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 blesses them or hurts them.
Deciding when to talk to your child about money and your estate is a little bit like deciding when and how to tell a child about sex. Telling them nothing has significant negative consequences. You cannot protect children from the dangers of poor sexual choices by pretending that they were immaculately conceived. Likewise, you cannot protect children from the dangers of poor money choices by pretending to be broke. It is naive and foolhardy to think children will arrive at adulthood with no knowledge of sex. The same is true with financial and estate planning. The accuracy and helpfulness of what your children know increases dramatically if you are involved in the learning process rather than just leaving it up to chance. No matter how sincerely motivated friends and the public schools may be, they will do no better at teaching your children how to manage your estate or succeed financially than they do at teaching your children how to succeed in marriage.
Parents sometimes delay or avoid talking to their children about their estate because they don’t know what to say. 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. Tell them! 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.
One of the greatest anxieties children face as their parents age is concern that there 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.
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 and Testament 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.
The one exception to this, in my opinion, is telling those to whom you have left the custody of minor children. For most families, who you leave minor children to will change over time. It is important that you retain the ability to do what you believe is right for your children without the concern that you may hurt someone’s feelings because at one point they were named to raise your children but now they are not.
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 be impossible. 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 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 discovering that you have been disinherited.
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. They talked about the pros and cons of keeping his existing car vs. purchasing the new one. They talked through the costs of insurance, registration and operating the vehicle.
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?” When he could, the father gave praise and consent: “I agree” or “I think you are right” or “good point; I had not considered that.” Sometimes he expressed a differing view: “I know the new car has a better stereo, which would be cool, but that alone is such a small improvement over what I already have, it would not justify the cost.” To his surprise, the son expressed his opinion that the father should keep his current car for another year because of pending technology enhancements that the son was aware of. A year later, when the father eventually purchased the upgraded version of the car, he thanked his son for his advice and input on the purchase.
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 behind the curtain what is going on in your thought process about your financial and estate planning decisions 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.
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, or 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) that is inconsistent with what the parents would want. Your children are more likely to retain your advisory team if they know who they are and have an established working relationship with them while you are living. This is critical for several reasons. It results in greater continuity in your planning. It helps retain the values and decisions that you have put in place. It facilitates a smoother and more trouble tree succession. It helps the next generations 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 you have developed over time. Your children won’t understand that if they don’t know or have not already worked with your advisory team.
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 or does not have an entitlement mentality.
This article is far to short to address every aspect of the entitlement mentality problem and the many potential solutions. We have space for this one issue as it relates to communicating about your estate plan with your children. Do not send your children the message that you have no personal concern about finances by using your money to rescue them from their own poor choices. This is an issue that impacts families at every economic level. Sometimes the poor stay poor over multiple generations because they are too generous to their children. When parents use their own money to bail out their children from stupid decisions, it hurts the child. It engenders a sense of entitlement. It relieves the child from personal responsibility and accountability for the choice. Wrongly applied wealth disenfranchises and dis-empowers children. It can also impoverish parents while they are living so they are dependent upon others and unable to leave an inheritance.
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 set still, don’t buy them a new one. Let them experience the natural consequences of their choice.
Some time ago I listened to one of my adult children describe trouble he was having with his car. This child is married and has children, and at the time was in his last year of earning a college degree. My biological parental instinct was to help. The thought occurred to me that I had enough cash in my pocket to fix the car, and that I would not feel it in the least if I did so. i whispered to my wife that I was just going to take care of this. Her wisdom was timely and perfectly on point. She said, “don’t you dare! He doesn’t need your money. What he needs is your confidence that he has what it takes to solve the problem on his own. If you fix it for him, you rob him of that power.” She was right. I kept the cash in my pocket. I said something like, “your wife is lucky to be married to someone like you who has what it takes to fix the car.” A year later when this young man graduated from college, he was debt free. He and his wife had paid their own way, and had earned and saved enough cash to make a down payment on a home in the city where he took a new job.
If I had picked him up then, I would still be picking him up now. Today he knows he can pick himself up. The best help is the power and confidence to solve one’s own problems. This means your children will have problems and it will be difficult for them, and that is good! Let it happen. Encourage, love, support, praise, counsel, but don’t rob them of the ability to make their own way in the world. The Three Little Pigs each learned an important lesson about how to build or not build a house. Those lessons would have been completely lost if mother had built the house for them because she was afraid of what the Big Bad Wolf might do to them. The wolf makes little pigs wise. The wise mother knows this. Even though it terrifies her, she lets her children build their own house.
While reading this, you had ideas occur to you of what or how you could communicate with your family concerning your estate. Take action. Do as you were prompted. Such thoughts and impressions are inspired and will bring blessings upon you and your family. If you don’t take charge of communicating about your estate to your children, someone else will do it for you. Anyone but you will have a different agenda and will bring about different results than what you want. To get what you want, take charge and take action.