Developing a well-designed investment policy statement is a necessary condition for successful financial planning. Besides addressing risk management issues, the overall financial plan should also integrate estate planning. We will briefly address this issue.
Although not directly related to investing, estate planning is a key step in the overall planning process. Unfortunately, most people spend more time planning their next vacation than planning their estate. This isn't surprising, since vacations have near-term benefits and are more enjoyable to look forward to than our own demise. However, an estate plan is a critical step both to make sure your intentions are carried out after you are gone and to make tying up your affairs less stressful for your heirs.
An estate plan is important no matter your net worth. When putting it together, be mindful of federal and state laws governing estate issues. The first step is taking stock of your investments and insurance policies and deciding who you want to inherit different parts of your estate. The next step is drafting a will. If your affairs are complex, an estate-planning attorney would be a worthwhile investment. Working with your accountant and investment adviser, the attorney can help guide you through many other issues arising in the estate-planning process, including items such as the use of a trust, durable powers of attorney, estate taxes, and charitable giving. Also, discussing your estate plans with your heirs avoids surprises and conflicts after you are gone.
Napoleon Bonaparte is widely regarded as one of the greatest military commanders, his campaigns studied at military academies all over the world. Yet he developed few military innovations. Perhaps the greatest contributor to his military success is summed up in a quotation usually attributed to him: "Most battles are won or lost long before the first shot is fired."
Each year, Americans spend billions of dollars preparing their assets for transition to their heirs. They engage high-powered estate and tax planners who set up complex vehicles like family limited partnerships, life insurance trusts, charitable remainder trusts, and charitable lead trusts. Despite these efforts, it is estimated that "70 percent of estates lose their assets and family harmony following the transition of the estate."[38] Given the talent engaged, it doesn't seem likely that failure is due to poor design. So why do most plans fail?
According to Roy Williams and Vic Preisser, authors of the Estate Planning for the Post-Transition Period, "The major causes of post-transition failures were discovered to lie within the family."[39] Estate plans failed mainly because the heirs were unprepared, didn't trust each other, and communications broke down. While the family and its advisers give great attention to preparing the assets for transition to the heirs, little if any attention is paid to preparing the heirs for the assets they will inherit.
Consider this list of the five things parents worry about most regarding wealth and its effect on their children:[40]
Juxtapose these concerns with the typical focus of estate planning on taxation, preservation of wealth, and governance—not on any transfer of family values. There is an obvious disconnect. It's no surprise most plans fail.
To help determine if your heirs are prepared for their assets, Williams and Preisser suggest you ask yourself:
Do your children (and their spouses) know your estate plan?
Have they read your will?
Do they know the family's net worth, meaning both yours and theirs (if they have assets in their name)?
Are they in communication with your team of advisers (your attorney, accountant, and financial/investment adviser)?
Two more important questions: Have the children been involved in the formation of the investment policy statement, and are they familiar with the investment strategy, goals, and how to manage the assets?
Families often treat money and the issues surrounding wealth as taboo subjects. These "lessons" of noninvolvement get passed on from one generation to the next, explaining why failure rates are so high. The solution: Treat family wealth as a private matter, but not private within the family.
For a plan to be successful, Williams and Preisser recommend that heirs, including spouses, should have some influence on how the estate is structured. At the very least, they should have input. There should be a plan to prepare them for their future responsibilities and thought given to whether the estate plan matches their skills and interests. Heirs should know the impact of their wealth on their family and the responsibilities of wealth.
A transition plan should include a family wealth mission statement addressing these issues:[41]
The overall purpose of the family's wealth and a strategy to implement it, with roles well defined;
Entire family participation in the important decisions;
Options for family members to participate in asset management;
Heirs understanding and buying into their roles;
Heirs reviewing and understanding all documents;
Asset distributions based on readiness, not age of heirs;
Incentives and opportunities for heirs;
Encouraging younger children to participate in philanthropic decisions;
Family unity as an important asset;
Open, regular family communication.
The FWMS has a multitude of benefits, beginning with articulating why it exists and why you have chosen to manage and distribute your estate in a particular manner. It should identify how the wealth was achieved, the life experiences shaping your financial philosophy, what wealth means to you, how it is important to you, and, most importantly, the values you wish to pass on.
The process of creating a FWMS helps identify and examine the people and entities held in the highest esteem, leading to wealth transfer decisions that make the most sense. As a clear expression for heirs and others, the FWMS can be a tool to help pass on personal values to future generations: identifying those charities or organizations for which you feel the most passion and desire to support with your social capital, as well as the individuals for whom you feel responsible and why you feel an obligation to give them a portion of your wealth.
The FWMS succinctly informs all advisers of your intentions, saving both time and money as they explore appropriate strategies to help you achieve your wishes. It should specifically identify how much money is needed during your lifetime and how much you wish to leave to your heirs. It should also identify why you believe the amounts are appropriate and what you want to achieve by giving them money.
Finally, the FWMS document should be signed and dated to demonstrate it is a valid document and accurately reflects your wishes.
In summary, just as most battles are won in the preparatory stage, the success of a family wealth transition plan depends on the effort and emphasis placed on transitioning not only the family's wealth but the family's values.