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Educate Heirs to Ensure A Perfect Pass

Educate Heirs to Ensure A Perfect Pass

A strong, well thought-out estate plan is only half of the equation

Even the most knowledgeable, successful clients attempt to pass their hard-earned fortune to heirs who are completely unprepared to receive it. A strong, well thought-out estate plan is only half of the equation. To stretch thin a common sports analogy, having an excellent game plan is worthless if the team never practices.  

Education Strategy

The best way to ensure heirs are ready is to create an education strategy for the family. This isn’t merely creating a curriculum and test that heirs must pass. The basics of investing or how to manage a budget are only part of the issue. The bigger challenge is instilling wisdom, and creating a firm foundation on which the family can continue to build.  

An education strategy should focus on two time periods; the first is what can be done to prepare heirs now while the benefactor is still around. The second is to prepare heirs for the time after they are gone. The first part should be less about specific estate-planning techniques; concentrate on creating the family paradigm that will hopefully guide future generations in their decisions. The education around what what actually happens upon death focuses on the technical side of the estate plan.

“Now” Planning

The fundamental goal of “now" planning is to create a system through which family members may better understand the responsibilities of ownership. Whether heirs will own part of a family business or a more intangible share assets, "responsibility" may includes anything from financial management to community involvement to family participation. In a recent presentation by the Family Office Exchange (FOX), Amy Hart Clyne and Teresa Bellock identified a four-step process for creating a family education system: (1) assess family needs and establish education objectives; (2) develop and deliver education programs; (3) evaluate progress and get feedback; and (4) modify the method and materials to continue to achieve family goals.

(1) Assess family needs and establish education objectives. Assessing family needs should start with a review of whether the governance structure of the family is open to participating in an education program. Maybe they even need to establish a "governance structure" in the first place. Is there open communication among family members? Are family meetings scheduled on at least an annual basis? Is there functioning and effective leadership? Do all family members have access to an independent financial advisor? 

It’s also important to figure out who is going to run the education program. This could be the family office, an independent advisor or a learning committee made up of family members themselves. Whoever it is, it's vital they are respected by all members of the family.

The educational goals will be as unique as families themselves. Planners should look at ages, occupations and the sophistication of the members, as well as the characteristics of the estate. In most instances, a solid starting point would be a program, or series of programs, that aim to provide heirs with an understanding of family virtues, values and history; a basic financial education; the ability to read and understand legal duties; ways to coordinate with financial advisors; and an understanding of the importance of family meetings.

(2) Develop and deliver education programs.

An education program doesn’t have to be tied to any special format. It can be a handout of reading material, a teleconference, a discussion led at a family meeting, an outside speaker or any combination of the above.

An increasingly popular program is to create a “family bank.” It’s a way for families to lend money to younger members in a way that’s both empowering and educational. Instead of simply handing money over to a child so that he may start a business, pay for school or buy a home, creating a family bank lets the next generation gain understand a real-world borrowing experience. It can be as formal or informal as the family prefers. Most are structured as a trust or a limited liability company and can be led by a family member, or even a board of members. The bank’s protocols outline the process for borrowing money. Maybe a child must submit a lending request summarizing the purpose of the loan, the proposed  terms and the plans to repay. Regardless of the specifics, undergoing a simulated loan process will provide the eventual heir with practical experience useful for a lifetime.

(3) Evaluate progress and get feedback. Seek feedback on the program so the family can evaluate its progress. No program is perfect and what may have once been well received and effective for one generation may not be for the next.

(4) Modify the method and materials if needed. Connect what the family is learning to real life experiences, either with hands-on practice or through a connection to the family's heritage. 

Tom Rogerson, of Wilmington Trust, and his wife give their four children $5,000 each year to invest together. If the children’s investments provide a healthy return, the money is used to take a fun family vacation. For the years when the children’s investments lose money or bring in weak returns, the family vacation is a camping trip or a road trip to visit family.

Younger generations can also learn valuable lessons from the experiences of those who came before them. Studies have shown that children who are familiar with both the good and bad aspects of their heritage are more likely to succeed when faced with conflict. A well-rounded education strategy should incorporate the stories of the older generations not only to preserve them, but for the wisdom they contain.

Preparing heirs for their inheritances should not be an afterthought, and the more structure that can be put around the process the better. We can’t expect heirs to seamlessly play out a client’s plans if we never teach them the rules of the game. At the end of the day, there’s no such thing as a perfect pass if there’s no one there to catch the ball.            


This is an adapted version of the author's original article in the February 2016 issue of Trusts & Estates.

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