Before You Plan the Inheritance, Understand the Money

One of the easiest assumptions to make in financial planning is that, once we understand how much money a client has, we understand their wealth.

We don’t. Two clients can have almost identical balance sheets and completely different relationships with money. One may have built their wealth from very little and still carry a strong sense that money has to be earned. Another may have experienced financial insecurity and be determined that their children never experience the same thing. Someone who inherited wealth may feel a responsibility to preserve it rather than spend it.

The important point is not that any of these assumptions are necessarily true. It is that they are worth exploring.

Before we start discussing gifting strategies, inheritance tax, trusts or investment structures, perhaps we should understand where the money came from and what it means to the people who own it.

The story behind the balance sheet

Financial planners are very good at discovering financial facts. We establish assets, liabilities, income, expenditure, pensions, investments and objectives.

But there is another fact-find sitting underneath the financial one.

How did you get here?

• What did money feel like when you were growing up?

• What did building this wealth require from you?

• What does having enough mean to you now?

• And what do you want money to mean to your children?

These questions move us away from simply identifying what the client owns and towards understanding why they think about it in the way they do.

The question “What does money mean to you?” can sound deceptively simple. But give someone enough time to answer it properly and you may discover far more than you would from another page of financial information.

“I don’t want to spoil the children”

This is where the conversation becomes particularly interesting.

An adviser will often hear some version of: “I want the children to benefit, but I don’t want to spoil them.” It would be easy to accept that statement and move on. I increasingly think we should be curious about it.

• What would being “spoilt” actually look like?

• What would you want your children to do with the money?

• What would worry you about giving it to them earlier?

• Would you think differently about helping with education, a home or starting a business?

• And what about the grandchildren?

Those questions can begin to reveal whether the concern is really about money at all. It may be about independence, responsibility, fairness, control, family relationships or the client's own experience of creating wealth.

That is where the planning starts becoming meaningful.

There is another side to this

Advisers also need to challenge clients in the opposite direction.

We regularly meet parents who are prepared to sacrifice too much of their own lifestyle because they want to leave more to their children.

For many clients, particularly those whose wealth is substantial but not unlimited, there is a genuine trade-off. Money used to provide for children cannot also be spent by the parents. Money retained for security cannot simultaneously be gifted. Helping one generation may constrain another objective.

The planning therefore has to balance four competing demands:

• Dreams: what the client would genuinely love to do.

• Living: the life they want now.

• Security: the resources they need to feel financially safe.

• Providing: what they want to give to children, grandchildren or others.

The answer is rarely simply to maximise the inheritance.

Sometimes our job is to give clients permission to spend.

Probe, but know when to stop

This is where financial planning becomes difficult.

The adviser needs to keep asking questions until we believe we have reached the kernel of truth underneath the client's initial answer. But that does not mean endlessly challenging everything they say. There is a judgement involved: when to probe, when to challenge and when to back off.

An answer that comes very quickly or sounds slightly too neat may deserve another question. So might a client who automatically says they will sacrifice their own lifestyle because “the children come first”.

A challenge might be as simple as: “I’m concerned your children may struggle to enjoy this inheritance if they feel you gave up the life you could have had in order to leave it to them.” Then stop talking and listen.

The objective isn't to steer the client towards the answer we prefer. It is to help them work out what they really think.

The plan should follow the philosophy

Only once we understand that underlying relationship with money can we sensibly start constructing the financial plan. Because the technically optimal plan isn't necessarily the right plan.

The role of the adviser is to listen, question and occasionally challenge until the client can make a genuinely informed and meaningful choice. We can then build a financial plan that works not only mathematically, but also practically and philosophically.

Perhaps, therefore, the family wealth conversation shouldn't begin with: “What do you want to leave the children?”

Perhaps it should begin much earlier: “Where did this money come from, and what does it mean to you?”

The difference between those two questions might tell us more about the family’s future than the balance sheet ever will.