When we look at our client's financial relationships with their kid(s), we tend to see a range of emotions from anxiety to resentment. Parents often worry about many financial topics when they think about their children:
- What happens to the money when they are gone?
- What will happen to assets that hold sentimental value?
- How do we treat our natural children in comparison to our step-children?
- Which children are financially responsible?
- How much do we give to charity?
Almost half of all U.S. adult parents (47%, according to troweprice.com) say that they've missed opportunities to discuss money and finance with their children. It's not uncommon for parents to not know how to approach the topic and avoid it altogether. Think of your clients estate documents as the last communication that your client's children or beneficiaries will ever receive from them. When there is a lack of communication around assets or finances, it can lead to the will or trust getting challenged, family fights, or doubts about your relationship with your client.
It's up to financial advisors to work with the client and plan a time to communicate with the children and describe their decision-making motives. There should be a plan that includes:
- How much of the financial plan to disclose.
- When to share the information.
- Who to share the information with.
The most common questions that you should address with your clients are:
- How much money do the kids get?
- What would you like the children to do with the money?
- What type of good or bad financial decisions have you already watched your children make?
- How should you bring up the topic, and when's a good time to do so?
How much money do the kids get?
The first step towards a good communication plan is to start with a healthy estate plan. This plan should involve your client as well as their family members different personalities, wants, and needs. This part of the planning will state how much the children get and how that is structured. When someone passes away, three things happen to their assets:
- They go to charity
- They go to the kids and other beneficiaries
- They go to the government
Most clients will want to avoid sending anything to the government. The usual conflict comes from deciding how much to give to charity and how much to the children. Then it's time to move onto the structuring of those amounts. Remember, there is no one-size-fits-all to these types of plans, but there is a way to make a plan that fits with the client's family's values and well-being.
What would you like the children to do with the money?
It's essential to find out what your client wants their children or beneficiaries to do with the money:
- Give a certain amount to charity?
- Use it to live off?
- Use it to be able to spend more time with their family and less time working?
- Allow them to live a lavish lifestyle?
- Use it to generate their legacy?
- Use it to start a business of their own?
- Use it to be free from financial constraints?
There isn't one answer that is better than the next when it comes to this. The purpose of asking your clients what they intend for the money is to understand the timing of distribution in your client's will.
What type of good or bad financial decisions have you already watched your children make?
You will need to evaluate whether your client's children need help with the financials prior to reaching a specific financial maturity level. Maybe the client wants their children to reach certain wealth milestones or accomplish particular goals before receiving their distributions. Parents tend to worry about their child's ability to value and respect money they didn't earn themselves. Some parents ask for distributions to start at specific ages to avoid irresponsible financial decisions.
How should you bring up the topic, and when's a good time to do so?
Financial savings and assets benefit from a succession plan, just like any other business does. Your client needs to talk to their kids, be honest about their financial maturity level, and create a tailor-fit distribution plan for their children's specific needs. Part of a financial advisor's job is to navigate a client and their family through a successful financial relationship with one another. If your client asks when they should start the conversation, tell them, yesterday. It's a topic that shouldn't be defined by age. The more planning your client does, the more successful their financial succession plan will be.