The progenitor’s dilemma: avoiding entitlement when transferring wealth
Wealth can, at times, feel more like a curse than a blessing. Wealth magnifies the impact of bad choices and presents dilemmas to those progenitors who must determine how to distribute their assets over their lifetimes and beyond. Perhaps the biggest fear among benefactors is transferring wealth in a way that engenders entitlement. Progenitors do not want affluence to crush the next-generation’s initiative, sense of purpose or self-esteem.
They also want to ensure that those receiving some of their wealth do not confuse self-worth with networth. This can be easier said than done in a world that responds strongly to the material. But if progenitors can understand the issues at play and how choices regarding transfer of their wealth may impact the recipients of that wealth, they will be better able to achieve the benefits they want for their next-gens and avoid some of the pitfalls they fear. Many families feel uncertain about the potential consequences of wealth transfer, wondering: How can I use my wealth to give my children opportunities but not make them entitled? and How much should I give, and when? We have found that, when progenitors make informed decisions with intention, factoring in all the relevant issues at play, they are better able to avoid common pitfalls and increase the likelihood that their wealth transfer will be constructive, and not destructive, for future generations.
Please note that throughout this article we will refer at times to parents or grandparents as progenitors and children as the recipients of wealth. We acknowledge that these relationships and roles are not the only ones to consider in the ‘progenitor’s dilemma’ and use them only as short-hand for readability of this piece. We do not mean to imply that these frameworks only apply to these roles. Whenever there is wealth transfer and a concern for its impact on the recipients, these frameworks apply. Finally, the magnitude of the wealth at issue varies greatly across families. The concerns of parents and grandparents, however, seem consistent and informative of how much of their wealth they choose to transfer to each of their heirs regardless of the magnitude of that wealth. Of significance is not the dollar amount given, but the relative impact that the money has on the individual’s choices and lifestyle.
For many families, wealth is transferred both outright and in trust. For some, it is transferred as ownership of a business, real estate, or other assets, such as artwork. Our focus, and the basis on which this framework was developed, considers the liquid assets over which heirs would have some significant control, whether in trust or not. In our experience, parents and grandparents typically have a sense of the magnitude of accumulated wealth that would likely be available to their heirs. They also have a rough idea of the percentage of that wealth which they intend to transfer to their children and grandchildren over their lifetime and what percentage might go to charity or other purposes. The question of ‘how much’ might be distributed, is often driven by tax implications and fairness considerations. The magnitude of wealth available also influences how much would be made available to each of the succeeding generations — ie, to what extent can the wealth benefit multiple generations, rather than the next generation alone.
These considerations are reasonably straightforward and are the primary determinants of ‘how much’ each heir will potentially receive. The more perplexing questions are the ‘when’ and ‘how’, because these are factors that have the most significant impact on heirs. Also important is clarifying the impulse behind the transfer of wealth. In their book, Cycle of the Gift, Jay Hughes, Susan Massenzio and Keith Whitaker make a distinction between a gift and a transfer. What makes a transfer of wealth a gift is that it is given with purpose, free of judgement, to express or reinforce emotional connection. A transfer has other motivations — to save taxes, to be fair, to influence behaviour or to protect the asset from others. Understanding the difference between a gift and a transfer is an important first step for progenitors, so they may then clearly communicate their intentions regarding the wealth and establish appropriate expectations. What determines the impact of wealth transfer? Our experience reveals that two factors influence how wealth transfer impacts beneficiaries: when wealth is transferred — specifically, the rate at which the expected lifetime transfer occurs; and how wealth is transferred, including the degree to which the transfer is accompanied by intentional messaging.
When, or at what rate, is wealth transferred
Should wealth be given gradually over time, at specific milestones, or withheld until the progenitor’s death? Thinking in terms of rate, rather than date (or when) is more informative because rate combines both the ‘when’ and the ‘amount’ and is more relevant to addressing the progenitor’s dilemma. A high rate would represent a significant portion of the expected lifetime wealth transfer at regularly scheduled times throughout the receivers’ lives, generally before the heirs reach 50 years old. A low rate would be small amounts, with respect to what can be made available, given sporadically without much predictability — perhaps with the bulk of the transfer happening when the progenitor’s estate matures.
How is wealth transferred
The degree to which wealth transfer is accompanied by intentional messaging has a tremendous impact on how it is received. How deeply does the progenitor consider and communicate the purpose of the transfer? Do they speak about the intended purpose of their wealth or how it should be used? Does the heir understand how the money was originally made or how much effort and sacrifice went into making it? Do they suggest that a transfer might be a test to determine how a child would use the money and how that assessment would impact what future gifts might be given?
- What would represent a high level of intentional messaging would be situations in which parents sit down with their children to speak about their intentions for providing the wealth, teach their children to understand and manage their wealth productively, and provide some guidelines and accountability. For example, for younger children parents may suggest approaches such as spending 1/3, saving/investing 1/3 and donating 1/3; or they may suggest that with money comes certain responsibilities. They might offer resources such as a wealth adviser, trustee or other trusted adviser to help the increasingly wealthy recipient make informed choices.
