Sudden Wealth Syndrome - Wells Fargo

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Wealth Planning Update. Sudden Wealth Syndrome. AUGUST 2016. Amir Mossanen. Wealth Advisor. Wells Fargo Private Bank. In this Wealth Planning Update:.
The following information and opinions are provided courtesy of Wells Fargo Bank N.A.

Wealth Planning Update

Sudden Wealth Syndrome AUGUST 2016

In this Wealth Planning Update:

Amir Mossanen Wealth Advisor Wells Fargo Private Bank

» High net worth families can make large lifetime gifts to their heirs that may be beneficial for estate planning purposes. » Parents may hesitate in taking advantage of this opportunity due to concerns about the impact such wealth will have on their children. » There are basic but important steps that parents can take to offset the potential negative effects of Sudden Wealth Syndrome on their children. » Gifting is more than transferring assets–done in the right way it can give future generations the opportunity to lead productive, meaningful, and enriching lives.

Approximately 70 percent of wealth is lost within one generation1 of its inheritance, while 90 percent is lost by the end of the third generation2. It is not surprising that faced with these odds you may be conflicted when it comes to transferring significant wealth to your children. On the one hand, you want to see the wealth you have generated and worked hard to protect to be put to good use and to benefit those whom you love the most. On the other hand, you may be worried about the destructive and negative effects such wealth can have on your heirs. High net worth families have the opportunity to gift assets with a value up to $5.45 million in 2016 per parent as part of their lifetime gift exemption. This exemption is an opportunity to take advantage of tax relief to high net worth families; gifts above the exemption amount are taxed at the 40 percent unified transfer tax rate. Yet high net worth families are sometimes reluctant to take advantage of the lifetime gift exemption. There may be concerns from a financial perspective, but there are also a number of families that have considerations that go beyond tax liability as they contemplate gifting and wealth transfer. While very few families like the idea of paying transfer taxes, such tax considerations can pale in comparison to the concerns that parents have over the effects the transfer of significant wealth would have on their children. Many parents worry that if their children knew they were to be recipients of fortunes they would lose their motivation to work and would become reliant on family support.

Wealth Planning Update

Common concerns about their children include: 6 Common Issues: 1. 2. 3. 4. 5. 6.

Emphasis on material items Naïve about the value of money Spend beyond their means Initiative ruined by affluence Won’t do as well financially Difficulty in taking financial responsibility

Doing nothing and hoping that your heirs will manage their inherited wealth successfully themselves is an option but likely not a solid one. The phenomenon known as “Sudden Wealth Syndrome” describes the potentially devastating effects of not being trained or skilled at managing a large and unexpected injection of wealth. This syndrome helps to explain why so many lottery winners end up losing their fortune, but can equally be applied to heirs who were otherwise ill-prepared to step into the shoes of their parents. A better approach is to incrementally but actively prepare your children for both the responsibilities and the opportunities that inheriting wealth can bring. The process of preparation may take several years and may include a combination of tailored formal education and practical hands-on experience. This Wealth Planning Update outlines steps that parents can take to offset the potential negative effects of Sudden Wealth Syndrome on their children. 1. Talk with your children about both the challenges and opportunities wealth presents Often families have a hard time addressing the subject of money in a productive way. Parents may find their children to be profoundly disinterested in the topic to begin with, thereby making the parents’ task that much harder. Making the conversation more difficult is that children may perceive these talks as “lectures,” and if they are in their teens or older they may have no interest in being lectured to. One way to overcome this perception is to have your children actively participate in the discussions as opposed to having to passively listen. Try asking questions to engage your children in the conversation. As the parent, you have the opportunity to offer guidance and advice without taking over the process. It is not uncommon for parents who have achieved success in their lives to have “take–charge” personalities— this might be, in fact, a reason for their success. This take-charge approach could, however, leave children with a lack of desire to take responsibility for their own future as they have been accustomed to someone else making decisions for them. To help facilitate conversations you may decide it would be helpful to ask a neutral third party to help facilitate such discussions until there is a good working relationship between generations. Partnerships need to be born out of respect for one another and common visions and goals. Your adult children may want to assert their independence and generate their own sense of self and, thus, may view your advice as an imposition of your will. A consequence may be that they resent the money and engage in potentially negative behavior. 2

