The greatest wealth transfer in American history is looming as baby boomers prepare to shift trillions of dollars to the next generations, but how do you broach that often taboo money topic with mom and dad?
The answer: Carefully, or you may regret it.
Nearly four in five wealthy families have had unplanned discussions about money, with 26% of people later regretting it, according to a new study by the Merrill Center for Family Wealth, a part of Merrill Private Wealth Management.
“When fear is driving it, it can go badly,” said Valerie Galinskaya, head of the Merrill Center for Family Wealth.
From parents’ perspective, the concerns include that sharing financial information can lead to entitlement among heirs or power struggles within the family. Members of younger generations, meanwhile, can be concerned about overstepping their place in the family. They might also feel anxious about what kind of inheritance may or may not be coming to them or worried about equitable sharing among siblings, financial advisers said.
Talk early and often
“We have seen people think of this as a binary choice — either share or not share. But it’s not a light switch that is either on or off. It should be a dimmer switch, where you share more and more as you’re comfortable,” Galinskaya said.
“Talk about the money, about the purpose of the money, then talk about the actual amount over time,” she said.
“Some people have ‘verbal vomit’ and share too much. It’s not a one-time thing. It’s a process with multiple conversations,” Galinskaya said. “Having a one-on-one conversation or two-on-one talk, rather than over the Thanksgiving table, tends to go more smoothly. It’s a really uncomfortable conversation for a lot of people.”
For higher-net-worth clients, there can be additional complexity. Having an unbiased individual in the room, such as a financial adviser, can be helpful, Galinskaya said.
James Sahagian, managing director of Ramapo Wealth Advisors at Steward Partners, said having a family meeting with an adviser who can act as a facilitator — or a buffer — can be very helpful.
“The formality of it and the formal setting can really help communicate what the older generation wants to convey,” Sahagian said. “No one wants to talk about their own mortality, but they want to address any concerns that the assets will not be managed appropriately or spent wisely.”
Morgan Hill, chief executive and owner of Hill & Hill Financial, cautioned that getting too specific about the dollar figures that may be passed down can be a mistake. Just explain the general division of assets, Hill said.
“Don’t talk about the exact money. Everyone wants their kids to get the same slice of cake. Just say ‘I love everyone equally and my documents reflect that,’” Hill said. “Kids don’t need to know anything about a specific number. There may be nothing left, because the parent isn’t done living yet.”
Hill also said every family should be clear about who is the executor of the will, and there should be clear instructions in the event of an emergency about contact information for lawyers and financial advisers.
“You don’t want everyone fighting with each other in the middle of a crisis,” Hill said.
And not every family has great wealth. Sometimes the conversation reveals financial shortfalls that adult children may need to help their parents with or seek advice about, Galinskaya said.
“It’s not always a rosy situation, but take the steps to have a proactive conversation so you can determine if there are some hard choices that have to be made,” Galinskaya said.
Why it matters
When families aren’t able to talk about and plan effectively for wealth and the transfers of wealth, it has repercussions: 70% of family wealth is lost by the end of the second generation, and 90% is gone by the end of the third generation, according to Merrill.
Most of the dissipation of wealth is due not to the economy or markets but to factors within the family, such as limited communication and heirs who lack the necessary skill sets to manage wealth, Merrill found, according to the survey of more than 270 individuals from families with assets of $50 million or more.
“Wealth remains a taboo topic in most circles. This curtain of silence leaves many wealthy families and individuals feeling isolated and ill-equipped to manage the responsibilities that come with wealth,” according to Merrill.
A separate study by Northwestern Mutual found the average American thinks 17 is the right age for kids to have their first conversations about family finances with their parents or guardians.
“Talking about money with your family used to be taboo in society, but today, young people are changing the conversation,” said Aditi Javeri Gokhale, chief strategy officer, president of retail investments and head of institutional investments at Northwestern Mutual. “Meaningful wealth discussions between generations are now happening earlier in life and more frequently.”
According to the Northwestern Mutual study, 29% of U.S. adults have talked to their parents or guardians about an inheritance, will provisions and other matters related to their estates.
Younger generations said these talks should be happening earlier. Millennials said the big talks should happen at age 45, while baby boomers and members of older generations said they should happen at 55.
“The most successful family situations tend to start at a young age with their children. They want financially aware children who have a general knowledge of the source of wealth and what it took to amass it,” Sahagian said. “The biggest problems are when the kids don’t appreciate what it took to create the wealth.”