Wealth planning vs. estate planning: Honoring your client’s wishes

Wealthy families face a generational wealth-loss problem that an estate plan alone can’t solve.

An estate plan is the first step, but a wealth transfer plan goes further to protect a legacy.

Marguerita (Rita) Cheng, CEO at Blue Ocean Global Wealth, described what advisors must know about wealth transfer planning during a recent webinar.

She cited statistics from a study by The Williams Group, a family wealth consulting firm, that found 70% of wealthy families lose their wealth by the second generation and 90% of wealthy families lose their wealth by the third generation.

“That means that the wealth creation was not sustainable,” she said. “We need to change course.”

Over the next 30 to 40 years, baby boomers are expected to pass down $30 trillion to Generation X and millennials, but an estate-planning gap exists, Cheng said. She cited statistics from Kiplinger that found only 4 in 10 parents have a will and about one-third have designated beneficiaries on their insurance policies or retirement accounts.

“It all starts with recognizing the gap,” she said. “If we don’t recognize it, how can we solve it?”

It’s not only the lack of planning that leads to generational wealth loss, she said. Lack of communication or trust within the family, or misalignment of priorities within the family, contributes to that loss as well. 

Many clients may “set it and forget it” with their investments, but Cheng said that strategy does not work with wealth-transfer planning.

Understanding plans

Cheng listed the differences between estate planning and wealth transfer planning.

» Primary focus. The primary focus of estate planning is managing and protecting the client’s assets during their lifetime and directing their distribution after death. Meanwhile, wealth transfer planning’s primary focus is optimizing how wealth moves from one generation to the next with minimal tax, legal friction and family friction.

» Scope. Estate planning prioritizes legal and financial issues. Wealth transfer planning deals with these same issues but also deals with family issues that are crucial to successful wealth transfer.

» Objective. The objective of estate planning is to ensure the client’s wishes are honored, to minimize probate and to provide for heirs. The objective of wealth transfer planning is to preserve family wealth, reduce tax erosion and sustain a legacy. 

» Tools used. Tools used in estate planning include wills, trusts, powers of attorney and healthcare directives. Wealth transfer planning tools include gifting strategies, family limited partnerships, charitable trusts and insurance structures.

» Timing. Estate planning deals primarily with distribution of assets after death. Wealth transfer planning deals with transfers of wealth during and after the client’s life.

» Beneficiaries. Beneficiaries of estate planning include heirs, dependents and sometimes charities. Wealth transfer planning also deals with family issues that are crucial to successful wealth transfer.

» Philanthropy. Estate planning may include charitable bequests while wealth transfer planning often integrates philanthropy as a strategic tool.

» Complexity. Estate planning can be straightforward with basic documents, while wealth transfer planning involves multigenerational planning and advanced structures. 

“At the end of the day, none of these matters unless you have engagement and conversation,” Cheng said.

She added that for planning to be successful, it must be conducted before the client is in “a crisis mode.”

10 generational wealth transfer tips

Cheng provided this advice for helping clients pass on their wealth.

1. Consider financial wealth as part of a larger picture. Money is only one part of what a client passes down. For the wealth to last, family values, knowledge and relationships are equally important.

2. Establish a mentoring system. Pair members of the older generation with their heirs early so financial literacy and decision-making skills are transferred along with the assets. Help the older generation and their heirs connect and align on things that matter to both of them.

3. Adopt family governance. Create formal structures, such as family meetings, so decisions about shared wealth are made transparently instead of informally or by whoever shouts the loudest. 

4. Plan for conflict resolution. Build a clear process for resolving disagreements before they arise, so family disputes don’t end up destroying both relationships and assets. Avoiding a problematic topic altogether is not a solution, because the problem won’t go away.

5. Evaluate individual risk. Assess each heir’s financial maturity, life circumstances and risk tolerance individually. Don’t assume a one-size-fits-all distribution will work for everyone. It’s about equity and not equality; make sure to communicate that to heirs.

6. Take the time to get organized. Consolidate and document accounts, assets and key information now so heirs aren’t left untangling a mess during an already difficult time. 

7. Choose your trustees wisely. Pick trustees based on their judgment, impartiality and willingness to handle the role — not on family loyalty or seniority.

8. Establish roles and responsibilities among beneficiaries. Clearly define responsibilities to avoid confusion and stepped-on toes down the line.

9. Protect assets. Use trusts, insurance and legal structures to shield significant assets from creditors, divorce, lawsuits or mismanagement.

10. Expect the unexpected. Build flexibility into the plan for events such as death out of order, disability, remarriage or sudden tax law changes.

Incorporating charitable giving

“Wealth transfer planning gives individuals the chance to see the good their wealth can do while they are alive,” Cheng said. She listed some issues advisors and clients should consider when incorporating charitable giving into the wealth transfer plan.

Clients should clarify what they want their giving to accomplish, whether that’s supporting a specific cause, honoring a legacy or addressing a community need.

Advisors and clients should bring family members into the conversation early so that charitable giving becomes a shared value instead of a decision imposed on them.

Clients should decide how much they can give sustainably without compromising their own financial security or other planning goals. Clients also should research charities for financial health, transparency and impact before committing funds.

Cooperating with other professionals

One problem with wealth transfer planning, Cheng said, is that each client’s individual professional — such as advisor, accountant or attorney — has a different picture of the client’s situation and wishes because each professional works with different information. No single professional sees the whole picture in real time as the client’s life evolves.

“We’re all on the client’s team,” she said. The solution, she said, is to put fact alignment before strategy. Team members must agree on what is true before deciding what to do.

Coordination among team members is necessary when a decision is hard to reverse. High-stakes, hard-to-reverse actions include irrevocable transfers, trust funding, beneficiary changes, business sales and executing estate documents.

Start the conversation

Cheng said family members say discussions about inheritance are more uncomfortable than talking about mental health, politics or funeral arrangements. But avoiding the conversation can leave heirs unprepared to manage wealth and leave families vulnerable to conflict. Ultimately, heirs may be unequipped for their role, and siblings could develop resentment.

To start the conversation, begin with basic money management skills during childhood. Introduce more details about family finances as children mature. Save the specifics about inheritance until children are ready to learn about them.

It is never too late to have the discussion with adult children, but clients should ideally start the conversation before a crisis hits.