A conundrum for families of significant wealth is whether to treat their children with fairness or equality. That is, should each child be treated the same in all circumstances or should each be treated fairly in response to their needs within the overall family.
Consider the situation of a family whose young adult son lost a job. The parents pitched in to help him cover his rent as he lived in a nice apartment and they didn’t want him to have to move. The parents didn’t set out a timeline for their support, which created little incentive for the son to work hard to find a new job. Eventually, the parents became resentful as did a younger sister who lived in the same city and was working hard and paying her own rent.
These were thoughtful parents who unwittingly got themselves in a tough spot, but they are hardly alone among wealthy families in “overfunction that leads to underfunction,” according to Valerie Galinskaya, head of Merrill Center for Family Wealth, a group within Merrill Private Wealth Management.
In a recent survey of 270 individuals from families with assets of US$50 million or more—and an average of US$230 million—83% said they provide some sort of support to the rising generation and 39% said they provide some type of “recurring lifestyle support.”
That figure was higher than Galinskaya and her colleagues expected, and points to a potential issue for families.
“When you’re gifting without any dialogue, you are much more prone to financial dependence, [and] you’re much more prone to conflicts over perception of fairness,” she says.
The survey conducted by the Merrill Center was done to help families understand how their peers communicate to family members, make financial decisions, and gift their wealth. When it comes to gifting, the survey explored views on fairness versus equality.
The survey set out to reveal the practical actions taken by those who effectively navigate wealth while maintaining their well-being and thriving as a family, Galinskaya says.
Penta spoke recently with Galinskaya about the results, which were published earlier this month in a paper titled, “Pulling back the curtain.”
Talking About Wealth
One-third of the families surveyed had more conversations about family wealth during the pandemic than previously, although 78% described these conversations as spontaneous. Though most respondents described the conversations as fine, or even productive, 26% regretted them.
The reasons for their regrets varied, but some said the spontaneous chats created “anxiety about their relationships with their children,” the paper said. In comments, someone said their children “may have different expectations for my inheritance than I do,” and another worried that their children’s knowledge of their family’s wealth “may impact their motivation or their drive.”
Many wealthy families do undertake these kinds of conversations with guidance from their financial advisors, resources such as the Center, or through planned family meetings, but “there’s still a taboo around discussing this topic, particularly for wealth creators,” Galinskaya says.
This shows up in decision-making. Nearly half of all those surveyed said their decision-making is shared among two or more generations. And the biggest challenges of sharing this task? A large majority cited qualitative factors such as family dynamics, limited skills in co-managing assets, undefined expectations, and lack of clarity on the purpose of the wealth.
“Only 14% of families said that the biggest challenge with shared decision-making is the technical complexity of the family asset,” Galinskaya says.
Productive Strategies
One reason frank family conversations can be so fraught is that many with wealth haven’t articulated their core values and the purpose of their wealth for themselves. Is it sustaining wealth or to give it away through philanthropy? Is it to allow family members to pursue careers no matter the potential earning power?
The Center’s suggestion is to use a “dimmer-switch” approach to communication, saving details about dollar amounts and estate planning to sometime after the values and goals are articulated.
Having these kinds of conversations early can thwart the type of situation the parents of the struggling son encountered. But once in a situation like that, the Center suggests the parents go through a “parenting and gifting self-assessment.” The exercise has parents define the purpose of their wealth, what’s troublesome about a given situation and what they want to change, how they might be potentially contributing to the problem, and what agreements they would like to reach, among other things.
After going through this assessment, the parents who needed to come up with a plan for their son devised a structure that included a defined timeline and specific expectations, and they spoke to their daughters about what they were doing and why. They said: “‘The purpose of our wealth is to empower you. We also believe in supporting family members during good times and bad. But we need to do it with skin in the game,’” Galinskaya says.
The sisters, both in their 20s, didn’t agree with the final plan, but “they felt that it was fair,” she says. “The process, and the way that they were included, made sense to them.” As they told Galinskaya, “‘This is the first time in our lives that we feel like we’re actually talking about money, not in a conceptual black box sort of way, but in a way that is really meaningful and that is practical.’”
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