Wealth Planning Update

2. Help your children define their dreams Once you have created a healthy rapport with your children when discussing money, wealth and finances, you can begin to support them in developing their own dreams and defining their goals. Ultimately, these are what motivate people. Perhaps your drive to create family wealth may have been as a result of a dream for a better life. Alternatively the desire to cease living pay check to pay check may have motivated you to work hard, take risks, be entrepreneurial and create wealth; however your children may not have had the same experience growing up as you did, and are therefore unlikely to have the same motivations. For your children, having those big ambitious dreams and then working hard to turn dreams into realities can be a reliable way of generating motivated and productive members of society and offset the negative effects of Sudden Wealth Syndrome. Your role in dream creation is very important, as money given to a child without a dream can create an illusion that money is a goal in itself. With their goals clearly defined, guide your children toward what they need to learn, how they need to behave, and with whom they need to partner in order to make their dreams come true. 3. Make trades together As the partnership between generations is being formed, it is a good idea for there to be clear understanding of what each party expects of the other. While parents may love their children unconditionally, not all would say that they would unconditionally support their children. In truth, we all have expectations of one another and, in the confines of a family system, these expectations are often poorly expressed and this can lead to disappointment and frustration. Making a trade can help clarify expectations. Making a trade is no different than making a promise, where each party agrees to fulfill their obligation. For very young children, it might be something as simple as “I will get you dessert once you have finished your dinner.” For there to be integrity in your family system, you have to keep your word. As children get older, the conditions may change but the principle holds true. This clarity provides a good environment for there to be trust and respect among family members. There are many simple trades that you can make to empower your child. For example, consider having your ten-year old research where he or she would like to spend the family vacation, and present it to you in a comprehensive and detailed way, with cost estimates, travel schedules, photographs, etc. In exchange for doing quality research and making your life easier, you, as the parents, can agree to pay for the vacation. This same process can be applied to more serious family decisions as children mature and become more capable of forming hypotheses and presenting their ideas. The process can provide a framework for children to be able to share opinions on what to do with the family business or other family assets, and for them to be rewarded for the contributions they are making.


Wealth Planning Update

4. Build in some safeguards Steps 1 to 3 are all about preparing your children to be able to make smart choices for themselves, but even if you have followed these steps and decide, as a result, that you should make a significant gift to your heirs, we recommend that you work with a good planner to establish some safeguards. Gifting does not necessarily mean handing over control to your children. A common concern that parents have about gifting is the loss of control coupled with the parents’ lack of confidence that their children will make the right decisions. One common safeguard is for the gift to be made to a trust for the benefit of your children, where neither you nor your children are the trustee. The trustee is tasked with the responsibility of managing the assets of the trust for the benefit of those to whom the gift was given, namely the beneficiaries. A trustee can be a family member, trusted friend or corporate fiduciary who should have the appropriate skills and knowledge to be able to both manage trust assets and coach the beneficiaries. Trusts can have provisions that allow for the trustee to be changed, thus giving the beneficiary the opportunity to assume the role of trustee at some point in the future. A good interim step is for your child to act as a cotrustee before being appointed sole trustee. This apprenticeship period is very important and allows your child to learn about important concepts such as investment management, real estate, operating a business, and taxes. In summary Ultimately, gifting is about more than passing assets from one generation to the next. It is about giving future generations the opportunity to lead extraordinary, productive, meaningful and enriching lives. Minimizing the negative effects of Sudden Wealth Syndrome while preparing your children to make the most of the opportunity with which you are presenting them requires a team effort, commitment from all parties and a lot of patience. Fortunately, this is not an endeavor you have to undertake on your own. Wells Fargo has been working with high net worth families for many generations and has developed educational programs, processes and tools to help your family have a lasting legacy and achieve your multi-generational goals.


Wealth Planning Update


Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values, Vic Preisier and Roy Williams. 2010 (The Williams Group study of 3,250 high net worth families across the world) 2

Why Most families Lose Their Wealth by the Third Generation,TimVoorhees,

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