable General Power of Attorney, or as a Surrogate or Agent under a Medical Directive or Living Will, let them know. They will also need to know where to locate documents in case of a medical emergency.
Also, even though it may be difficult, if you have skipped or excluded or omitted a child or a grandchild from your estate, let them know. If they are estranged or if contact is lost, this may not be possible. However, if you are in communication, and if there is any possibility that they may have an expectation of receiving an inheritance, it is a terrible blow emotionally for them to find out that they were disinherited after you are dead.
Tell them now. Tell them why. If you are leaving more to one child because they need it and less to another because they don’t, say so. Some of the saddest and most painful experiences I have witnessed in the administration of an estate is the deep personal and spiritual crisis that results from someone discovering that he/she has been disinherited.
3. Appropriately Involve Your Children in Your Own Money Choices.
I once witnessed a wealthy man have a discussion with his teenage son about the car he was thinking of buying. He openly discussed some of the features of the new car such as its safety record, fuel efficiency, and low maintenance requirements. They talked about the adequacy of the car for its intended use: commuting to an office, hauling family and customers, etc. They discussed the pros and cons of paying cash vs. the available financing options. The father frequently asked the son for his opinion.
“What do you think?” “Would I be better off keeping the car I have or getting this new one?” Whatever the son said in answer, the father would ask a follow through question such as, “what do you mean?” or “explain your thinking on that?” or “tell me why?” Obviously, the father was perfectly capable of deciding for himself whether or not to purchase the car, and did not need input from his son.
The point of the discussion was not about the car, it was about the son. Letting your children see into your thought process, about how you view your financial and estate planning process, will enable them to make better decisions in their own lives. Teaching our children to make good choices is perhaps the most powerful and useful legacy we can leave them.
4. Involve Your Children With Your Advisers.
A classic characteristic of those who succeed financially is that they assemble a team of highly qualified advisers to assist in specialized areas such as the law, tax, investments, and insurance. Sadly, as soon as the parent dies, most of the time the children will replace these advisers with newer, younger, less experienced people who are more likely to have an alternative agenda (such as commissions); agendas that are inconsistent with what the parents would have wanted.
Your children are more likely to retain your advisory team if they know who you have used, and more importantly, have an established working relationship with your team while you are still living. This is critical for several reasons; it results in greater continuity in your planning, and it helps retain the values and decisions that you have put in place. It also facilitates a smoother and more trouble free succession, helping the next generations to avoid foolish, untimely or unhealthy decisions.
Take your children with you to your annual tax meeting with your CPA. Have your estate planning attorney explain your plan to your children. You can work out in advance what the attorney does or does not disclose, and you can have the attorney spell out tough issues such as: “you will be disinherited if you bring a law suit”; or, “I am giving significant gifts to charity instead of you.”
Introduce your children to your financial and insurance advisers. Show them how you reconcile or statements and balance your books. When you die, the high school buddy or next door neighbor of your child is NOT going to do a better job than the advisers whom you have developed over time.
5. Help Your Children Understand the Difference Between Your Money and Their Money.
The most common concern I hear parents express about their children in their estate planning is that they have an “entitlement mentality.” The children feel that they have an unconditional right to their parent’s wealth. Such “affluenza” and entitlement mentality is a complex issue with significant social, political, economic and policy implications. It causes more trouble than just about anything else in estate planning.
It is one of the major factors that results in 90% of inherited wealth being lost or destroyed by the third generation. It is perhaps the biggest reason why parents don’t tell their children about their estate plan. An individual’s work ethic, resilience, self-reliance, long term relationships, freedom from addictions, productivity, and contributions to society will be determined, in large part, by the degree to which that person has an entitlement mentality.
The unintended consequences of misapplied financial help start at the earliest of ages and continue through life. If the little child drops an ice cream cone on the sidewalk because they refused your advice to sit still, don’t buy them a new one. Let them experience the natural consequences of their choice.
Until Next time,
Richard E. Durfee Jr. is a preeminent AV rated attorney representing clients and the families throughout the country for dynasty estate planning, asset protection, charitable planning, and tax efficient business structures. He has authored many articles and publications including, “Leave Your Estate To Your Children Without Ruining Them,” “Why All Trusts Are Not Created Equal,” “Preventive Law Primer,” and many others. Richard is admitted to practice before the Arizona Supreme Court, the United States District Court, and the IRS.