Most people start with the simple premise of providing that assets be divided equally among their children. But, is equal distribution always fair? Should they leave substantial wealth to their children? At what age should children get access to wealth? Do entities such as trusts and foundations have a role to play? And, why is sharing information about one’s estate plan important?
In this episode, we answer these questions and more, sharing some of the best practices for estate and succession planning seen from families across the globe.
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Paul Knox: Hello, and welcome to our Life & Legacy podcast series. In this episode, we are going to be discussing what’s important to consider when putting together a succession plan for your children.
My name is Paul Knox, and I am a Senior Wealth Advisor in the J.P. Morgan Hong Kong team. I am here today with Yannick Stehr, Senior Wealth Advisor in the J.P. Morgan German team. Welcome, Yannick.
Yannick Stehr: Thank you, Paul!
Let me start with a Winston Churchill quote, which I thought would fit in well with our discussion:
“Saving is a fine thing. Especially when your parents have done it for you!”
Now, let’s jump to those kind of parents Churchill referred to and their succession planning for (or with) their children!
Succession planning is a big topic, and the approach of someone making a succession plan is likely to vary depending on the age of the children. The considerations are very different if the children are still minors as compared to where they are grown-up adults—maybe in their 40s or 50s. Generally, most people thinking about this issue will usually start with a simple approach.
They will decide what portion of their estate they want their children to receive, either:
- On their death; or
- On the death of the survivor of themselves and their spouse or partner.
And in most cases, they will want their children broadly to inherit in equal shares.
PK: So people start thinking they want their children to share equally, but do they also think about how much they actually want their children to inherit?
YS: For the very wealthy, the question of how much they wish their children to inherit has become a very big issue.
People such as Warren Buffett and Bill Gates have made it very clear that they only intend to leave their children a relatively small proportion of their wealth so as to ensure that their descendants will remain motivated to find their own success in their lives.
As regards the question of how the children should inherit, the younger the children and the greater the level of wealth.
There are likely to be more questions around at what age the children should be able to benefit and whether some form of structure is needed.
Firstly, regulate and have a unified arrangement for the management of the wealth and, secondly, to decide when or at what age distributions should be made to those inheriting.
The older the children, there may be less need for some form of structure (although this will depend on location and circumstances).
However, the planning can become more challenging where there are children of very disparate ages and by different partners. In these cases, it is more common to make different plans for the eldest and youngest children.
But let’s come back to the initial aspect of leaving one’s assets in the same way and equally. That certainly seems to be the fairest way. So Paul, why do people depart from this?
PK: Well, Yannick, there are many reasons we have seen people departing from a pure equal division.
Sometimes there are those unfortunate circumstances where, sadly, there is genuine family feuds, and a deliberate decision is made to reduce or sometimes totally exclude one or more child’s entitlement. Fortunately, these situations don’t arise often, but a recent public example was Sir Elton John’s mother. In her will, she only left Sir Elton two urns and two family photos, but nothing else. One can only speculate on her reasoning.
However, there are many other good and positive reasons why people do consider unequal distributions between children:
- There may be a child who suffers from a physical or mental disability or, for example, a grandchild with special care needs. I have seen many instances where it is recognized that a child will require special care for the rest of their life, and so parents or grandparents set aside a special fund for the benefit of that child.
- Another example is where one family member has benefited more than other from family funds during their lifetime; for example, I have seen instances where the parents have advanced money to a child for a real estate purchase or a business venture, and so it is fair that these benefits provided in lifetime are taken into account on the parent’s death.
- Sometimes there are concerns about the marriage of one of the children, and the parents may be reticent to leave money outright to the child if this might be lost in a divorce settlement.
- The issues can be particularly tricky where the wealth is primarily in a family business, where one child has had more involvement, and so is the more natural inheritor.
- There are also situations where one child has acquired significantly more wealth than others due to their own endeavors or good fortune, and have less need for funds. A recent case I saw, the client had two children—one had a successful career in finance and the other was a teacher, and they felt that it was appropriate to provide the teacher with a greater share of the assets.
YS: So, Paul, there are many different examples and situations there where departing from the equal division makes sense. How do you help clients who want to take an unequal approach?
