March 3, 2021 – Giving up control is hard. As financial planners, we hear it in clients’ voices and see it on their faces: parting with money that took a lifetime to acquire can feel like a wrenching, identity-erasing experience.
It is also a potentially hazardous endeavor, as it often entails navigating complex family dynamics with children who may have vastly different spending habits or other relatives who have not proven to be reliable. It may cause anxiety over financial security. Deciding to start passing on a life’s fortune can trigger feelings of grief, doubt and even paranoia.
However, the political climate has changed and that could negatively impact current gift and estate tax exemptions for wealthy investors. Failing to let go could therefore be a costly decision.
Doing the math
Currently, a married couple can transfer roughly $23.4 million in assets to their heirs before having to pay a gift or an estate tax, a limit set to expire at the end of 2025. If Congress and the Biden administration, however, move to reduce that exemption now—which many believe is likely, cutting it to $11.7 million or less—investors who fail to act could end up paying millions more in taxes. They could also face a higher tax rate for transfers on amounts above the exemption.
As of now, clients can still take advantage of the increased exemption. Waiting is not advisable, as passing assets to the next generation or other beneficiaries is not a question of ‘if,’ but ‘when.’
Nevertheless, clients often hesitate to take that plunge, regardless of the tax advantages. Transitioning assets means giving up control and, for many, giving up control is harder to do when there is more wealth. While indulging these sentiments isn’t advisable, fretting over them isn’t recommend either.
‘You are not alone’
Those struggling with these issues should know they are not alone. We have seen how the process of ‘letting go’ manifests itself deep in the psyche of investors as they are forced to grapple with complexities that go far beyond matters of wealth. These issues can arise in a number of scenarios.
Take a man, for example, who was a consummate disciplined investor and frugal spender with assets inherited from his family, ones he grew into a sizable portfolio. He may be reluctant to part with his money because he’s afraid he might run out, even though he deems his children financially responsible.
In another scenario, consider a former executive who amassed a fortune after decades of ascending the corporate ladder at her company. She may struggle with passing on her assets because she doesn’t believe her children share her work ethic and fears a sudden inheritance might make result in complacency.
And in yet another common scenario, an entrepreneurial couple who spent their lives building a prosperous business with strong revenue growth may be hesitant to let go if they don’t have heirs who they believe will carry on their legacy. They may have several children, but only one who might be interested in running the family business.
A call for introspection
While we can’t prescribe how any one client should handle these feelings, we can offer insights that might help put these decisions into context.
First, it is important to remember that transitioning assets is a process and not a one-time event. Investors don’t suddenly decide to hand over their life’s fortune to their children. It is a methodical and gradual decision that requires careful contemplation of the beneficiaries’ intentions, desires and frame of mind. It is also true that giving up control may not be a viable option at this time.
Additionally, it is helpful to compartmentalize the different aspects of the transition. In each of the examples above, as with most cases, giving up control has both a technical and behavioral component.
On the technical side, ceding control could be viewed as a move to implement estate planning tools to protect assets, mitigate estate tax liability, and ensure that an investor’s wishes are reflected. We as planners have many tools to design estate plans. The wealthy man with inherited assets, for instance, can take advantage of an array of trusts and techniques, including grantor retained annuity trusts (GRAT) and domestic asset-protection trusts (DAPT). The key is understanding his lifestyle and ensuring the plan provides for his needs. The former executive could consider a spendthrift trust which grants the trustee control over the beneficiaries’ access to the funds. A business succession plan would allow the entrepreneurial couple to grant ownership of their company to all their children, while only giving control to one. An irrevocable life insurance trust is as option for those who don’t want to give up control now but want their assets to remain intact when passed on to the next generation.
The behavioral side can be much more challenging. Here, psychological dynamics have the ability to cloud judgment. Some introspection is needed to help distinguish rational fears from irrational ones. Isolating emotions and identifying their sources can help eliminate obstacles and make the transition easier.
Clients are often consumed by fear, concerned about exhausting their assets or being unable to continue their lifestyle, and not having trustworthy relatives to ensure that their needs are met. Some might fixate on the fear of the unknown, wondering if another pandemic or a global economic collapse is on the horizon which may deplete their assets.
Many use their assets to measure their self-worth and feel giving away a portion of their assets is tantamount to giving away some of their self-worth. Some have such strong attachments to the business they’ve built that they feel giving away assets would mean losing their identity. Others simply fear that giving up money will mean they are no longer the decision maker.
Some may even want to retain control of their money “from beyond the grave.” And, as in the example of the former executive, others might fear their money will feed a sense of entitlement with their children or contribute to a failure to reach their potential.
Ultimately, we can only serve as guides, helping clients understand their risks, motivations and options—and reminding them that it is all part of a process that comes with time, patience and reflection. We understand the resistance and biases people have around these issues and help clients identify and address them by listening and challenging through reflection. Our job is to help clients overcome psychological obstacles leading to an efficient estate plan where everyone is satisfied.
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