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Preparing Heirs for Their Inheritance

Originally published
Originally published: 10/7/2022

Inheriting money comes with plenty of benefits. From being less worried about paying for life’s necessities to enjoying the luxuries affluence can bring, inheritors often find that many of life’s key stumbling blocks are no longer in their way.

That said, inheritance doesn’t automatically mean a worry-free life. On the contrary, inheriting wealth can create unique challenges and conflicts. A windfall can be the root of significant problems for your heirs—and therefore for you too.

Consider some of the inheritance-related issues that often crop up among ultra-high-net-worth (UHNW) individuals—those people with a net worth of $500 million or more—and how they tend to address these issues. Their strategies can potentially inform your action plan as well.

Transferring Wealth

Experience has proven that many wealth creators want to pass on some of the fruits of their labor, to their children and other loved ones. However, doing so, involves several considerations, including:

    •    Addressing Financial matters - The aim here is to be tax-efficient in transferring wealth. For instance, different tax strategies are available to mitigate the intergenerational loss of family wealth.

    •    Ensuring heirs will be smart about the money - A major concern of UHNW wealth creators is that inheritors will misuse the wealth they inherit. Often the notion of being given control over a large amount of money vs. making wise decisions regarding the windfall, do not always align.

    •    It’s not just the wealth creators who are concerned about the ability of heirs to manage their inheritances—it’s often the heirs as well. It can be easy for inheritors to mismanage their fortunes, and we find that many inheritors recognize that potential problem. As such, means heirs must prepare themselves for the day when they receive the inheritances and be at least partially informed and ready with a strategy for moving forward.

Money’s Impact Today

A good starting point for understanding how inheriting wealth might affect heirs’ lives in the future, is to see how money impacts them today.

Heirs should consider answering the following questions:

    •    Is wealth a source of terrific possibilities, a source of horrific problems, or some combination of the two?

    •    How is money affecting your life now?

    •    Is wealth the cause of serious relationship problems? If so, what and with whom?

    •    To what extent do you define yourself by your family money? What would happen if the money vanished?

In addition to answers to the above questions, parents should assess the ability of their children to manage their inheritances before making legacy decisions. A question to ask: If my children are not up to the task, what steps should I take to ensure that they are capable and will not waste their inheritances?

Chances are, there will be a range of analyses among heirs in terms of their abilities to intelligently and prudently handle significant wealth. That simply means that different heirs will probably need different wealth education approaches to best handle their inheritances.

Not surprisingly, there are many different ideas about how best to teach heirs to manage money. For example, some professionals strive to educate heirs on the intricacies of wealth management. However, we find that most inheritors are not interested in these types of details.

Teaching Heirs Responsibility

An approach we find much more effective across all types of inheritors is to focus on how to be responsible for their wealth. This means giving them a good understanding of the bigger picture. By knowing what they want to achieve financially and being attuned to what is going on with their money, they can make more informed decisions.

One important aspect of being responsible for their wealth is giving heirs the ability to effectively select and work with professionals such as lawyers, accountants, and wealth managers. Part of that means empowering heirs to know how to avoid the “pretenders”—professionals who may want to do a good job for their clients but lack the requisite skills. Pretenders can be detrimental to heirs’ financial well-being.

Identifying Predatory Behavior 

More problematic—especially if heirs receive significant sums—is the possibility of being exploited by predators, grifters, and the like. Significant wealth is a magnet for all manner of financial predators, so having the skills to identify such people before they do harm is a necessity for most inheritors.

Even if the assets are in trust, heirs are better positioned if they understand how the trusts are set up and what they intend to accomplish. In this way, heirs can better ensure what is going on in the trust and what are the correct federally regulated processes.

Having the Right Team of Professionals

Iincreasingly, wealthy families are making concerted efforts to teach future inheritors how to evaluate and oversee the work of the professionals they will rely on.

Additionally, there may be a need to discuss money and self-esteem issues— as new wealth can produce feelings of anxiety and even worthlessness among some inheritors. Delving into ideas that help separate people’s wealth from their overall sense of self can help foster a more comfortable relationship between an inheritor and their inheritance.

Lessons for All of Us

Of course, you don’t have to be anywhere near the UHNW level of affluence to benefit from getting your heirs ready to receive an inheritance from you someday.

The key is to get going long before the day comes when assets transfer. Encourage heirs to think about their views, values, and attitudes toward money and wealth—and how those might change if their bottom line suddenly had additional zeros. Particularly, make sure to help them understand some financial basics and smart ways to size up any professionals they may encounter down the road.

Armed with self-awareness and a strong foundation of financial knowledge, your heirs can potentially get the most from their inheritance.

Keven P. Prather offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. Call 216-592-7314, send an email to kprather@fi nancialguide.com or visit transitionextadvisors.com.


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