Wealthy parents are concerned that leaving a large inheritance to their heirs could do more harm than good, according to research published by Merrill Lynch’s Private Banking and Investment Group. The report, How Much Should I Give to My Family? On the Risks and Rewards of Giving, is based on the results of a nationwide survey of 206 high-net-worth parents with at least $5 million in investable assets. The majority (91%) plan to leave most of their wealth to family. (For more, see: How to Choose the Right Executor for Your Estate.)
Financial advisors working with wealthy clients should take note that the results of the report show that many of these parents see significant risk in passing on wealth without context, conversation, guidance or accountability. In fact, Merrill found that there is a higher degree of confidence about wealth transfer decisions by those who use an advisor to map out wealth transfer strategies; such strategies often include guidelines and, in some cases, restrictions and accountability. (For more, see: Tips for Family Wealth Transfers.)
How Much Is Too Much?
Almost half (46%) of respondents are worried about giving too much money. The more assets they have to give, the greater the level of concern, the report found.
When asked at what point an inheritance is considered too much, 46% responded “when the money creates a disincentive to achieve one’s full potential.” Meanwhile, more than a quarter said it is when the recipient can indulge in a perpetual life of leisure. (For related reading, see: 4 Fatal Financial Fantasies.)
Just over half of all wealthy parents and 42% of those with more than $10 million in assets plan to pass on all of their remaining assets after they're gone, with their wishes outlined in a will or trust and estate plan. (For more, see: 10 Questions to Ask Your Estate Planning Attorney.)
The appropriate amount of money to give and the best way to do so varies depending on the recipient. While high-net-worth parents want to be fair when it comes to how they pass on wealth, their concerns about giving too much often is associated with how it might affect a specific person or group of people. This can include a child with special needs or a family member struggling with addiction. (For more, see: Advice on Dealing with Unequal Inheritances.)
One-quarter considers equity and/or fairness the top consideration when deciding how much to distribute among their heirs. But at the same time, almost 40% say they want to be fair to everyone. (For more, see: Tips for Spreading the Wealth to Relatives.)
Two-thirds have at least some level of concern about the negative impact of passing on wealth to a particular individual or group of individuals. “Too often, people think only about dollar amounts, not impact, when deciding how much is too much to give,” said Michael Liersch, head of behavioral finance and goals-based development at Merrill Lynch Wealth Management, in a statement. “There is no silver bullet answer or one-size-fits-all approach to gifting assets. The process of meaningful, intentional giving, whether to family, friends or philanthropy, should be highly personalized. It requires honesty, humility and a willingness to face this all-important topic head on.” (For more, see: 5 Ways to Mess Up Estate Planning.)
Lack of Dialogue
The report suggests that the idea of giving too much is of particular concern for those who have not clearly identified the purpose of their wealth or defined their values and intent for passing it on. The main reasons for not talking with family about passing on wealth is not thinking about it, followed by concerns about disrupting family harmony. (For more, see: Trust Options You Should Consider.)
“Many wealthy families shy away from discussions about wealth, and their avoidance can impede the very real and important process of defining priorities for wealth and giving,” said Stacy Allred, a managing director and wealth strategist in the Merrill Lynch Private Banking and Investment Group and leader of Merrill Lynch’s Center for Family Wealth Dynamics and Governance. “Unfortunately, discussions around wealth tend to occur only at big life junctures, such as an illness or death, when it is often too late to influence the way wealth is distributed, perceptions of the gift by its recipients or how they use it.” (For more, see: Estate Planning: Living Trusts vs. Simple Wills.)
While 63% of high-net-worth parents say they have documented or defined plans to pass their financial assets to others, only 29% have had a conversation with the recipients. Far fewer have expressed their intended purpose via a letter (16%), a values statement (3%) or video (2%). (For more, see: Ethical Wills Share Final Thoughts with Heirs.)
The top three events that trigger a discussion about wealth transfer are a health issue (56%), followed by death of a family member or friend (43%) or an initial discussion with a professional advisor (34%). (For more, see: Advisors Should Monitor Millennial Inheritance.)
The Bottom Line
Wealthy parents worry that leaving a big inheritance to their offspring can do more harm than good. And while most plan to pass on their wealth and many have plans in place, few have had discussions with their heirs. Financial advisors to wealthy clients should initiate a dialogue with them before a major life event to ensure the intent and impact of an inheritance is executed properly. (For more, see: Tips for Handling Client Inheritance.)