Planning without talking to the heirs

Hans Portmann (name changed) was lost in thought. The strict but fair company boss had kept everything under control throughout his life – both at home and in business. But now, a crisis threatened to shatter the family peace. His adult daughter and two sons were reproaching him for how he had set up their inheritance.

The alleged solution

What had happened? It had all started well enough. He and his wife Martha had decided to organize their assets and throw up unnecessary ballast. That he could let go was something that made him particularly proud. At the same time, the married couple also wondered how they could adequately prepare for retirement and protect each other to the end of their lives. So they set up a marriage contract and contract of inheritance that included a reciprocal primary beneficiary clause. They wanted to leave their children with a simple, transparent situation, which in turn should serve as a foundation to ensure that the children would be treated fairly in the future. Their most important shared assets included a custody account, a paid-off single-family house, a multi-family house and a vacation home in Engadin.

Portmann flashed back to the past. Things actually ran off the rails as soon as everything had been agreed and the contracts were ready sign. Suddenly, his daughter showed interest in taking over the family home, while his two sons laid claim to the vacation home in Engadin. “For parents, fairness often means something other than what is means for their children when it comes to distributing family wealth,” is how UBS-Financial Planner Antonio Colaci explains a common source of such confrontations. For the older generation, the materially equitable distribution of their assets may be most important, while younger generations often place greater weight on emotional values, for example a childhood home, no matter its nominal value. What was the final and fair solution for the Portmann family?

The conciliatory dialogue

The wealth planner’s suggestion to have the family sit down at a table was the key to this story’s happy ending. “This helped them to come to a common understanding of each other's hopes and needs, taking into account those of the next generation,” says Colaci. For the parents, creating a financial plan was central. Using it, the UBS expert could show them that their retirement was secure into old age – even with advances against inheritance. In concrete terms, Colaci was able to show them that their securities were more than enough to ensure their income to the end of their lives and selling off real estate wouldn't be necessary.

In such a pivotal moment, it’s important to include a third party who can lead the conversation and offer advice, says Colaci. A competent external advisor – who has earned the family’s trust – has a comprehensive understanding of the situation and the tact and sensitivity to mediate between the generations. According to the Portmann family's financial plan, two-thirds of the assets would be distributed and one-third, mainly consisting of securities, would go into a so-called compensation fund. Setting up the compensation fund was a necessary step. By receiving the single-family house as an advance against her inheritance, the Portmann’s daughter was being treated preferentially in purely arithmetical terms. At the same time, the fund now serves as a retirement reserve for the married couple and it will go their sons after they die. The sons are already are making investment decisions with their father. “This shows that you can extract individual vested rights from assets without diminishing the retirement of the testator,” says Colaci. The multi-family house will go to the two sons, but the parents can fully use it during their lifetimes. Summarizing the successful discussion, Colaci comments that “in this story, the daughter is at first treated preferentially, but the sons agreed to this to preserve the family consensus.”

In general, the wealth planner concludes: "the biggest challenge in estate planning for wealthy families is understanding everyone's wishes and needs – including those of the children – and finding a fair solution for all parties involved. Quite often, the testator’s expectations can deviate significantly from those of the heirs – or the heirs can't reach an agreement among themselves (see box)." The law can’t force a family to agree on how to hand down what it values. Experience shows that families who openly discuss inheritance and bequest have fewer disagreements when it comes to succession planning.