Marc E. Seaverson

CPWA, Wealth Strategist

Sharing wealth with family members is often a complex process. It requires determining what to give, who will receive it and taking steps to ensure your gift(s) will be administered according to your intentions.

The best way to make sure your goals are met is to create a governance structure that can stand the test of time. Often we see a lot of attention paid to the initial gift and structure, but then don’t see the full intention of the giftor come to fruition because of a lack of a thoughtful distribution policy, investment strategy and family governance.

Here are the key areas to focus on.

When will funds be distributed to heirs?

Distributions generally work best when benefactors express clear intentions regarding how and when funds should pass to family members, whether as direct gifts or placed in trust.

When assets are held in trust, the distribution decisions legally must be made by the trustee. While these distributions may be guided by the financial needs and circumstances of each beneficiary, they must be in accordance with the provisions in the trust document. Many trustees find this to be a daunting task, especially when there are multiple current and future beneficiaries named in the trust.

To increase the likelihood that your wealth-transfer intentions will be realized, we recommend you make sure the trustees you choose fully understand their responsibilities and are committed to implementing your goals with care. Further, proactively communicating your intent to the beneficiaries can go a long way in preventing future family discord or putting the trustees in a difficult position.

Among the distribution policies benefactors most often put in their documents for trustees to implement:

  • Disburse funds when beneficiaries reach a predetermined age or achieve certain life milestones, such as earning an advanced degree, getting married or buying a first home
  • Draw funds only from portfolio income, not asset sales
  • Allow distributions to provide a baseline lifestyle so the beneficiaries can pursue vocations that are less financially rewarding, or more easily consider staying home with young children
  • Manage assets equitably to benefit both current and future (remainder) beneficiaries. Naming a corporate trustee with deep experience in this area can be extremely helpful to a family
  • Lastly, trusts can also contain provisions prohibiting distributions under certain circumstances, such as if a beneficiary is going through a divorce or has a substance abuse problem

How will the money you give be invested?

Whether your gift is being placed in trust or given directly to heirs to be invested, a disciplined approach begins with you and carefully considers:

Time horizon and asset allocation – Generally, the first step in the investment process is assessing when your heirs are likely to need the funds, which naturally transitions into asset allocation strategies. Start by considering these points on your gift’s time horizon:

  • Near-term (within five years) – Is your gift meant to help a beneficiary buy a home, pay off debt or start a business? For other beneficiaries, it simply may be a psychological safety net of earmarking a portion of their gift as a rainy day fund. Regardless, if the intent is for short-term outflows or peace of mind, it’s prudent to protect capital here and place the funds in cash-like instruments or short-term bonds.
  • Further into the future – Is your plan to benefit those with much longer time horizons, or potentially future generations to come? If so, consider placing the funds in more growth-oriented investment strategies, such as larger equity or private investment allocations, given their potential to generate larger returns over many years.

Risk profile – This is informed by your (and also your heirs’) investment skills, financial needs, and psychological and financial willingness to assume risk. In our view, there are three key considerations here – risk required, risk capacity and risk tolerance:

  • Risk required – What is the amount of risk needed to achieve goals?
  • Risk capacity – What is the investor’s ability to take risk based on their goal priorities, amount and time horizon?
  • Risk tolerance – What is the investor’s willingness to take risk, which is influenced by personal factors that are subject to emotions and environment?

Both risk required and risk capacity are anchored in an investor’s goals and time horizon, and thus are more stable, while risk tolerance is less stable due to personal sentiment.

Will your wealth be preserved over time?

In our experience, the most successful families:

  • Have a clear vision of what they want their wealth to achieve
  • Are guided by shared values
  • Encourage open communications among all family members
  • Balance the needs of the current generation and the interests of future generations

Some families choose to detail their governance policies in writing and to regularly review them at annual family meetings. Others take an informal approach, and discuss family values and wealth goals at the dinner table or in other casual settings.

Whatever approach your family chooses, it is critical that you create a governance framework that promotes collaboration and a shared commitment to wealth preservation.

This, in turn, can help protect you and your beneficiaries from risks to multigenerational fortunes brought on by family strife or exacerbated by poor communication among family members; competing rather than shared values; or feelings of entitlement.

To increase the likelihood of a successful family legacy, we place a high emphasis on educating generation two, three and beyond around financial literacy concepts to ensure they are well prepared to be responsible stewards of large gifts coming their way. Meeting with your J.P. Morgan advisor will help put any gift in context with each beneficiary’s broader financial picture. This often includes building a customized wealth plan analysis around their specific goals, objectives and current balance sheet.

We can help

Aligning your intentions with your wealth strategies and long-term goals is an evolving process. Your J.P. Morgan advisor can help you explore your options, assess your gifting capacity and make the most of your wealth-transfer plans.

Your advisor can also help educate younger beneficiaries on a range of financial literacy topics, such as spending, saving and sharing.

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