Amy Renkert-Thomas of Withers Consulting Group talks about how relying on well-organized and informed people, as opposed to hard-wired documents, can help families tackle some of the issues around inheritance.

Millionaire real estate investor Maurice Laboz who died earlier this year left $20 million to his daughters but embedded a string of conditions in the trust if they want to access the assets before turning 35.

The news – which has been widely covered in US and UK media – created an interesting contrast to strategies for passing on inheritance at a time when the wealth management industry is increasingly focused on the importance of family governance and communication in successful wealth transfer and preservation, according to Amy Renkert-Thomas.

In the case of Laboz and his daughters, this was a classic incentive trust idea that was once quite popular but is in fact still used today by parents who want to incentivize their children for “good” behavior, Renkert-Thomas, joint managing director of Withers Consulting Group, told Family Wealth Report.

Some of the requirements laid out by Laboz include that his daughters – aged 21 and 17 – attend an accredited university and find a good job (source: The Telegraph). The siblings hope to challenge the rules in a Manhattan, NY, court this week, according to The New York Post.

“We see structures that are even more rigid than that,” Renkert-Thomas said. “But we're not seeing this flavor of patriarchal control so much these days.” She added, however, that many wealthy families still do believe that their primary mechanism for passing along wealth to their children should be through hard-wired legal documents.

“One of the challenges of structures like incentive trusts or writing mandates like these into documents is that what seems very clear at the time they are written often isn’t so clear – and can lead to legal challenges – over the long term,” Renkert-Thomas said. “Legal challenges are tremendously expensive to resolve and may well result in a quick depletion of whatever assets were in place.”

An alternative to weaving stringent demands into a plan could involve writing a much more general document and appointing an individual or a committee to give the beneficiaries clear – but non-binding – instructions about what the grantor hopes the funds will be used for.

“The grantor could write a letter of wishes and meet with the trustees/advisors, which would give them the chance to ask questions and understand what the nuances [of the demands] are,” Renkert-Thomas said.

This approach should reduce the risk of ending up in a messy legal battle by facilitating a discussion early on between the grantor and the trustee, and then between the trustee and the beneficiary, about what an appropriate distribution would mean for an appropriate reason. After all, trustees have fiduciary duties and a breach of those is what they would be personally liable for, she noted.

“Clients often think of the legal system as both a good threat and as a quick way to resolve potential conflicts,” Renkert-Thomas said. “I remind them that probably neither is true and if you escalate an argument too quickly then you're at risk of wasting assets. Most family debates and discussions are not resolved well by a public legal system.”

She believes that many of the aforementioned issues will become increasingly relevant over time as there are fewer “outright transfers” today – even in the midst of the highly talked about great transfer of wealth currently sweeping the US.

Indeed, it has been widely acknowledged that talking openly about inheritance planning will likely have a positive impact on heirs’ satisfaction with the wealth transfer process while also reducing the likelihood of family disagreements. This is particularly relevant among blended families where there are second marriages involved, for example, and the wealth management sector is responding accordingly.

“Relationships tend to come 'in tact' to wealth advisors,” Renkert-Thomas said. “I am increasingly talking to wealth advisors who are being (in part) recruited for their ability to successfully communicate with the next generation. Founders and wealth creators are expecting their wealth advisors to have skills in this area and be able to educate – at a minimum.”

According to a report released by Merrill Lynch in May – entitled How Much Should I Give to My Family? On the risks and rewards of giving – over six in ten (63 per cent) high net worth parents have documented or defined plans to pass on financial assets to others, but just 29 per cent claimed to have spoken to the intended recipients about it.

“Unfortunately, discussions around wealth tend to occur only at big life junctures, such as an illness or death, when it is often too late to influence the way wealth is distributed, perceptions of the gift by its recipients or how they use it,” said Stacy Allred, a managing director and wealth strategist in the Merrill Lynch Private Banking and Investment Group and leader of Merrill Lynch’s Center for Family Wealth Dynamics and Governance, at the time.

Dr Richard Orlando – founder and chief executive of the independent firm Legacy Capitals and author of the book LEGACY, recently wrote in an article published by Family Wealth Report that, actually, wealth holders rarely avoid talking to the next generation about their finances because they lack communication skills.

“In reality, they fear the implications of others knowing about their wealth, such as their children developing affluenza or being taken advantage of. Additionally, some believe that one is not supposed to talk about money, or that to do so is crass,” he said.

“An emphasis on relying on well-organized and informed people, as opposed to hard-wired documents, is my biggest theme today,” Renkert-Thomas said. “Capable trustees and advisors can provide information and education, and help to influence outcomes that work for the beneficiaries while still aligning with the grantor’s intent. When families go to court, only the lawyers win.”