The Loaded Question

“Dad, are we rich?”

Ethan’s father drops his fork mid-bite. “That’s an unusual question,” Roger carefully responds.

Ethan, who just turned 16 and still fears his father’s disapproval, hesitates before continuing. He knows there is an unspoken rule in his family to never speak about money. Despite his nerves he plows on determined to get to the bottom of the wild claims his classmates made.

“So, the guys said I didn’t need to get a summer job and I was like, ‘yeah, right,’ and then they asked if I had ever Googled you – I mean us – as a family. I hadn’t so I did.”

“Ah,” responds Roger, “You want to know if it’s true.”

Ethan shrugs, embarrassed. “I guess,” he mumbles, eyes locked onto his plate.

Roger sets down his fork, gently folds his large hands and looks Ethan in the eyes. “Yes, it’s true, son. But that changes nothing. You are to work, you are to study hard and you are to go to college. You are to find a career – any career – and you are to live a productive life. An inheritance changes nothing. I know from experience, understand?”

Ethan nods.

“Now that this nonsense is cleared up, we will never speak of it again,” and true to Roger’s word, he didn’t.

The Fallout

Unfortunately, just eleven short years later, Roger and his newest wife die in an airplane accident on their honeymoon, and Ethan suddenly inherits the responsibility of his late father’s estate.

What Ethan quickly learns is that an inheritance does, in fact, change everything.

Ill-prepared, Ethan must suddenly shoulder a nearly half-billion-dollar empire consisting of several closely held businesses, a myriad of trust funds for his multiple half-siblings, step-siblings and cousins, and properties around the world about which he wasn’t even aware. He fails to fend off vultures purporting to give advice and guidance under the guise of feigned concern, which he realizes too late are really efforts at grabbing as much cash from his family as possible. His family’s businesses slide downhill as key personnel jump ship without the consistent vision of a well-prepared leader. And, because money is a magnifier of all things, family infighting leads to mistrust, lack of communication and eventual lawsuits.

Feeling that his father threw him like a screaming lobster into a pot of boiling water, Ethan drops out of veterinary school to try to manage the estate. He’s not dumb, so he should be able to learn on the go. But as lawsuits mount and his family falls apart, Ethan becomes clinically depressed. Furious at being forced to change his life for this unexpected, stressful burden, Ethan blows through money like water, supporting a lavish lifestyle with several marriages and overly-entitled children. In defiance of everything his father wished, Ethan, who knows nothing about his family’s history, lets the estate’s businesses fail and real estate investments depreciate. At this rate, the next generation will be lucky to inherit anything.

Think something like this can’t happen to you or your loved ones? Think again.

Wealth Transfer Today

The United States is currently experiencing the largest wealth transfer in history. According to the Boston College Center for Retirement Research, two-thirds of baby boomers will inherit family money over their lifetime to the collective tune of $7.6 trillion, and over the next 46 years, the Boston College Center on Wealth and Philanthropy (CWP) estimates that over $59 trillion will change hands. Yes, that’s trillion with a “T.”

So, affluent families should expect to inherit huge estates that will keep generations rolling in it for years to come, right?

Wrong. Worldwide, including the United States, 70% of all wealth transitions fail. Used in this context, “wealth transition failure” means that financial “reversals” remove the estate’s assets – involuntarily – from the control of the beneficiaries. These reversals can occur due to poor financial or legal planning, taxes, economic downturns, litigation, mismanagement, inattention, incompetence, family feuding and simple financial loss. Furthermore, 70% of heir families lose family cohesion after receiving an inheritance, and only one-third of family businesses successfully make the transition from one generation to the next. This consistent failure rate gives rise to the phrase “shirtsleeves to shirtsleeves in three generations.”

Ethan’s story isn’t so unique after all.

Researchers at the family-wealth consultancy, The Williams Group in San Clemente, California, conducted a study of over 3,250 affluent families and asked why the 70% failure rate was so consistent around the world. Their results are eye-opening.

The reasons for wealth transfer failure most often cited by lawyers and financial planners, high taxes and poor investments, surprisingly only account for 15% of all failures. In fact, the single biggest factor of wealth transfer failure in 60% of all cases is poor trust and communication among family members. Additionally, the failure of parents to prepare their heirs for their wealth resulted in 25% of wealth transfer failures. Doing the math, a full 85% of wealth transfer failures are due to family dynamics rather than poor legal and financial planning.

So, it’s not enough to prepare your assets for your heirs….You must also prepare your heirs for your assets.

Talking about wealth transfer means talking about death and money, which are admittedly two of the most highly sensitive and uncomfortable subjects for families. But not talking about it risks your entire estate. Don’t let Ethan’s story become your own.

While our law firm has always prepared our client’s assets for the heirs, we now have a comprehensive program to prepare the heirs for the assets. The program is called the Heir Estate Education Program. We invite you to contact our office to learn more about the program. Let us help you start the conversation to preserve your wealth, and your family unity, for generations to come.

For more information about any of the information discussed in this Client Alert, or any other income or estate tax planning or asset protection planning assistance, please contact the Jeffrey M. Verdon Law Group at 949.333.8150.

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