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June 04, 2018

Why Wait? How and Why To Transfer Wealth in Your Lifetime

Wealthy individuals typically plan to take the traditional route of passing along their fortunes upon death, but many opt to give at least part of their money gradually during their lifetimes.

There are a number of benefits to transferring wealth this way — perhaps the most important being the opportunity to educate and prepare children to inherit and manage a substantial estate.

An RBC Wealth Management survey of high-net-worth individuals in the United States, Canada and the UK found that despite their best intentions, many families repeat a "cycle of inadequate financial guidance" that results in a lack of preparedness.

Wealthy families are "delivering too little too late," starting the next generation's formal financial education, on average, at age 28, the survey found.

Only 26 percent of those surveyed had developed a full strategy for transferring their wealth, and only 35 percent of inheritors reported that their benefactors had prepared them in advance. Further, 36 percent said they received no help after inheriting their riches.

People are uncomfortable discussing inheritance, the RBC survey acknowledged, but how people pass on their wealth to the next generation impacts whether a family legacy will last for a single generation or well beyond.

This is where gradual giving can make a vital difference.

"Gifting is the only way to prepare your heirs to inherit the larger wealth that is coming their way," said Paul DeLauro, manager of wealth planning at City National Bank.

Whether a family has millions to pass to the next generation, or little more than the proceeds of a $1 million house, heirs can quickly lose their new nest egg if they don't know how to handle it properly.

Roughly 20 percent of people who inherit money remain wealthy at their own retirement, according to DeLauro. “That means 80 percent of them have blown their inheritance no matter what size."

So how do you make sure that grim statistic does not apply to your own family? Making gifts to a young-adult child through an irrevocable trust - using your cash flow, "excess" estate holdings or both - along with the services of a professional trustee, can provide the necessary training.

“You have a duty of stewardship to prepare your children, not only to inherit wealth but to manage money," DeLauro said.

Families often share financial guidance informally, but unlike most parents and grandparents, professional trustees know how to manage an estate and educate heirs on finances.

Making gifts in life by seeding a trust can enable children to "learn what it means to be the beneficiary of a small estate before you pass a large estate to them," DeLauro said.

Yet less than a third of wealthy families make this choice. Fifty-seven percent of wealthy individuals surveyed by RBC plan to pass along all their wealth upon death or illness, while only 29 percent plan to gift gradually during their lifetimes.

“People think about it, but pulling that trigger is really tough," said Catherine Walker, senior trust consultant at RBC Wealth Management-U.S. “If they do, it's often for a specific reason, such as establishing a 529 plan for a grandchild's education, or making a $30,000 gift for a house downpayment."

The main reason for the hesitation for a quarter of survey respondents felt their funds were not sufficient enough to justify shrinking their nest egg now. Although parents want to leave a legacy, they also want a sense of security and the ability to maintain their lifestyle. Before establishing a plan for lifetime giving, your banker will work with you to ensure your retirement goals and objectives can bet met.

Why make gradual gifts, assuming you can afford to do so?

“I honestly believe you get more personal benefit from giving during your lifetime, if you can do it," said Walker. “When you approach transferring your wealth in this way, you can see the benefit and the happiness it brings."

Giving during your lifetime allows you to share your financial values and know-how with heirs and help shape their relationship with money. This can play a significant role in teaching them how to manage the wealth responsibly and how to best make saving, investing, and spending decisions.

Children often graduate college and head to their first real job having never balanced a checkbook, DeLauro said.

“I would suggest right around that age is when you'd want to make a significant gift in trust, whatever you can afford," he said. It may be $100,000 or $200,0000, “some amount where you can say, 'Kid, don't call me if you need money anymore.'" Instead, the child will need to work with the professional trustee.

If you seed a trust in your lifetime, "that becomes the piggy bank allowance for that kid for the rest of their lives," DeLauro said.

Parents can set up the rules of the trust however they prefer, but DeLauro strongly recommends that parents appoint appropriate bank professionals rather than setting themselves up as trustees.

The trust, at its core, is a contract between the trustee and someone transferring assets, he noted. It can be restrictive, limiting fund distribution to health, education, maintenance and support needs, or liberal to the point where the trustee is instructed to provide money for whatever the child requests.

The young-adult beneficiaries receive access to a private banking experience — a team of professionals who will meet with them, provide reports, answer their budgeting questions and handle discretionary distribution requests.

In addition to providing trust administration, tax and investment services, the team can dispense the kind of financial education on cash flow planning, budgeting and portfolio construction that even high-net-worth parents are generally unequipped to give.

That means when the parents eventually die, their grieving offspring won't be left unprepared and uncertain about what to do with a large inheritance, DeLauro said.

Benefactors can seed up the trust and, if they desire, make additional gifts every year, with private bankers helping them determine how much they can afford to give.

Individuals can gift up to $15,000 each a year to any recipient tax-free, so a wealthy married couple could give $30,000 a year to their adult daughter. If she has a family of four, the parents could deposit $120,000 combined annually in trust gifts to each family member.

“Having that account set up is that training-wheels concept, where the daughter can really learn what a trust is and how it functions," DeLauro said.

With the proper plan in place, transferring your wealth throughout your lifetime will help you to share your financial management skills and values with the next generation. Doing so helps ensure the family legacy you've built is maintained and enjoyed by multiple generations

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This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

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