About half of wealthy families feel giving their children too large an inheritance could prove detrimental, according to a new report from Merrill Lynch Wealth Management. Most of the 200 high-net-worth investors surveyed believe $63 million was too much to give on a $100 million estate, while $26 million was not enough to give a child.
Despite their concerns, about 22 percent of parents with over $5 million in assets said no amount was too much.
“Parents are coming and saying, based on our lifestyle, I’m concerned about my children becoming good stewards and maintaining passion and purpose," said Mollie Colavita, the metropolitan regional managing director at Merrill Lynch Wealth Management. "But it’s in conflict with the way the parents are actually parenting. They’re living in this world of abundance without a lot of boundaries." She says that to really ensure that children understand what to do with large sums of wealth, it’s best to start educating them early.
There’s a huge opportunity for advisors to lead these discussions with wealthy families, particularly when it comes to making a decision on how to divide the estate and working to educate the younger generation on creating a plan forward, said Stacy Allred, managing director and wealth strategist for Merrill Lynch’s Center for Family Wealth Dynamics and Governance.
According to Merrill’s recent research, about 35 percent investors surveyed said having a trusted advisor involved in the process would increase their confidence.
“There’s a lot of intensity around these questions," Allred said. "If Mom and Dad are in disagreement, our experience is that a lot of times, it’s around this one issue of differing viewpoints on how much to give in terms of kids versus charity."
About 25 percent of investors surveyed have had a conversation with family members who will be receiving the gifts, but only 15 percent had a written document, a letter of wishes, outlining what they hope the purpose of that inheritance will be used toward.
The most common approach to discussing wealth is the “balance sheet approach,” with families sitting down during the estate planning process and revealing to children their net worth, said Michael Liersch, head of behavioral finance and goals-based development at Merrill Lynch Wealth Management.
However, Liersch says the experiences with clients show that a more empowering conversation is one in which the family has ongoing conversations about what constitutes good financial decision-making in their family and modeling that behavior provides better outcomes.
“When you have money like that, it’s really important to get really clear on your values and form a framework for your financial estate lifestyle decision-making,” Allred says.