PK: The point is that it is their wealth to decide what to do with, and it is not for advisors to be judgmental over those decisions. However, my advice to people departing from equality even where they have in their own mind valid reason for doing this is:
- At the very least, to put an explanation in the will as to your reasoning; or
- Even better, explain to the child or children who will receive less the reason why you are doing this.
The death of a parent or any close family member often unlocks deep emotions within families, and an imbalance in distributions can be a source of friction and stress even when the intentions were totally reasonable.
I’ve also seen the appointment of one child over another as executor or trustee of an estate as causing upset in the family. It’s always best to avoid giving children shocks in wills if you want to preserve harmony in family, and so providing an explanation during one’s lifetime can avoid a lot of these issues. So communication of intentions is very important.
Yannick, let’s turn to the question of what age should children get access to wealth?
YS: Another big question, Paul. There are no hard and fast rules here as to the right age at which children should receive the wealth, and it will depend on many factors.
Generally, the younger the children and the greater the levels of wealth, the more likely that parents are going to be concerned about a child potentially having direct access to significant funds before they have some form of career or settled life.
This is where some form of structure either set up during lifetime to allow others to manage the money for the child and make a level of distribution appropriate for the child’s needs until such time as they are ready to take on ownership of the wealth.
There are obviously many other reasons why one might also look to consider structures such as a mechanism for controlling ownership of family assets and asset protection. As you mentioned briefly earlier, there are often concerns over assets being lost due to family disputes.
PK: You mention structures there, Yannick. What type of structures do you see families using in practice?
YS: The structures used will vary, but most typically include:
- Trusts in common law countries;
- Private foundations or usufructs in civil law countries—insurance products or family partnerships can also have a role to play.
The right structure might not only depend on where the parent lives, but also where the child is living, if that is different. We have a lot of experience in helping identify issues for clients whose children are living in different countries, and where there may be unthought of tax consequences for children receiving inheritances outright or through particular structures.
At J.P. Morgan, we often help clients think through the options and consequences before they see their legal advisor to draft their will or start setting up a structure.
Paul, is there anything else parents should think of as part of this process?
PK: We have already mentioned the importance of communication. If you want wealth to transition successfully, it is really important to make sure that children of all ages are equipped and prepared to inherit the wealth.
Where children (or grandchildren) are still minors, we have a lot of experience in helping clients think about how to prepare their children to be ready to take responsibility for their financial affairs on reaching adulthood.
In general terms, it is usually preferable to involve your adult children in discussions on your succession plan. It can also be helpful if they know your professional advisors so that they understand who they need to liaise with at the appropriate time. This will all help to make the transition of assets more seamless.
Yannick, anything you would want to add?
YS: Hmm. One thing, perhaps:
Where possible, it is helpful to allow some flexibility in your succession plan so that your inheritors can have access to funds for special circumstances.
Just the other day, we had a client who was adamant that her children had to work to support their families, but she was also keen that one of her very academic grandchildren should have the chance to go to a top U.S. university. We had to point out that her daughter would not be able to afford to finance this education on her teacher salary. So we explored with our client the ways in which she might create a special fund to help with these university expenses.
My advice: Plan carefully, try to think through different potential alternatives, but be aware that a situation might arise you haven’t thought of.
So, Paul, how do you see J.P. Morgan can help clients in these discussions around succession planning for children?
PK: Whilst we don’t draft wills or any legal documents, as you mentioned earlier, Yannick, what we do is help client scope out the issues, identify the information that the legal draftsman is likely to require, and to think through some of the options they need to consider to implement their estate planning objectives. We also are able to share a lot of practical experience of how we have seen other families around the globe approach these issues.
This generally makes for clients having more productive and efficient meetings with their lawyers who will draft the estate plan. Additionally, understanding the longer-term intentions for your wealth is really helpful for your whole J.P. Morgan team, as this can influence the way in which we think about managing your wealth.
So whether you are new to estate planning or think your estate plan needs to be reviewed, please do reach out to your J.P. Morgan contact to see how we can help further!
YS: Thank you, Paul. That brings us to the end of this episode. We hope that you will join us for more upcoming episodes where J.P. Morgan Wealth Advisors will explore some of these issues in more detail. Thank you for listening to our Wealth Advisory Series on topics of Life and Legacy.