How to talk money with the family

Talking to children about the family's wealth is a daunting task, and can on the surface appear even damaging to building a good work ethic in a child. But studies reveal that poor communication at an early age is often at the core of financial disputes that erupt within a family at a later stage, and that the children of the wealthy are frequently and deliberately kept in the dark as to the true picture of their financial reality. Our analysis of the studies: Obscuring the truth about a family's wealth does more damage than good.

According to SEI Private Wealth Management's Algorithms of Wealth: Family, an astounding 81 per cent of heirs do not know how much they will inherit, with parents keeping the details hushed behind closed doors within the same generation, with some vague notion they'll reveal all to the next generation at some unbeknownst future date. The reason, according to SEI, is that most families lack confidence about their plan for passing along wealth. They are probably right to be concerned. Only 19 per cent of ultra-high-net-worth parents say they have provided their children with formal training or education in family financial matters, according to the report.

What's the right age to start the conversation? Kids need to be 20 or older to have a decision-making role on the strategic goals and investments of the family wealth, claim 61 per cent of the very wealthy. A mere 9 per cent see it fit to discuss such matters with children under 15.

Our belief: Start the conversation gradually as early as possible in your kid's life. Learning how to handle great wealth is, like a lot of things, acquired painstakingly through hard and steady work over a long period. It doesn't come in a flash at age 21.

The Williams Group is a research firm that conducted interviews with 2,250 families over a period of 20 years. The long-term Williams study showed that more than two-thirds of intergenerational wealth transfers fail, and that's largely due to a breakdown of communication. Without clear and unambiguous communication, trust among the players can't be established, and when distrust pervades, imaginary scenarios percolate in feverish minds recalling past slights. With this in mind, we asked Chris McDermott, Fidelity's Private Wealth Management group's senior vice president, for advice on how to start that dreaded wealth talk with the kids.

Small talk

Get started early and force yourself to look for casual opportunities to talk about money matters. He stresses the importance of a conversational tone – nothing heavy. Where do these moments exist? Often, the holidays are a time to discuss the family's charitable missions, and a chance to give a young adult the rights to pick a cause they believe in and discover the values he or she holds. Later, “the wedding of your daughter, for example, might be a time where a prenuptial agreement is part of a broader conversation about money and thoughts on how to transition the wealth, potentially laced with concern, depending on the in-law's values,” he says. The magic, he says, resides in the tone of voice carried through the conversations.

Many parents finally holding legacy conversations have children who are 40- or sometimes 50-years old. The “kids” can often be well-established in their own right, both professionally and personally well-off. McDermott says the best way to converse about the family wealth transfer, in such cases, is to “get the children's' perspectives,” and incorporate their desires and life ambitions in your planning, rather than declaring your wishes as a fait accompli. McDermott puts great value in asking a lot of questions of your children. History shows that if your child is cognisant of your estate plans, and is signed up to the plan's objectives, you're more likely to be in the 30 per cent of successful wealth transfers.

Respond but don't react 

Consider what your kids tell you with an open mind. Don't be a control freak – in the end your children, rather than you, know what's best for them and their lives. “Parents should certainly have the vote,” McDermott says, but the viewpoint of the heirs is also critically important. If a child is “averse to a certain wealth transfer strategy, it doesn't mean their opinion is wrong. It means they have a different perspective.”

Your reactions, particularly negative ones, can show an unwillingness to listen. For example, it's counterproductive to get angry when your child says he or she doesn't want to devote time to the family foundation that reflects your interests, because of an interest in starting a new foundation with a different set of objectives. Think about it. That's actually a good thing, suggesting your child has a passion, wants to take ownership, and is burning to achieve results in their field of interest. Conversely, recognise there is no value in maintaining in a purely mechanical way the worn-out legacy issues of your generation. Each new generation has its own battles to fight. So keep your cool – you might, in the process, gain a window into your son's or daughter's inner life and what makes them tick.

Stay in the game 

The conversation is a process. Fight any instinct – such as distaste – that might lead you to a one-and-done event. “It's a conversation built over time,” says McDermott. Start with a smaller group, a trustee or trusted attorney, say, “then, broaden out the conversation to those impacted by your plan.” It might even make more sense to get one person's perspective before talking to another – and even taking some time to reflect on what you heard, in between conversations – rather than charging ahead and starting a global free for all around a conference table.

Think of intergenerational wealth transfer as a long-distance run – you'll only pass the finish line successfully if you set yourself the right, methodic pace from an early start.
 

This piece has been reproduced with permission from Barron's.