Take the Guesswork Out of Passing on Your Wealth
Take the Guesswork Out of Passing on Your Wealth

Take the Guesswork Out of Passing on Your Wealth





Take the Guesswork Out of Passing on Your Wealth

How a Letter of Wishes can help your children be good stewards of your wealth.

Will they blow it? Or will they be responsible?

It’s the nagging concern that feeds the indecision about whether (and how) parents should pass on their wealth to their children. Parents worry their children may blow the money on an addiction, like gambling or drugs. Or that a spendy spouse will squander the gift and their child won’t benefit from it. Or that the money will be lost in divorce. Or that an adult child won’t learn to earn wealth the old fashioned way—by hard work.

Fit for Inherited Wealth?

A 2015 survey by Williams Group Wealth Consultancy reports that 78% of wealthy families believe the next generation is not financially fit to manage inherited wealth. There is a saying among ultra high net worth families, “Shirtsleeves to shirtsleeves in three generations.” That is, wealth created in the first generation is, by the end of the third, often completely gone. The loss of family wealth is real.

To manage the unknown, wealthy families often set up a trust with a future trustee. And many times the trust is kept secret until the parents pass away. Keeping it under wraps, while not something I recommend, allows parents to plan for the future while not coming across as “untrusting” of their children during their lifetimes.

The irony is the one thing that would prepare children to handle wealth consistent with family values is the one thing many wealthy families don’t do: talk about it. Families tend not to talk about wealth for many reasons, stemming from not knowing how to talk about money to fear of family conflict.

Of wealthy American families, 64% admit to disclosing little to nothing about their wealth to their children.

The short-term decision not to talk can create long-term tension among family members, who all think they know best how you would want the wealth used. While you can’t control human behavior, articulating your wishes ahead of time can help guide how your wealth is managed once it’s passed on. It also helps get all the beneficiaries on the same page.

In Your Words

There is a tool that can help your family have a conversation about money and the values that are part of it. It is called a “Letter of Wishes,” which is written in plain English. It expresses how you hope your wealth is put to use. Often the letter describes why the funds were placed in a trust, as well as your wishes for the beneficiaries.

A fellow advisor told me of one family who recorded a letter outlining the kind of life they hoped their adult son would enjoy. With only a modest amount left in the trust to supplement their son’s monthly disability payments, they had specific ideas on how to maximize the funds for his happiness. For example, they instructed the trustee to support their son’s dream to tour the U.S. in an RV. While the trust would not allow for the purchase of an RV, a 2-week rental would give their son a trip with lasting memories.

Express Values:

  • The letter can be a warm and values-driven declaration. Sometimes these letters are written to express family values, not only with the trustee, but also with current beneficiaries and future generations. You can simply list your values or write a narrative of those life experiences that have shaped your values and belief system. Perhaps involvement in a particular nonprofit organization shaped your ideology about giving. Knowing the values and beliefs important to you will help children better understand the legacy you hope they will carry on through your wealth.

Multiple Versions:

  • A letter can be made either private or public. In some cases, clients choose to write two letters. One can be penned exclusively for the family, and shared when the will is read. It is not legally binding, but family members hear in your words your desires. It can also explain disparities in gifts. For instance a parent might choose to give a larger portion to a child with a chronic health problem who is unable to work. The letter, which explains your reasoning for the disparity in bequests, can minimize future family conflict. In some cases, each family member gets a copy of the letter to guide their moral conscience.

For the Trustee’s Eyes Only:

  • Others write a letter that is kept private with a trustee. A private letter can provide more specific insight into family dynamics, like a child’s tendency to gamble or spend money on superfluous items. These are tender topics that if made public would be hurtful to beneficiaries and perhaps create strife within the family.
  • Keeping it private also ensures that the trustee judiciously protects and distributes your wealth. If the letter, for instance, suggests that the trustee be generous in making distributions, sharing the letter may encourage beneficiaries to request funds more often. Letters directed to a trustee help him or her understand your interpretation of the categories of your trust: health, education and support. Does “health” translate into medical reimbursements and co-pays, or a monthly enrollment in a yoga class and a facelift? How do you define provisions for education? Is it for private pre-K or SAT tutoring or an educational trip abroad for the summer?

Defined or Undefined:

  • If you don’t define how your wealth should be distributed, then it is left up to a trustee to define, based on the number of beneficiaries, the amount of money, and what the beneficiaries’ standard of living appears to be. It’s a subjective act that is made less so with a Letter of Wishes. It’s not a legal document nor is it binding on the trustee; it is intended to be a guide. Everything you put in writing gives a frame of reference for the future trustee, and it can be changed, replaced or thrown away as circumstances change.

Family Legacy

One of the greatest gifts that parents can give their children is a framework for starting a conversation about the role of money, what it means to the family, and how they hope their resources can shape the next generation. A Letter of Wishes helps to pass on not only the wealth itself but the family values – and thus the family legacy.

Tags:  Beneficiaries, Inheritance, Legacy, Letter of Wishes, Next Generation, Trust, Trustee, Ultra High Net Worth Families, Wealth, Will

Note:  The content of this article is for guidance and information purposes only and is not intended to be construed as advice. Information provided is not intended to provide investment, tax, or legal advice.