By Angie O’Leary
As family structures have changed, so have the ways in which families build and grow wealth over lifetimes and generations.
When you hear the phrase “modern family,” your first thought might be of the TV show bearing that name. The family portrait it presents—including second marriages, same-sex marriages, adopted children and half-siblings—is closer to today’s reality than the old notion of a “traditional family” composed of a mother, a father and 2.2 kids. According to U.S. Census Bureau data, half of Americans identify as being outside of a traditional, nuclear household.
There is a need for fresh thinking when it comes to wealth planning and preserving family legacy.
Rethinking the Vertical Transfer
A convergence of demographic trends—including increased longevity, higher divorce rates, delayed and childless marriages, same-sex marriages, staying single by choice and multi-national unions—has thrown a wrench into the traditional pattern of wealth transfer, from grandparents and parents straight down to children and grandchildren.
Today’s modern families, and the professionals who advise them, also need to plan for complex dynamics yet to come. Future children and grandchildren, divorces and remarriages, step-children and step-grandchildren, a beneficiary’s untimely death or unforeseen disabilities can all further complicate an already nuanced estate plan.
It’s also critical for single, childless individuals, who are growing both in number and influence, to think carefully about how they transfer the wealth they’ve accrued during their lifetimes. Single adult women now outnumber married women in the U.S., and they are inheriting and attaining wealth at unprecedented levels. For this group and all the many kinds of modern families, having assets properly titled with beneficiary designations, having a will and having a healthcare directive are important first steps.
Thinking Beyond Basic Wills
But again, basic first steps are not always sufficient to address the needs of today’s families. Now, estate planning requires input from more individuals, who often have diverging needs and expectations. It may also require more than a simple will. The structure of so many of today’s families is so complex that they would likely benefit from a detailed estate plan to control and protect the disposition of their wealth.
In many cases, the degree of complexity is so high that adding a professional trustee to the mix is the best way to help bring confidence to the plan and reduce family discord. A trustee is a neutral individual who likely has years of experience managing a range of family financial matters—and he or she has the legal and tax knowledge required to guide important decisions. As a professional fiduciary, this person can also ensure assets are managed in line with the highest investment standards.
Planning Strategies for the Modern Family
While my colleagues and I are seeing a degree of focus on estate planning and preparing the next generation for inherited wealth, research makes it clear that the majority of families are falling short. Only 26 percent of high-net-worth individuals in a recent survey say they have a full wealth transfer strategy in place, with a surprising 32 percent of respondents admitting they have done nothing yet to prepare.
So what can families and those who advise them do to succeed in this new era of estate planning? For one, they can take measures to prepare the next generation to receive wealth. Beneficiary education has proven to be a crucial step in sustaining family wealth, and the earlier it happens, the better. This doesn’t have to be a formal process—just talking about day-to-day saving and budgeting can go a long way towards getting younger generations into a wealth succession mindset.
More forward-thinking families can also engage the next generation at an earlier age by involving them in financial matters that tie directly to core values, including charitable giving decisions. This enables parents and grandparents to use gifting as an opportunity to share the family’s vision, priorities and intentions. Instilling an early sense of family stewardship can be an excellent way to spark further conversations about wealth and related responsibilities.
Lastly, families must also grapple with some tough, potentially unpleasant decisions. Parents and grandparents (especially in blended family scenarios) must decide how wealth will be transferred among heirs—typically this is done on an equal basis, but sometimes family heads will base these decisions on the individual needs of the inheritors. As lifespans continue to lengthen, older family members might also ask themselves if they can begin wealth transfers while they are alive or if they’ll need to preserve those funds for healthcare and other living expenses.
Beyond financial education, sustaining wealth for future generations requires careful planning and the ongoing “care and feeding” of a comprehensive wealth management and transfer plan. It requires that families sit down and talk openly about the good and the bad, the opportunities and the risks. Again, with so many diverse parties and potentially competing interests inherent in today’s modern family structure, it’s often the best idea to engage and retain an estate specialist who can facilitate discussion and help establish a comprehensive plan designed to ensure that the family legacy endures for many generations to come.
In the end, while family structures have changed dramatically, their overarching financial goals have largely stayed the same: accumulating wealth, funding your lifestyle today and tomorrow, protecting wealth, leaving a lasting legacy and sharing wealth with others. Effective estate planning that takes into account all the latest definitions and iterations of family can help individuals achieve just that even if their beneficiary designations look a bit different from generations past.
Angie O’Leary is Head of Wealth Planning at RBC Wealth Management-U.S.