By Mallon FitzPatrick May 17, 2021
Recently, we discussed the psychological hurdles associated with “letting go,” or making the decision to begin transitioning wealth to the next generation as the final years of life draw near.
The transition, as we pointed out, is necessary for anyone who wants to mitigate a potentially large tax liability resulting from anticipated changes to gift and estate tax exemptions. Ultimately, wealthy investors who hold onto their money too long could end up paying a hefty bill.
That moment of reckoning presents a critical juncture for those grappling with a fear of financial insecurity, feelings of grief, a pending sense of identity loss, or concerns that their heirs may not act responsibly with their newfound wealth. While we discussed the reasons behind some of those anxieties for older individuals, the next logical question might be: How do I, as a child of one of those wealth owners, broach this subject with a parent?
Taking the first step
This scenario, of course, applies to aging individuals who hold and control wealth, regardless of progeny. But as with many life events in financial planning, these transitions can be most acute when dealing with those closest to us, such as our parents.
As one of those children trying to manage the wealth transition between generations, you may be wondering—how do I take the first step? That is, how do children talk to parents about beginning the process of passing on assets when it could mean forcing them to confront their mortality and leave them feeling like they no longer have control?
Younger generations may ignore the issue, wanting to avoid what feels like a grim task. The discussion could trigger suspicions about motives, considering a tax bill could chip into their inheritance. Others may be frustrated their parents aren’t making wiser decisions. For others, it may expose unseemly family dynamics if parents believe transferring wealth will mean their child will exclude them from certain financial conversations going forward.
Even aging wealth owners who have accepted the potential fallout from the changing tax climate and have already decided on a course of action can be reluctant to execute on their plan or let their offspring take the lead.
Enlisting the help of advisors; financial planning tools
There are no easy remedies, but we can offer some advice as financial planners. For this, I need to look no further than my own circle of friends for an illustration. It involves a close friend whose mother had inherited money which she has grown into a sizable portfolio over many years and has not yet begun transitioning her assets.
Similar to many others in this situation, my friend has been unsuccessful in his attempts to convince his mother to take the leap. She has protested the move, questioning why the transfer is needed now, fearing that she will run out of money. Her children fear she will lose much of her wealth to taxes. In these situations, it’s best to begin with an objective assessment of assets, reminding parents of the realities of the looming changes.
An individual can currently transfer up to $11.7 million in assets to his or her heirs before having to pay a gift or estate tax, a limit set to expire at the end of 2025. Many are bracing for Congress and the Biden administration to reduce that exemption now, cutting it to $5.85 million or less, meaning investors who fail to act in the near future could end up paying millions more in taxes. They may also face a higher tax rate for transfers on amounts above the exemption and be taxed on unrealized gains within the deceased estate. These wealth owners can still take advantage of the higher exemption but will face consequences if they fail to act.
Fears such as running out of money may be exaggerated and irrational, but can sometimes be diffused with the help of financial planner. Planners can develop projections based on current assets and spending patterns, anticipated living costs, and model scenarios such as lower investment returns, higher income taxes, and large unexpected expenses for an added margin of safety. The charts help investors visualize how their assets fair over the long-term and in many cases assuage fears of running out of money.
Planners can also project the impact of estate taxes. A projection may show, for instance, how cutting a $50 million estate tax bill down to $10 million can free up a nearly $20 million inheritance for each of two children, while also sustaining wealth for future generations. It is money that could also go to charity or other causes.
Parents who equate the transfer with loss of control might also respond to a chart that shows the state of their assets after the anticipated change in estate taxes—demonstrating they will have even less control over their money. Others might respond to speaking to investors who have successfully made the transition, retaining plenty of money to spare.
Another approach is to seek the input of a trusted advisor, whether a financial planner, wealth manager or family attorney, who can offer professional insights. In the case of my friend, he and his sister enlisted the help of their estate attorney to broach the subject of gifting with their mother.
Finally, these investors might also respond to a little inspiration. As financial planners, our job often requires us to set aside estate plans and income projections to reflect on a client’s emotional state, considering what life events might be impacting their financial judgment. We can serve as source of comfort, helping them keep fears in check by showing them that “letting go” could be a time to explore new opportunities with the wealth they have. We can mitigate control issues, alleviate feelings of loss, and begin to repair confidence by helping them discover a new sense of purpose. In that way, we can all help “the talk” not feel so grim.
Mallon FitzPatrick, CFP®, is a Principal and Managing Director at Robertson Stephens Wealth Management, LLC, an independent SEC-registered investment advisor that provides wealth management solutions for high-net-worth individuals and family offices nationwide.
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