Taboo #12 Inheritance

Taboo #12 – Inheritance.

On the face of it this is simple. You accumulate (assets and or debts) through life and when you die the residual is passed on to others, in large part the taxman, however that’s for your Financial Adviser or Accountant to comment on. Here I’m thinking about implications in life as well as when we have departed.

I am not in the most part talking Bill Gates here, some of us may well have the capacity to spend our children’s inheritance whether by desire or the situation we find ourselves in either intentionally or otherwise. The super-rich seem to openly debate their intention to pass on only a fraction of their vast wealth to their offspring citing their desire to avoid (to paraphrase Bill Gates) ‘It distorting anything they might do … and creating their own path.’

Warren Buffett has said wants to leave his kids “‘enough money so that they would feel they could do anything, but not so much that they could do nothing.” (So he plans to leave each of his three children ‘only’ $2 billion each!)

Although I have no objection to writing for the ultra-privileged I have no expertise in wealth management so cannot comment further. However, I would like to explore not the amount of money per se but what effect this has on families and those close to us. We have all heard of family feuds originating from “…Aunty Maude always said I was to have that ring/clock/picture…” or the like and should where possible try to avoid these by writing a will and discussing the contents with our heirs. Making clear the ‘whys and wherefores’ will also ensure clarity and if too awkward in life save it for the will!

Apparently, 70 percent of Millennials expect an inheritance whereas only 40 percent of their parents plan to leave one! This is a shocking mismatch and might well be expected to result in financial decision making relying on ‘windfalls’ that aren’t going to materialise. This is coupled with somewhat naïve assumptions about their retirement and how it will be funded with the Millennial’s aspiration to quit working at 59, on average whereas possibly more realistically Baby Boomers expecting to retire at 65.

It gets worse for the Millennials – longevity is increasing and that costs! What might have been an inheritance is likely to be swallowed up by living expenses, worse still 24% of Baby Boomers expect their Millennial offspring to contribute to THEIR retirement as more than half don’t expect to have money left to pass on and a third plan to spend whatever money that’s left on themselves. Do the math, there’s not much left over to inherit! That nearly half of Baby Boomers don’t even have a will makes the situation frightening, albeit maybe not for them, being dead and buried!? Do we not however have the duty to explain the ways of the world, the whys and wherefores and dispel myths into adulthood just as we did to our children?

Whatever the answer let us consider some interesting patterns involved in the family inheritance process whilst we are still alive. What we do and why is discussed in a paper entitled The family inheritance process: motivations and patterns of interaction. by Liliana Sousa et al. (2010)

The motivations for giving and receiving an inheritance seem to go well beyond altruism and exchange and can be translated into a continuum between altruism and egoism. This continuum seems to be organised around two topics: ‘justice’ and ‘power’. (Who has the right to decide about the division of inheritance) and ownership (who owns the assets).

Let us be honest, there will usually be choices, a spectrum along which we as donors make decisions based on our particular perceptions of ‘fairness’ or ‘justice’ and self-interest with at one extreme trust in family values (altruistic motivation), and at the other extreme control over family members’ values and decisions (egoistic motivation).

Liliana Sousa et al describe these steps along the spectrum thus:-

Altruistic Motivation – justice means supporting the family and it is not important whether one person is treated better than the others (family members trust each other and self-interest is mixed up with the family’s interest). Altruistic motivation rests on family values (shared by heirs and donors), which aim to maintain family identity, therefore the inheritance of moral principles is valued in the absence of material inheritance; the inheritance is preserved in the family as a symbol of what they were, are and will be; or the inheritance is used to help whoever is in need, because that is the main strength of the family. The inheritance belongs to the family (ownership), which also has power over the transmission of the inheritance.

Equality Motivation – justice is in the equity of the distribution, taking needs and rewards into consideration, i.e. confidence in the family depends on the egalitarian principle (some control emerges to ensure self-interest). Equality oriented motivation lies in the maintenance of family ties (avoidance of conflicts) and recognises individual needs and the importance of rewarding some family members. Power and ownership of the inheritance seem to be in the family, but equity in division must be respected; otherwise family cohesion is seriously threatened.

