Communication: How to Save Your Family in the Legacy Plan
Kathy Longo, CFP®, CAP®, CDFA Monday, 26 March 2018
When it comes to financial planning, we spend a lot of time talking with our clients about what they want their financial legacy to be. Beyond the money and assets, they will leave to their family and charities they care about, we often discuss how that legacy will be used and what financial philosophies they will leave behind.
For example, clients may have misgivings about leaving substantial assets to their children for fear it will spoil them, encourage a poor work ethic, or give them a sense of entitlement. When it comes to giving to charities, our clients often want to make sure their funds are being used for the causes and purposes that are meaningful to them and that they are making the right types of gifts that will make a lasting impact.
These concerns and questions are significant, and careful planning, as well as good communication, go a long way in making your legacy impactful and purposeful.
In a 2011 article in Forbes, research conducted by The Williams Group cited substantially more success for family wealth transfers if families had communicated a great deal about the future of their wealth, established a family mission, and developed a strategy to perpetuate that mission. While not every family is discussing millions of dollars in wealth, it is important to recognize that conflict and lack of communication is often the biggest challenge facing families and estates in the aftermath of a loved one passing.
The following key areas tend to cause the largest conflict among family members. Having a well-established plan for these parts of your estate and communicating your wishes clearly with your children and grandchildren can help keep your legacy plan as conflict-free as possible.
Leaving money to charities that you are passionate about can have a lasting impact on the organization or organizations you choose to support. For philanthropists, knowing that your estate will serve a noble cause brings peace of mind and a sense of purpose. In some cases, children and grandchildren see eye to eye with their parents about the choice to leave a substantial part of their estate to nonprofit organizations and foundations. However, there are instances when this can be a major point of contention among parents and kids or other family members.
On the one hand, parents may see the money that they will leave in their estate as having the potential to spoil children or grandchildren and they want to teach the lesson of “building their own castle.” On the other hand, their children may see this money as something that they need or see the opportunity for it to help them succeed in business, other ventures or in saving for their children’s schooling. Talking with your heirs about your concerns as well as your philanthropic intentions may help you come to a decision that will help your family as well as charities and, at the very least, have time to psychologically and emotionally come to terms with the decision you have made regarding your wealth.
Some practical things to consider when it comes to your philanthropic legacy are the tax implications these organizations may face depending on the financial vehicle you choose to use in your bequest. Since nonprofit organizations don’t get the same tax breaks as individuals when they receive donations from a Roth IRA, this might not be the best choice. However, you could name the charity as the beneficiary of the IRA. When the charity receives the IRA as a beneficiary, no income tax is payable. If your children want to play an ongoing role in your philanthropy you might consider establishing a Donor-Advised Fund as a vehicle to fund and distribute their giving during their lifetime or as part of the estate plan. This can help foster independence as well as a means by which your children or grandchildren can work together towards something meaningful by advising how and when the charities receive the funds from your estate.
Home Sweet Home
The family home, if you keep it until you pass, can be an emotional topic for family members. Each surviving heir will have their own memories and connection to his or her childhood home and the items within it. It is important to make a list of collectibles, antiques and other objects of value (emotional or monetary) and provide detailed instructions as to how they will be dispersed to your heirs.
Your intentions for the home itself should also be clearly stated in your will. In some cases, one child may have lived there longer than other children or have returned after college in a boomerang fashion. This can sometimes create a false sense of ownership that needs to be mitigated and clarified in order to reduce discord or conflict after you pass. In other cases, children live at home to care for an aging or ailing parent (though there may also be financial reasons). They may not be in the financial position to buy the rest of their siblings out of the home. With some discussion and perhaps the assistance of a mediator or financial advisor, children may be able to come to an agreement that their sibling can continue to live in the home after their parents pass. If one child wants to stay in the house, then they need to buy their siblings out or another viable option needs to be identified in your estate documents. Again, communication in this type of scenario is par amount. If this is something that can be predetermined and discussed in advance of your passing that would be better for everyone. Grief and loss can evoke heightened emotions and with that can come lack of rationality in the face of conflict or disagreement.
Something Old, Something New…
Personal items like wedding china or silver, antiques, and collectibles, musical instruments, etc. can be a major point of contention for family members because of the memories they evoke and the connection that multiple family members may have too many of these items. There is also the monetary value that many of these items may have and an even dispersion of these things based on your wishes is an important thing to discuss and map out in your legacy plan.
