Family Estate Planning

Most family estate plans are set-it-and-forget-it, until something big changes. Here are some examples of the type of changes I’ve seen family members consider as it relates to updating or changing their estate plans:

• The birth of a grandchild.
• The divorce of an adult child.
• The passing of a loved one, especially if they have young children.
• Coming into a large sum of money, say from the sale of a business or a valuable piece of real estate.
• An heir succumbing to addiction, which severely clouds their judgement.
• A significant financial loss.

Families facing these situations usually have some tough judgement calls to make. Here are four questions I often see these families struggling with:

• How will our wealth impact the ones we love? Sometimes it’s easy to predict this. But other times, that can be very challenging. For example, giving an adult child with an addiction problem a lot of money could actually accelerate them down a dark path.
• What do we want our wealth to do for those we love? Depending on the situation, wealth can simply add to the net worth of a loved one and ease their mind about the future. But other times, wealth needs to be pressed into service right away to address an issue. Knowing what you want wealth to do will help you put the right strategies in place.
• How will we tell our loved ones about the decisions we’ve made? This can be quite tricky. I’ve known of families with one mature and responsible adult child and another child who is not. In these situations, tough calls need to be made about what’s in the best interest of wealth preservation and family health. But choosing how to communicate these decisions also has implications for family unity.
• How will we institutionalize the decisions we’ve made? Once decisions are made, estate documents often need to be updated to reflect the will of the family. This can be a very sensitive situation because sometimes documents can seem impersonal, cold and uncaring. The language in the documents can produce adverse reactions, especially if you are not around to explain why you made certain decisions.

Real Estate Considerations

Real estate is usually the single biggest expense a family will incur. So being smart with real estate has long-term implications for perseveration and growth of family wealth. Most of the families I’ve served over the years struggle with these types of questions:

• Should we buy investment properties? If yes, how much of our net worth should be tied up in or dependent on the real estate for the long-term gains we want to realize? Why would we invest in real estate versus other investment options and how does that impact our wealth?
• Should we buy a second home or a vacation property? Many families choose to do this because of what it can do for family unity and overall enjoyment. But there are often invisible expenses associated with this decision. Sometimes, it’s better financially to rent versus own. But each family has to weigh this for themselves.
• For entrepreneurs—will investments in real estate hurt my ability to invest in my business? Over the years, I have seen situations where an entrepreneur came to regret buying more property because they could have used those funds to fuel the growth of their business. Smaller entrepreneurs, in particular, often self-invest to grow their businesses. Making the best possible decision here can really improve the financial future of a family. The opposite is equally true.
• How will real estate impact our long-term net worth? In some affluent families I’ve served, real estate has been the primary source of their net worth. But could they have built wealth faster, better and with lower risk than tying up their capital in real estate? This requires a careful analysis and long-term projections based on reasonable assumptions.
• When should I rent versus buy? In the US today, it seems nearly everyone believes that home ownership is crucial to building long-term net worth. But actually, in my experience, renting can sometimes be a much better option.

Work And Career Changes

As professionals progress through their careers, there are often attractive new opportunities that might pull them in a new direction. Here are three of the biggest questions I see people struggling with:

• Should I switch companies? There are all sorts of implications to this question. For example, senior executives often have stock options that mature on a defined schedule. What do you give up if you leave before full maturation? What about benefits, like 401k? If the new job requires you to move, how will you pay for this? Finally, what can you expect, based on reasonable projections, about the financial outcomes of job A versus job B?
• Should I start a business? This is a major consideration. For most entrepreneurs, especially for those who leave a steady paycheck to start their own business, this requires a great deal of soul searching. There are quality of life and financial considerations a plenty in this decision.
• If I move, how will this impact my family? One of the biggest challenges with making a career switch is what it can do to loved ones. This is especially true for those who have children and teenagers. Moving a teenager in the middle of their high-school years can be very impactful on them.

Divorce

The old saying is that the heart wants what the heart wants. But a divorce can be the single most stressful event that anyone can go through. Divorce can also deplete family wealth. As I’ve worked with families where a divorce is in play, here are the kinds of questions I hear:

• How much will the divorce actually cost us in the short-term? In my experience, most people underestimate the short-term expenses involved in a divorce. This includes legal fees, the cost of additional housing if a spouse moves out and the often negative impact divorce has on work. This can result in people under-performing at work and missing opportunities, especially if they are in a high-performance role like sales or business development.
• What does a divorce do to my long-term net-worth? Most people know that long-term, a divorce can really negatively impact wealth. But in my experience, about the last thing a person considering a divorce wants to do is sit down with their financial advisor and build a new financial plan. But without this being done, it’s nearly impossible to know what your long-term financial future looks like.
• What’s more important to me – getting a divorce and living with the financial consequences or staying with a partner that I might be able to work things out with over time? This is a really tough question and one that probably has less to do with finances than it does quality of life. But I do think it’s important for people considering a divorce. In some instances, staying in a relationship and working it out can be the surest way to long-term happiness.
• What is the most advantageous way to separate finances? Once a decision has been made to get a divorce, there are numerous strategies to consider for protecting everyone’s long-term wealth. If a divorce is acrimonious, a spouse may use financial pain as a means of retribution. But if an amicable split is an option, divorce does not have to mean irrevocable financial damage.

Charitable Gifting

Most of the families I serve have some level of charitable intent. This is often about the legacy of the family and the impact they want to have on their community. In some instances, this is also about the legacy of a patriarch or matriarch. Families who want to support charities often ask themselves these questions:

• What charities do we want to support and why? Getting clarity on the why can be really important for defining the best way to support the charity. For example, let’s assume a charity provides housing for at-risk families who’ve fallen on hard times. Let’s also assume that the reason a family wants to support this charity is because they’ve gone through the same thing themselves in the past.
• What is the best way to support them? Let’s assume a family wants to make a sizable impact on a charity. This can certainly be accomplished with a cash transfer. But it might be more impactful to gift stock, real estate or other non-liquid assets that can generate income passively, over the long-term, for the charity. This can also have significant tax implications.
• How can we make the biggest impact on the charity without hurting ourselves or our heirs? Many affluent families want to support a charity and their families. Figuring out how much to give to heirs versus to a charity can be an emotionally draining decision.

Who Should Be Your Guide?

As you can see, these five areas can be quite complicated. You might be wondering why a financial advisor is talking about all of these big decisions? Here is my answer. Each of these decisions can have a direct impact on your wealth and your happiness. I believe it’s my job to help my clients organize their financial lives so their dreams most likely come true. So I like to start with why. I want to know not just what a client wants to achieve, but why.

The reason I want to know this is because once I know it, I can serve them really well. The decisions a client is considering often have implications well beyond my area of expertise. In fact, I prefer to coordinate closely with a client’s other professional advisors, particularly their CPA, estate attorney and insurance advisors. However, it’s my role to know my client so well that I can be an advocate for them to their other advisors. This is especially important during stressful times, such as I’ve described above. In these times, I can save a client a lot of time and energy, allowing them to really focus on their family and loved ones.

Final Thoughts

The idea of a rugged individualist makes for great fiction and movies, but not so much for a great life. There are many moments in life where we shouldn’t be walking alone. If you’ve not yet faced big decisions in the five areas I’ve described in this thought piece, that time could be just down the road for you.

Estate planning, real estate decisions, career path changes, divorce and charitable gifting can all be rather complex. But if you have a solid team around you, especially a financial advisor who deeply knows you and can serve as your advocate, you put yourself in the best position to realize your dreams. If you don’t have this type of relationship with your financial advisor, it’s probably time for us to talk.