Exchange-oriented Motivation – justice lies in the reciprocity that ensures self-interest and control (I give my inheritance to receive care; and I give care because I receive the inheritance); however, confidence between family members is scarce. The exchange motivation conciliates the individual (being cared for and receiving the inheritance) and the family (resolving conflicts) in order to maintain family ties. Ownership of the inheritance seems to be with: the family (everyone decides who will be granted privilege in the exchange of care-giving); the donor (when he/she decides); and/or the heirs (when they decide). Power lies with those who receive the inheritance, since they can fulfil their obligations or not (in fact, most of the problems which arise in relation to this motivation are concerned with the non-fulfilment of the care-giving commitment).

Egoistic Motivation – justice seems to be in ‘not getting a bad deal’, ‘restoring justice’ or guaranteeing self-interest; i.e. confidence has vanished, and control assumes the leading role. For example, heirs who took advantage of donors (and other heirs) feel they are being just (or restoring justice) because they need more, or have been treated badly on other occasions, or because someone else wants the inheritance without needing or deserving it. These heirs make use of less fair strategies to ensure justice. The egoistic motivation focuses on the individual, since each person involved may show any of the motivations described. Power is disputed since each individual has their own motivations and rules (and each feels that they are being just and cannot let others cause them harm); ownership is also individual, since each person feels they have the right to the inheritance (in some cases, that assumption is legitimate, for example, when a donor assumes the management of their material assets, they have a legal entitlement to do so).

The main point the authors of this work make is the importance of the meaning of ‘justice’ for each person which is in turn is connected to principles that underlie roles and relationships in families.

It is possible that the baby Boomers are the ‘Golden Generation’. Many will have grown up in relatively booming times, invested in property, have generous pensions, good healthcare and have a longevity likely not likely to result in using up all one’s assets before dying. Many will wish to ‘provide’ for their heirs although the inheritances may well be limited or non- existent. Governments also debate the ‘fairness’ and effects of inheritance on the distribution of wealth and tax accordingly as there is evidence that inheritance increases the divide between rich and poor. There is very little evidence in qualitative studies to support the idea that people ‘live poor to die rich’ for future generations. Equally, there is little evidence that people are deliberately planning to spend all their (potential) children’s inheritance.

A perceived concern as highlighted by the billionaires above is whether the expectation of a significant inheritance would limit motivation to work, achieve, save etc. and thus should the donor not limit the bequest? Inheritance tax and rules around bequests vary around the world. For example in Portugal inheritance law follows a system of what is called ‘forced heirship’ whereby legitimate heirs including the spouse, biological and adopted descendants, and ascendants of the deceased are entitled to a minimum of 50 percent of the whole estate. In the UK People who are married or registered civil partners do not have to pay any Inheritance Tax on money or property left to them by their spouse. The rules for couples mean it is usually best for them to leave everything to each other but under French law the surviving spouse does not automatically inherit the whole of the estate of their deceased, only that part of the estate belonging to the deceased is subject to inheritance laws, so a surviving spouse will normally retain ownership of at least 50% of their jointly held assets.

There are also trade-offs to be considered. Does one use up assets to maintain or even enhance living standards, save to pay for long-term care or make lifetime gifts so as to avoid death duties and give the heirs a leg up? Regarding lifetime gifts, studies suggest that it is most likely to be kept or invested because it is considered to be ‘special’ money which should not be spent recklessly. The majority of bequests are to one’s children and spouse, however seldom is life so simple. Divorce, remarriage, adopted and step children etc. may muddy the waters. Most of us will never meet our great great grandchildren so will not be motivated to provide for this or succeeding generations. The aristocracy may be an exception but passing down the majority of the wealth down the family line with only the first-born son inheriting is seen by many as an anachronism and unfair.

So, what to do? Please DO make a will – whatever the contents your heirs will thank you over having none at all. Know your mind and your family. Plan what you perceive as fair and discuss so as to avoid conflicts arising when you are gone. Being clear, fair and having considered all concerned is likely the best bequest you will make!