More than a third of high-net-worth individuals don't have confidence in their beneficiaries to handle their inheritance responsibly, according to a new study by Barclays Wealth.
The survey canvassed more than 2,000 individuals in 20 countries, each of whom had more than $1.5 million in investable assets, and 200 with more than $15 million.
For the 34% percent who said they are either ambivalent or don't trust their children or stepchildren to protect their inheritance, their views have likely been influenced by the recent upheavals in global markets and economic dislocations that have vanquished a considerable amount of wealth, according to Chris Johnson, director of the Wealth Advisory Group for Barclays Wealth.
"I think that there's been an increase in distrust over the last several years," Johnson said. "I think that the drivers for that are partially social and partially economic."
Johnson suggested that the sour macroeconomic picture and continued market volatility has forced more affluent individuals to reconsider their inheritance plans, a reckoning that for many has brought to the forefront reservations about their children's ability to manage their fortunes that they may have harbored for some time, but that only recently assumed a pressing urgency. Johnson drew a parallel with the studies that have correlated a spike in failed marriages with the mortgage crisis, job loss and other elements of the economic downturn that have brought unwelcome stresses to many families.
However, 96% of survey respondents said they still plan to leave their fortunes to their children, with 70% saying they would divide their inheritances equally among beneficiaries.
But the high level of distrust that parents expressed about their heirs' ability to manage their inheritance suggests the importance of implementing a comprehensive wealth management strategy. And 60% of respondents said they will require a high level of professional advice as they craft an inheritance model for their children and stepchildren. Nevertheless, 23% of individuals surveyed said that they don't have a will, a finding that the Barclays researchers called "a surprisingly high number."
In their consultations with affluent individuals, wealth managers at Barclays will often counsel an inheritance plan that avoids a lump-sum windfall to the beneficiaries, particularly if they are young, or if their parents express reservations about their ability to manage their finances or the concern that a vast inheritance will discourage them from working hard to advance their own careers.
"Often a solution might be as simple as implementing a trust structure," Johnson said. Those can take a variety of forms. Incentive trusts, for instance, can be structured so that whatever the children earn on their own, the trust will match.
Many investors also opt for a trust structure with trustees who can make discretionary payments to beneficiaries on an as-needed basis, such as the so-called HEMS model, where payments are allocated when needs arise from health, education, maintenance and support costs. Those trusts can also shield the assets from potential claims that could be made in court in the future, such as a divorce proceeding. Others prefer a staggered distribution model where beneficiaries receive defined payouts as they reach certain ages.
All of these models "allow beneficiaries ... to participate in wealth but not in an unfettered manner," Johnson said. "Trusts are a great way to ensure that a person's wealth profile is not asymmetrically associated with their maturity level."
The degree of distrust that survey respondents expressed varied by region. Wealthy individuals in the developed areas of the Asia Pacific region, Europe, North America and Australia reported greater concern with their beneficiaries' custodianship of the family fortune than those in the Middle East, Africa and Latin America.
Survey participants were also asked about their experiences with money-related conflicts. Fully 40% said that they had gone through some type of family squabble, often related to succession and wealth transfer issues.
"Commonly, these conflicts are triggered by individuals who feel that they haven't received their fair share of the wealth. Among children, there may be those who feel they weren't adequately rewarded for the caring responsibilities they took on preceding the death of a parent. Where there are multiple spouses, there may be those who feel entitled to more from the estate, based on their contribution in creating it," the authors of the report wrote.
"But disputes may also arise or be aggravated by less logical arguments and more emotional ones -- particularly, negative feelings to other members of the family. These emotions may be kept in check while the patriarch or indeed the matriarch are still alive, but emerge after their deaths," the report continued.
Johnson said that he has also helped clients navigate conflicts when the matter of succession has already been determined, but a dispute arises over how to allocate assets that are pooled among the beneficiaries.
Survey respondents who had inherited their wealth reported higher rates of financial conflicts than those who earned their money. Perhaps unsurprisingly, the study also found that wealthy individuals who earned their fortunes were more likely to express financial happiness than those who inherited their windfall.
Barclays also asked survey respondents to weigh in with their thoughts on the challenges the next generation will face. More than any other issue, respondents ranked "economic turbulence" as the top challenge their beneficiaries will have to contend with. A close second and third were the burden of caring for an aging population and a shortage of economic opportunities. Respondents also expressed concerns about climate change and environmental issues, as well as the rising costs of education.