Sell Assets and Divide Proceeds
While typically not a common approach (due to the emotional value many items have to heirs), selling all of the personal property and dividing the proceeds as directed in the estate plan could be the simplest way to avoid feelings of unfairness. On the downside, many items may have a low resale value and the opportunity to preserve the sentimental value of the items is lost.
Work it Out
Most families opt to discuss the items and try to come to a consensus of what items will be distributed to whom. In this situation, usually things get sorted, but there can be times when one family member is particularly pushy, or one family member may want to avoid conflict altogether which can cause discourse and bad feelings.
To avoid this, some families decide to use something called the “draft pick” approach where people draw straws to determine who will “pick” an item first and then the selection continues in “rounds” until all of the items that people want have been divided and the remaining items are typically sold.
One of the negatives to this approach can be that those who are first in the draft order will benefit from being able to pick the most valuable items and then leave the outcome lopsided.
Appraisal Selection Auction
While appraisal selection auctions are a bit complicated, they can be the fairest. First household items are appraised, and the results are distributed to the heirs of the estate. Beneficiaries would then flag items that he or she wants. If only one person wanted a particular item, then it would be distributed to him or her and the value of the item or items would be deducted from that heir’s distributable financial assets from the estate. If more than one person flags an item, then each heir submits a sealed “best” bid for the item to the executor. This highest bidder receives the item and the amount is deducted from the beneficiary’s share of the estate. If two or more beneficiaries want a particular item, the beneficiaries submit one sealed “best” bid for that item to the executor or trustee. The highest bid wins, and the bid amount is subtracted from the beneficiary’s share of the estate or trust’s financial assets.
While on its face this approach seems the fairest and most transparent, the bidding outcome may be predetermined if one heir is wealthier than another.
A Peaceful Getaway
Just as any family home, a vacation home holds fond memories and deep emotions that can sometimes be the cause of disagreement or conflict. We have often seen situations where one or more siblings want to keep the vacation home as part of the family or the parents wished for the home to be in the family for multiple generations and the other sibling(s) or heir(s) wants to liquidate the asset. These are clearly two very different perspectives and an upfront conversation needs to take place to resolve the matter. Typically, especially if it is the parent whose wish it is for the home to stay in the family, we recommend that a trust account be established so that the heirs are not having to incur the costs of expenses and maintenance. This can alleviate emotional and financial burdens for those who may not have wanted to keep the home, and also allow resources for the child who does not have the extra money to afford the ongoing vacation home cost.
Beyond the manner in which you structure the bequeath of your vacation home, it may also minimize disagreement if you prepare a written agreement for your heirs. This agreement can be completed and signed as part of the gifting process and can include governing rules and operations expectations. Details of this type of an agreement might include:
- Payment Agreement: Who pays for what and how often
- Improvements and Décor: Who manages home improvements and decides on how the home will be decorated and furnished
- Liabilities: The type of insurance coverage that should be maintained
- Terms of Sale: Determines whether or not an interest can be sold and on what terms
Advance planning and family discussions coupled with agreements like the aforementioned can really help you to foster understanding and diminish potential discord in the estate distribution process.
Conversation Can Save Conflict
Regardless of who you would like to leave your estate to and what your wishes are as to how that legacy lives on, it is paramount that you communicate your wishes in carefully outlined estate documents and that your money is invested in a manner that will maximize the contributions you can make to the charities of your choice and the people you love. Working with a team of professionals like an estate attorney, accountant, and financial planner can help you establish a clear plan for your legacy so you can have a lasting and meaningful impact on the causes and people that matter most to you. Discussing these decisions and documents with your family in a positive, proactive manner can help eliminate potential conflict over the legacy you are leaving behind.
About the Author
Kathy Longo brings over 25 years of expertise and experience to Flourish Wealth Management. Kathy is wholly dedicated to improving the life of each client and finds joy in making complex matters simple and easy to understand. She excels at asking the right questions, uncovering new possibilities and implementing the most advantageous strategies for success. Playing such a pivotal role in her clients’ lives remains an honor and a privilege. After earning a degree in Financial Planning and Counseling from Purdue University, she began her career at a small firm in Palatine, Illinois where she worked directly with clients while learning to build a viable, client-centric business. Over the years, she gained extensive knowledge and wisdom working as a wealth manager, financial planner, firm manager and business owner at notable, various sized companies in both Chicago and Minneapolis.