"Anything financial that we send to another will always be a meteor from outer space crashing into the atmosphere of the recipient to which he or she must then adapt," said James Hughes, co-author of The Cycle of the Gift: Family Wealth and Wisdom, a book aimed at helping Americans prepare recipients for large gifts. "So the great question is: 'What inspiriting of the meteor am I doing that creates the greatest possibility that the recipient will be able to adapt positively to this alien object rather than being destroyed by it?'"
By way of background, two of three Baby Boomers who were between the ages of 46 and 64 in 2010 — were projected to inherit on average of $64,000, according to "Inheritance and Wealth Transfer to Baby Boomers," a 2010 study commissioned by MetLife from Boston College's Center for Retirement Research.
The study suggested an inter-generational transfer of wealth totaling $11.6 trillion. But the amounts that Boomer households were projected to inherit from grandparents, parents, spouses and trusts varied greatly. The wealthiest Boomer households were projected to get the biggest inheritances, with $1.5 million as the average. The average for the poorest was projected to be $27,000.
So if you have designs on passing down your wealth to loved ones, what might you do to help prepare them for their sudden riches? Here's what experts had to say:
Get help
You might not think you need help, but odds are high you could benefit by getting some advice from someone who understands how to work with legacy and wealth transfer issues.
"Statistically speaking, sudden money creates all kinds of challenges for people who are not prepared and who are not surrounded by people they can trust," says Todd Fithian, managing partner of the Legacy Companies, a consulting firm based in Norwell, Mass. "It's a known fact that lottery winners, for example, often end up bankrupt, divorced or faced with a number of new challenges." What's more, he says 70% of lottery winners spend all of the money within a couple of years of receiving it.
Fithian recommends working with someone who can clarify why you want to pass on a gift, what that could stand for, and that can respect the things you value throughout the process. "With that clarified, then you can feel more confident about looking at what specific financial vehicles would best serve your plan," he says.
Others also emphasize the need to create a plan of action for your wealth transfer. Michael Liersch, head of behavioral finance for Merrill Lynch Wealth Management, says the first step for those intending to pass money to others is to establish and execute a plan. "Circumstances change, so keeping a will, trust and other related documents up to date is essential," says Liersch, who works with wealthy and ultra-wealthy clients in Merrill Lynch's Private Banking & Investment Group. "Reviewing them annually is not too often."
Think through the plan
Experts also say you should identify the "implications" of your plan. "Wealth transfer plans have financial and emotional outcomes, so optimizing the strategy around a stated mission or philosophy can increase the chances that the intended outcomes are achieved," says Liersch.
Fithian shares that opinion. "There is a financial event to consider, and a more emotional one to look at as well," he says. "A financial event — passing on some money can be wonderful for the recipient, but with just a bit of advanced thinking, it can be generationally life-altering. Money that is passed without purpose and proper preparedne! ss of the! beneficiaries has caused more harm than good historically many would argue, but it doesn't have to be that way."
According to Fithian, thinking through the implications requires some introspection. "Think through what you'd like to pass on along with the money," he said. "Are there some lessons, values, stories or traditions that you want the recipient to get as well?"
For instance, if you were able to steward your wealth because of specific habits, or thinking you had, what were they? "They'll likely be useful for the person receiving the gift," says Fithian.
Communicate the plan
Like it or not, experts say you need to communicate your plans to transfer your wealth to your beneficiaries. "To the extent possible, share decisions — and the intent behind the decisions — with the affected family members in a structured and transparent way, so that everyone is clear on how the event will unfold," says Liersch. "If appropriate, bring all affected individuals together for a discussion."
Are you on the receiving end?
If you're on the receiving end of sudden wealth — and it doesn't always have to be an inheritance — experts say it's wise to get some advice from someone who understands how to handle large wealth transfers.
"You'll know you're talking to the right kind of person because they'll have a process to uncover and understand what really matters to you before they give you financial advice," says Chris Venn of the Legacy Companies. "If their first answer is, 'You should put it in this fund,' you're likely speaking to the wrong party."
And no matter whether you work with an adviser or not, Liersch suggests that you avoid doing anything rash. "Take it slow, he says. "When receiving sudden or unexpected money, emotions can be high and the situation can feel overwhelming and complex.
His advice: Don't make any non-critical financial decisions for a period of time — at least a few months — to allow the circumstances surrounding the even! t to sett! le in.
"Before executing a strategy, articulating the goals that one has with respect to wealth can be extremely beneficial," says Liersch. For instance, it could be education, lifestyle, new home purchase, philanthropy or legacy.
Once the goals have been laid out, then priorities can be assigned, says Liersch. For example, what is the No. 1 job the money has to do? "If it's to provide for one's lifestyle for the rest of his/her life, then ensuring that the appropriate amount of money is set aside and invested toward that goal 'before' large one-time purchases are made can decrease the risk of unintentionally overspending, over-giving to relatives and charitable organizations, or dedicating dollars to investments (and the like) that may not be in line with primary goals."
If you did get an inheritance, consider too how to honor the person who gave you the gift by handling it in a way that respects how they created it, says Venn.
And, give some real thought about how you can perpetuate it by being able to create your own gift to pass on to the next generation, even if that might still be decades away. "Develop a pay-it-forward mindset," says Venn.
One last item to do if you come into a large amount of money, suddenly: "Communicate," says Liersch. "Whether it is with a spouse, parent, adult child, trusted relative or investment professional, share your thoughts and feelings about the wealth — especially its challenges — in a structured way. Communicating with others can increase confidence in decisions by bringing the best information and thinking to the table."
Robert Powell is editor of Retirement Weekly. E-mail him at rpowell@allthingsretirement.com
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