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A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.
Battles over aging parents and their fortunes are becoming increasingly common in wealthy families, with some requiring cognitive assessments for those leading family businesses.
While many families focus on the tax or financial components of wealth transfers, fewer are addressing the question of when an aging parent should give up control, wealth advisors and lawyers told CNBC. Waiting until a parent’s cognitive decline is apparent can leave families scrambling over who controls their fortune.
“Look, most of the matriarchs and patriarchs who create family wealth are strong personalities, right?” said trust and probate attorney Scott Rahn. “They’ve done great things, they’ve created this wealth, they’ve created dynasties. Now you’re coming face to face with the reality that despite all of their accomplishments, they’re human. That can just be emotionally difficult for families.”
Rahn said delaying a transition process can come at a steep cost. His law firm, RMO LLP, specializes in inheritance disputes among ultrawealthy families. He said these types of conflicts have become more common as families grow richer and people live longer, which comes with higher chances of a family member developing conditions like Alzheimer’s disease.
Family businesses can build in legal safeguards, such as mandatory retirement ages or mental capacity evaluations, according to Rahn. But how families talk about succession can matter as much as the legal language, he said.
“Whatever that mandatory retirement clause may be, it has to be part of a fulsome discussion around family wealth — what it means culturally to the family,” he said.
Here are four tips to make it easier for parents to pass on the reins:
1. Talk about it earlier rather than later.
The biggest mistake that families make is waiting for a crisis like a stroke or a disagreement to discuss succession, according to Mallory Findley of Rockefeller Capital Management. By then, emotions are running high and sometimes trust is already broken, she said.
“The better approach is to begin while everyone is capable of participating really thoughtfully — as we like to say — while they’re happy and healthy and here,” said Findley, the firm’s head of family dynamics and financial education.
She said meaningful life events, like selling the family business or a birth in the family, make for natural points to evaluate future plans.
It’s easier to have these weighty conversations if the family talks regularly, said BJ Goergen Maloney, global head of J.P. Morgan Private Advisory.
“If you don’t have a cadence of talking about things, even if it’s a couple of times a year, it’s really hard to have those conversations,” she said.
Families can build their muscle memory, as she puts it, with casual gatherings, Maloney added.
“People like to think of a family meeting for a very wealthy family as very formal, but a family meeting can be dinner on Sunday night,” she said. “It doesn’t have to be complicated. It’s really about creating a place where you can talk about things and be transparent and solicit other people’s opinions.”
2. The transition should be gradual.
While families should seek a health evaluation sooner rather than later if they see signs of cognitive decline or dementia in a matriarch or patriarch, the succession process shouldn’t be rushed, advisors told CNBC.
Cognitive decline is usually a gradual process, and aging adults’ needs can change over time, noted Valerie Galinskaya, head of the Merrill Center for Family Wealth. Handing over family affairs should not resemble flipping a light switch, she said.
For instance, when a client expressed concerns that his mother, who managed multiple properties, was no longer as sharp as she used to be, Galinskaya said she framed the conversation as financial planning for the entire family. Rather than focusing on the mom’s faculties, the advisor asked how each family member viewed success across different time horizons.
“We reframe it as not taking reins away but asking who is the right individual holding reins for individual decisions at hand,” she said.
Adult children’s efforts to claim control can backfire if they act too quickly or second-guess their parents’ decisions, according to Dan Griffith, director of wealth strategy at Huntington Bank.
“One of the sad scenarios I’ve seen is that you’ve got overbearing kids who drive their parents away. When they do that, they’re driving their parents into the arms of somebody who potentially could take advantage of them,” he said.
3. Treat the wealth creator with respect.
Tact is everything, according to Mark Parthemer, chief wealth strategist of Glenmede.
“This individual — for whatever role that we’re talking about getting them out of, whether it’s driving the car, running the company, or being the trustee of the trust — a lot of their self identity is invested in that role, right?” he said. “They’ve been the key person. They’ve been the person everyone relies on, and so we should be delicate about removing them from that role.”
There are ways to make a transition feel empowering, Parthemer said, noting one family he advised chose to “promote” the patriarch from president of the company to chairman of the board.
“That was a real-life situation where we were trying to allow dad to remain in a position where he felt important, needed and valued,” he said. “Even though he couldn’t do the multi-step business dealings, he could have done before, he was still able to attend strategy meetings and weigh in.”
Sometimes it’s not possible for a parent to stay involved in the family business. Findley recommended that families in that situation discuss and acknowledge the other ways they contribute, which can make handing over financial control feel less like something is being taken away and more like a natural shift in responsibilities.
“Our process is really to help families recognize that every family member brings value beyond financial contribution,” she said. “So for the senior generation, oftentimes that looks like wisdom, family history, emotional steadiness, mentorship, or even just the ability to keep people in the family really connected.”
4. Get the family on the same page.
When siblings are involved, it’s rare for all the adult children to be on the same page, according to Galinskaya. It’s common for one child to live closer to a parent and be aware of a parent’s declining health while their siblings may be disengaged or in denial, she said.
It’s important to have a consensus among the siblings before broaching these subjects with a parent, she said. While some advisors prefer in-person meetings in family homes, Galinskaya said she prefers a neutral space like an office. She also said virtual meetings can be surprisingly helpful.
“If there is a family member who takes up a lot of the airtime, Zoom is actually a good way,” she said. “Everyone is a rectangle.”
She recommends setting ground rules, such as not allowing spouses or partners to participate. To prepare, Galinskaya has clients fill out pre-meeting questionnaires, which are kept confidential, about their objectives and concerns. Often family members admit to feeling judged for how they spend their money or resentful of how finances are used as a means of control, she said.
As for meetings with the senior and next generations, the goal isn’t to get everyone to agree but to clear the air, said Rick Pitcairn, chief global strategist at Pitcairn.
“In my view, families, the succeeding generations of family members, they don’t always have to agree with the decisions, but if they understand why they were made, and the person says this is why I made this decision, they’re pretty accepting of those decisions,” he said. “If they don’t, then they start to accuse people of things that they probably didn’t do, and there’s mistrust and dysfunction.”
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