Today’s guest post tackles a sensitive question in estate planning: when to disburse an inheritance to heirs. The post is courtesy of Mark Goodfield, a professional accountant who writes the The Blunt Bean Counter Blog. Mark covers accounting, tax and wealth management issues on his blog and if you haven’t checked out his site, please do so. It is excellent. Now, over to Mark…
I am often engaged to provide estate planning. Many people born to the “silent generation” have amassed great wealth; a 2006 Decima Research study estimated that over one trillion dollars in wealth could be transferred between 2006-2026. After twenty-five years of discussions regarding the distribution of wealth, it is my opinion, that where an estate will clearly have excess funds when the parents pass away, that the excess wealth should be transferred in partial gifts during a parent’s lifetime.
It is my observation from these meetings that people form four distinct groups: those that will take their wealth to their grave (or leave it to their pet Chihuahua), those that will distribute their wealth only upon their death, those that may not be able to afford their grave (as they give and give to their children) and the most common, the middle ground of the extremes, those who are willing to distribute their wealth, but in many cases harbour concerns their wealth will be “blown” or lead to unmotivated children.
In this blog, understanding my opinions may be diametrically opposed to some readers, I will talk about these varied groups.
For those who wish to take their wealth to the grave, there is often a deep rooted family issue, and the chill in the room makes it very clear that advisors should stay clear of delving into these family issues.
In the case of those who wish to distribute their wealth upon their death, the issue is typically philosophical. That is, one or both of the parents feel that their children need to make their own way in the world and that leaving them money during their lifetime will do their children a disservice or destroy their moral compass. This is a touchy area, but I often suggest that if the parents feel their children are well-adjusted, they should consider providing partial inheritances. A partial inheritance can facilitate a child’s dream, such as climbing Mt. Kilimanjaro while the child is physically able, or assist with the down payment on a cottage. The selling point on partial distributions is that the parents can share vicariously in the joy of the experience they facilitate.
In the third situation, the parents spend every spare nickel on their children’s private school, dance lessons, hockey teams, etc., while younger and then assist in buying houses, cars, etc., when their children are older, to the detriment of their own retirement, let alone the distribution of their wealth. In these cases I suggest the parents pare back the funds they spend on their children and/or make the children contribute to their own activities. It is imperative the parents impart upon their children that they are not an ATM and that there are family budgetary limits to be adhered to, often easier said than done.
The majority of families fall into the last category. They are willing to distribute their “excess” wealth while alive, but in many cases harbour concerns their wealth will be “blown” or lead to unmotivated children. Dr. Lee Hausner, an advisor to some of the wealthiest families in the United States, suggests in various articles of hers that I have read, that parents do not transfer money during career-building years so the children learn to be productive members of society. Children should be taught they have choices to make (ie: distribute money for one thing they want but not three things they want) and they should learn to be philanthropic amongst other things. I think this advice stands on its own whether you are one of the wealthiest families in the United States or just a family that has been lucky enough to accumulate more assets then you will ever require.
How one distributes their wealth is an extremely private issue and each individual has their own thoughts and reasons for their actions. However, in my opinion, where the parents have the financial wherewithal, they should consider making at least partial gifts during their lifetime.
Update: Mark posted a follow-up article on his blog discussing the lessons everyday Canadian families can learn from estate planning tips for wealthy families.