Heirs who are unprepared for an inheritance may find that a big windfall can quickly become a mixed blessing. An essential step in estate planning is making sure beneficiaries know all the responsibilities and challenges that accompany the management of increasing wealth.

When an aging parent with an air-tight estate plan fails to prepare heirs for an inheritance, an act of kindness runs a high risk of backfire. Even assets in the most buttoned-up plan for wealth transfer can be frittered away or become a source of strife without proper balance, transparency, objectivity, education and monitoring.

Some 55% of Americans die without having prepared a will or estate plan, according to the American Bar Association’s website. For those who have assets to pass on, this all but guarantees a bumpy path for heirs in obtaining their inheritance. But even the most forward-thinking and comprehensive estate plan may yield the same results by not ensuring that heirs are ready to handle sudden wealth.

Unprepared heirs may squander the assets out of incompetence or self-indulgence, and an heir who is unready for the responsibilities of new or increased wealth may feel unsure of next steps and whom to trust. Sometimes these generational transfers lead to litigation among heirs with conflicting expectations. Much is at stake: baby boomers in North America will transfer to their descendants about $30 trillion in inheritance during the next three to four decades, according to Accenture. Here are ways we think about minimizing the risk that an inheritance goes awry:

Make sure your estate plan has the right balance of security and autonomy. Estate plans can offer heirs a full range of control, from an outright inheritance without limitations, to trusts that distribute assets over decades. Trusts often make sense, as they provide economic benefit to heirs while protecting assets from certain creditor claims and taxes. The provisions of a trust—and its oversight by a trustee—may reduce risks of heirs feeling overwhelmed by the responsibilities accompanying newly acquired wealth. Within estate plans, grantors can enshrine their ideals as guidance for later generations, unifying their thoughts and actions, including philanthropic work, and establishing a sense of the grantor’s legacy.

Consider telling heirs the extent of an inheritance. Some benefactors prefer not to disclose the magnitude of an inheritance, fearing that heirs will otherwise lack the incentive to lead a productive life. While veiling the size of an estate may be warranted in some cases, many heirs indicate that with prior knowledge they might have pursued more vocationally centered careers aligned with their interests and talents.

"Thoughtful preparation ensures that heirs will handle their wealth not just responsibly, but with vision and confidence."

Heirs struck by sudden riches often confront a maelstrom of conflicting feelings and thoughts. One is an awareness of maxims such as “great wealth brings great responsibility” and “to those to whom much is given, much is asked.” Preparation for an inheritance creates a sense of impending stewardship over assets intended for their and their family’s long-term well-being. Such preparation may take many forms—such as regular family meetings to discuss financial matters and involvement of descendants in management of the family’s charitable endeavors. But the key to success is clear, consistent communication.

For example, a family may have given scant thought to wealth planning, being led to believe little would be passed to them. When a windfall strikes, they may be stunned, and quickly realize the urgency of beginning long-term planning. They may not grasp the full implications of being heirs of significant wealth. “Am I an heir, what does that mean?” may be a common question. An effective advisor, however, when working with the grantor, can guide the beneficiaries, allowing them to proactively embark on their own planning in advance of the distribution.

Share news of the inheritance with help from an advisor. Heirs can feel a complicated mix of emotions when considering the benefits and responsibilities accompanying an inheritance. An advisor can introduce heirs to objective notions of estate planning, answering their questions without the overtone of emotion that sometimes accompanies meetings guided by a family member. The early establishment of trust between heirs and an advisor increases the likelihood of a smooth transfer of wealth, providing reassurances to a benefactor.

Another example involves a grantor who has accumulated significant assets after decades of modest and industrious living, and who decides not to share the extent of wealth with the family. Should substantial gifts be contemplated, the grantor may have the advisor notify the children. The advisor would prepare the family for the coming assets and, when gifts are significant, would work with heirs to craft their own plans.

Make sure your heirs are able to meet their future responsibilities. Some heirs have little familiarity with finance, markets and asset management. Thoughtful advice on these topics is essential as heirs begin to ponder their long-term investment needs. Our efforts prove especially helpful in ensuring that our clients ride out periods of market volatility and remain confident in a strategy of diversified, long-term investing.

When effective, the advisor ensures that heirs know the extent of their decision-making authority and ability to vet investment opportunities and measure portfolio performance. They should feel confident to raise questions and seek counsel from other qualified professionals. Trusts may also assist with this education and training. In some cases, grantors will use trusts to provide an “apprenticeship” for heirs by having them serve as co-trustee alongside a professional trustee.

Monitor the progress of an estate plan with periodic checkups. We have found that one of the biggest challenges to executing an estate plan is helping heirs adjust to tax and regulatory changes. We also find it helpful to regularly check in on the investment portfolio to ensure that performance, asset allocation and specific assets align with a family’s goals.

An inheritance is best used to sustain financial security, support the personal growth of heirs and bring broad benefits to communities. Thoughtful preparation ensures that heirs will handle their wealth not just responsibly, but with vision and confidence.


Please download The Advisory to read other articles in this issue including:

Off the Beaten Trail
By Taylor Graff, CFA, Asset Allocation Analyst

Investors should expect the market swings of 2015 to carry over into the new year, driven largely by concerns over weak global growth. We are recommending that clients consider high-yield bonds and other asset classes that can offer the prospect of solid gains that diverge from the path of traditional stocks and bonds.

Diamonds In The Rough
By Tom Graff, CFA, Head of Fixed Income

Weak commodity prices and flagging emerging market economies have dimmed the outlook for energy and metals companies, and are shaking up the high-yield bond market. Through conservative, bottom-up analysis, we are taking advantage of current market dynamics to buy attractively priced debt in companies with solid revenues and limited vulnerability to an economic downturn.

Anchoring Expectations
By Mark Kodenski, Private Client Portfolio Manager

Stock market corrections can prompt investors to impulse selling or other moves that are often harmful to their long-term financial well-being. By walking through four steps with a client, we can refocus his or her mindset on the fundamental issues that help safeguard financial stability and achieve steady outperformance.

The views expressed are those of the authors and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance. In addition, these views may not be relied upon as investment advice. The information provided in this material should not be considered a recommendation to buy or sell any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients or other clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients and is for informational purposes only. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

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