June 2010
WEALTH TRANSFERS:
ARE YOU A DILIGENT DONAR?
By Gary W, Buffone, Ph.D.
Are you a diligent donor? And of all the challenges parents face when it comes to their children and money, one of the most difficult is the transfer of wealth. In fact, I rank this decision right up there in importance to choosing a career or picking a mate. No matter what the size of the estate, all affluent parents must decide at some point what to do with their assets. And this raises some tough questions.
When’s the best time to make distributions? How should the money be transferred so as not to disrupt their child’s life? Are their better ways to handle the transfer of a family-owned business? What the best way to distribute assets to encourage desirable behavior while discouraging undesirable behavior? Is it better just to give it all to charity?
As I’ve witnessed too many times, the heads of affluent families find out, often too late, of the disastrous consequences of poorly planned financial gifts to their children. How can these heads of households plan their disbursements to prevent, or at least minimize, the kinds of familial catastrophes that often befall the moneyed?
This is the last thing parents want. Parents want their financial gifts to enrich their children, to make their lives better, and certainly not to harm them. So with all of these good hopes and intentions, how is it some parents get it so terribly wrong?
So what causes problems in the wealth transfer process? It’s not as if parents lack the intellectual horsepower, financial savvy, or access to sound legal and financial advisors. Successful parents are smart, capable people who usually surround themselves with the best legal and financial minds available. But they still can make, often contrary to the very professional advice given them, the poorest decisions when it come to gifting their kids.
Because the reason has nothing to do with intellect or smarts, it has to do with the feelings and psychological needs of the parents. This is at the heart of the problem for it is just these feelings that drive the parent’s decisions, no matter how irrational they may appear to the outside observer.
Whether we’re talking about the guilt many parents feel over not having been there for their kids growing up, or the pride of showing off their accomplishments by bestowing huge gifts. Or let’s look at the fear parents have of their child’s rejection or anger by not giving them what they think they deserve, or the anxiety that many parent’s feel believing that somehow their child cannot be happy or survive in the world without significant wealth. These are the emotions and issues that are the drivers for the poorest of decisions in the estate planning process.
So whether practically or emotionally, many parents and children just simply aren’t adequately prepared for such large transfers of assets. How about you? Do you feel ready to pass on your estate to your kids? Let’s take just a minute and answer a few questions to see if you’re a diligent donor.
1. Do you feel you fully understand the potential negative impact poorly planned gifts can have on your children and the family?
2. Have you carefully considered your own feelings and needs and how they may influence these critical decisions?
3. Have you fully considered your children and what would be best for them, including the options if charitable giving?
4. Have you consulted with your legal and financial advisors to finalize the essential elements of your estate plan?
5. Have you clearly communicated to your children what they need to know about the estate and what is to occur after your death?
6. Have you carefully considered the timing, conditions, and size of the financial gifts you plan to leave to your children?
If you answered yes to every question, then pat yourself on the back, you’ve at least have laid the groundwork to truly enrich your kids. If you answered no to any question, then we’ll talk more about some things to look out for as you move ahead.
But keep in mind that you’re only a part of the equation. What about the kids who will receive your generous gifts, the real beneficiaries of your largesse? Are they themselves prepared to responsibly handle such generosity?
Here are just a few questions to consider when thinking about your children and wealth transfers. So whether you want to believe it or not, sudden money, particularly in large sums, like anything else, has a dark side that can strangely distort our lives. These windfalls can create tornado-like changes to our most basic values, work, and relationships, all the things that form our basic life structure. This can lead to a swirl of confusing impulses and emotions, that left unchecked, can swamp even the most solid of individuals.
Just like donors, beneficiaries come in all shapes and sizes. Some are well qualified to handle large gifts from their parents while others are disasters just waiting for financing. So how is a parent to know? Check out some basic questions to see where your kids stand.
1. Is your child financially savvy when it comes to handling money?
2. Have they demonstrated a consistent pattern of fiscal responsibility as an adult?
3. Have they demonstrated a stable work and/or family history over time?
4. Have they established a reasonable savings or net worth on their own?
5. Do they lack any history of emotional instability, reckless spending, substance abuse, or other self-destructive behavior?
6. Do they have an established team of trusted professional advisor?
If you answered yes to all of the above, give yourself and your kids an extra pat on the back for they appear to be better prepared to handle a financial windfall than the average Joe. If, like many parents, you found yourself answering no to these questions, then take some time now and make an effort to learn more about what you can do to prevent such problems, most of which are preventable, in gifting your offspring..
For more information on family wealth issues, visit our website at www.thefamilywealthresource.com.