Wealth Transfer and Family Conflicts

Estate planning is both a practical and emotional process. Often with children and inheritance, the idea of when and how to give our money away can make us feel uneasy. It evokes various feelings and highlights our relationship with money, with our children, and with ourselves.

Nonetheless, in today’s world, the complexities of estate planning require a consideration of many different aspects: how to divide up assets between children, give away control, minimize tax liabilities, set up trusts, and more. During this process, the emotional aspects – or the “soft issues” – are often pushed aside or overlooked. Thus, over the years, families have faced issues emerging from inter-generational wealth transfer due to lack of awareness regarding the non-financial aspect of wealth transfer – aspects that are not considered but are necessary to explore for a successful generational transfer of wealth to take place.

Research shows that only 5% of wealth transfer failure is due to poor financial decisions and education and that 95% is due to soft issues: communication breakdown amongst family members, unprepared heirs, and lack of vision and purpose.

We have all witnessed situations, with detrimental effects, of families facing inter-generational conflicts due to unsuccessful wealth transfer. Disputes over wealth not only erode finances due to legal fees and asset freezing – causing some family members to live in reduced circumstances whilst litigation is ongoing – but also ruin family relationships and the family unit itself.

However, these conflicts can be minimized if families ask themselves important questions before deciding on the legal structure of wealth transfer, such as:

  • What is the best age to give our children their inheritance without negatively affecting them?
  • What will the practical and emotional consequences of our decisions be?
  • Do we involve our children in the estate planning process?
  • What is best for our children: to distribute equally or treat each of them differently based on their personality and life circumstances?

In situations where a trust has been put in place, without careful consideration of the non-fiscal aspects, beneficiaries are expected or encouraged to engage in key family decisions, but what usually happens is a contradiction in the messages that they receive. A mixed signal is sent: a family may encourage their younger generation to engage in voting and giving and asset disposition issues, yet at the same time teach them that they are ‘beneficiaries’ of a trust and as such have reduced powers in deciding on the future of the family wealth. This can be destabilizing, making them feel powerless about their financial future and reliant on ‘hand-outs’ from the trustees.

In another situation, a technically ‘fair’ one, where the family decides to divide all assets and distribute it equally to all heirs, without conditions or consideration of the non-fiscal aspects, while it promotes ownership, the challenge is that some offspring may be more able to deal with this wealth than others. Those who are less able to manage their inheritance tend to lose it fast. Also, an equal division of assets does not encourage the next generation to work together. As such, the economic scale and doors to opportunity that a larger, closely allied family would have, are reduced.

Professionals have first-hand experience witnessing what successful and unsuccessful techniques have been employed by their clients. Working with specialists to address these issues can provide seamless and holistic solutions to the problem of inter-generational conflict.

I first published this article on the Nexus, an organization dedicated to the next generation of family business or family office members whether they are working or not working in the business.

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