By Michelle D. Bennett, AIF®, CFP®, Executive Vice President, Newport Capital Group
For people who have not given much thought to the titular question, the answer may seem like a binary choice. Leave your kids all of your money, or none of it.
But the inheritance question is far more nuanced than that. And, interestingly enough, the first step to answering it does not involve your kids at all.
It starts with you. There is an old saying that you should not “count your chickens before they hatch.” Similarly, before you start making plans to distribute your assets to children as part of an inheritance, you must first consider how your net worth will address all of the other needs and goals that are important to you: income throughout retirement, preserving or enhancing your lifestyle, charitable giving goals, legacy aspirations and more.
If you are still reading this article, chances are you’ve already spent a lifetime putting your kids’ best interests first. That is not necessarily the best approach when it comes to an inheritance. Instead, it’s critical to put your own life needs and legacy goals first, so you can design a plan that ultimately takes care of you and then takes care of your kids – not the other way around.
The question you should ask yourself is not just “how much?” but also “to what end?” It’s important to consider the principles that have guided your wealth accumulation and how these should translate into a meaningful legacy. Is the goal to instill a sense of stewardship and responsibility, or is there an element of providing outright support? These considerations are crucial in determining the structure of your inheritance plan.
Once you have established your goals, the next step is to work with a financial planner who has meaningful experience with estate planning and intergenerational wealth planning.
The process from there should not go straight into running financial and tax projections, setting up trusts, purchasing insurance and/or implementing complex strategies. These actions all matter but they should come later.
A skilled financial planner should start by understanding and documenting what wealth means to you, what values about money you want to pass on to the next generation and what you hope the next generation(s) will do with the family legacy.
Your financial planner should also gain a deeper understanding of your kids’ financial education to identify what values need nurturing and what communication channels need building. Recognizing each child’s individuality – their strengths, weaknesses and life paths – is essential in crafting an inheritance that not only provides financial benefits but also respects your child’s unique journey in life. For instance, providing for a child with entrepreneurial ambitions might look different from supporting one with philanthropic endeavors. An equitable division of assets does not necessarily mean equal; it means taking into account the context of each beneficiary’s circumstances and aspirations.
Families focused on charitable giving should also make their intentions crystal clear. Effective communication – the cornerstone of any successful intergenerational wealth transfer strategy – is especially important when it comes to strategic philanthropy. Open and honest discussions about philanthropic values, goals and expectations are crucial for aligning the family’s vision and for ensuring younger generations are engaged and empowered to carry on the family’s giving legacy.
It’s never too early to get children involved. Tailor philanthropic activities and decision-making to the age and interests of younger family members, ensuring that their involvement is meaningful and engaging. Active participation will help younger generations gain a better understanding of the mechanics behind the family’s philanthropic efforts.
Once this deeper level of understanding is established, then it’s time to design a highly customized plan that aligns your net worth with your legacy goals. This plan should include financial and tax analyses, a strategy for managing risk, an asset allocation to generate the appropriate level of long-term growth and income and instruments like trusts and insurance for wealth preservation. These instruments can be meticulously crafted to reflect specific family situations and objectives, such as ensuring care for a special-needs child or safeguarding a family business’s continuity. For strategic philanthropy, it is essential to establish the necessary infrastructure, such as private foundations, Charitable Remainder Trusts or Charitable Lead Trusts, which should be explained comprehensively to younger generations.
A nuanced understanding of local laws and tax implications is also essential, as they can dramatically affect both the structure of your estate and the net benefit to your beneficiaries. For example, certain regions may impose inheritance or estate taxes that can diminish the value of what is passed on, while others offer tax breaks that should be strategically leveraged. Additionally, international estates bring layers of complexity, requiring expertise in cross-border tax laws and international treaties to ensure that assets are protected and transferred according to the wishes of the decedent.
With a plan in place, transparent communication is critical, and an experienced financial planner will know how to facilitate it. Ongoing discussions about an inheritance can help cement future generations’ understanding of the importance of the family legacy and all the responsibilities that come with it. It also means building an even closer connection with your kids.
Michelle Bennett, CFP, serves as the executive vice president of Newport Capital Group. The opinions in this column are not to be used as financial or planning advice. For additional important disclosures, please visit newportcapitalgroup.com/disclosures.
This presentation includes forward-looking statements. Actual events may differ materially from those reflected in the forward-looking statements. Always consult an attorney or tax professional regarding your specific legal or tax situation.
The article originally appeared in the April 18 – April 24, 2024 print edition of The Two River Times.
