Things to Consider When Distributing Wealth - Doug Baumoel
Distributing wealth to the next generation is an exciting privilege to have, but it comes with its set of challenges. There is no ‘one size fits all’ approach, as many factors and dynamics will impact the way your wealth will be best distributed.
Doug Baumoel, expert financial advisor, has devised three key questions you must ask yourself before acting upon distributions. He notes that, “how clients transfer wealth is as important as how much they transfer.” It is not wise to simply act. Rather, one should strategize with a consultant and create a clear plan of action for distribution.
The three questions Doug encourages you to answer are:
1. Is the distribution fair?
“When transferring wealth in families with more than one heir, fairness is a major factor to consider. Who should receive more? Does the heir with a partner and children receive more than the heir who is free and single? Should the wealth be equally distributed among all of them? While these questions are important to think about, it’s also important to note that there is no right or wrong answer to what is “fair.” The answer for each family evolves through effective and smart communication — advise clients to be transparent with the recipients so everyone is on the same page and the concept of “fairness” doesn’t become an issue. For some families, fair is based on need. For other families, equal is fair or compliance to family ‘norms’ is required. Whatever the family norm, communication is key. What is considered ‘fair’ also changes with time. Communication with an adolescent needs to be much different than with an adult heir — just as is the consideration for what is fair.”
2. Are recipients prepared?
“Ensuring that those who are receiving the money are well educated and skilled in their acquisition of wealth is crucial. Do they understand how the money will be transferred? If it’s transferred into a trust, do they understand what that means and how that works? Do they have the required experience and understanding to manage the wealth wisely? Surrounding them with the right advisory system (now and in the future) will help them to manage, invest, and use the money wisely. If possible, suggest connecting them with a peer or mentor who has dealt with similar situations who can relate to their wealth journey. This provides the recipient with a safe space to explore their wealth and ask questions.
“A skills-based assessment is also a good way to gauge whether or not the recipient is prepared to handle the wealth. For example, if an heir wants to use their wealth on a business venture, there are a few things to consider. Is this person responsible and educated in business and the particular industry of the venture? Have they made similar investments in the past or worked in the industry before? Do they have the right advisors and partners for success? Asking these questions does not imply a desire to control, second-guess or micromanage the prospective recipient. It’s simply an opportunity to provide education and guidance.
“Utilizing a skill-based metric for transferring wealth can help with determining what is ‘fair’ for families (see #1 above). Rather than using an ‘equal is fair’ standard, for example, distributions based, in part, on skills provide an incentive to learn and accomplish. It sends the message that family members who are more capable to receive wealth might have access to more wealth.
“Finally, it’s important for gifters to communicate their family values to the recipients — both explicitly through conversation and implicitly through their own behavior. When the recipient understands the history of the money and the values behind it, they are more likely to appreciate the wealth and handle it with care.”
3. What are your intentions?
“Advise clients to ask themselves what their intentions are when it comes to the transfer of wealth. Is it a gift or a transaction? The blurred line between the two is often where conflict ensues. A gift is free of judgment with no strings attached — there are no stipulations or conditions surrounding it. A transfer, however, often has other motivations (i.e. to save taxes, to protect the asset from others, to incentivize certain behaviors, etc.). Understanding the difference between a gift and a transfer and communicating that clearly to the recipient is a crucial first step.
“Whether there are guidelines surrounding the use of transferred wealth or not should be clearly communicated. Having a written document explicitly stating what the guidelines are (if any), consequences for not following said guidelines, or any other conditions will establish expectations early on and avoid confusion and future conflict. Additionally, this letter of intent is especially helpful should the progenitor pass prior to having these conversations verbally.
“Providing a gift, rather than a transfer, is a wonderful opportunity to communicate the level of trust, affection, and pride that prompted the gift. It is a missed opportunity to believe that the tangible gift ‘says it all.’”
Doug emphasizes that distributing wealth without first evaluating these critical factors can lead to negative consequences. Things such as family conflict, entitlement, misunderstandings, and a possible false narrative of power dynamics may arise. This will lead to bigger familial issues and is why the distribution of wealth must be thought out strategically and performed mindfully.
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