How heirs learn to manage wealth and ownership
Key takeaway
Heirs can prepare for wealth and ownership through financial education, conversations about money choices, learning about investment risks, interviewing financial professionals, and understanding company financial statements.
Research notice: Based on primary sources linked below. Financial education resources come from the CFPB and SEC. The IFC handbook offers suggested family business governance practices. Minnesota statutes supply the state examples. Other states differ. Ask qualified legal, accounting and investment professionals to review the documents and circumstances relevant to your family.
Family governance can support ownership education and career development
For a family business, ownership education can include learning to read the company's financial statements. The IFC Family Business Governance Handbook describes an optional education committee that anticipates family members' developmental needs and organizes educational activities, including an accounting seminar about company statements.
The handbook also describes a career planning committee that monitors family members' careers and offers mentoring. Career advice can extend to relatives who choose to work outside the family business.
These are suggested governance practices. The handbook does not replace individualized advice from qualified family business consultants, lawyers and accountants.
What does a transferred LLC interest give an heir?
In Minnesota, for example, a transfer of all or part of an LLC transferable interest gives the transferee the transferred rights to distributions the transferor would otherwise receive, in accordance with the transfer.
Subject to the deceased member representative exception below, the transfer alone does not give management participation or ordinary access to company records or information.
During dissolution and winding up, the transferee is entitled to an account of company transactions only from dissolution. The company need not recognize transferee rights until it has notice of the transfer.
A transfer violating an operating agreement restriction is ineffective as to a person who had notice of that restriction at transfer.
A deceased member's personal or other legal representative may exercise the transferee accounting rights and, for settling the estate, current member information rights under §322C.0410. Other states differ.
Bring questions about LLC agreements and management roles to the family governance guide. Use that discussion to identify which ownership and company documents to review with counsel.
Investment risk, time horizon and diversification
Investment education can begin with the relationship between a financial goal, the time available and the risk involved. The SEC explains that asset allocation depends largely on time horizon and the ability to tolerate risk.
Time horizon means the expected months, years or decades available to invest toward a particular financial goal. Risk tolerance means both the ability and willingness to lose some or all of the original investment in exchange for greater potential returns.
Diversification means spreading money among different investments to reduce risk. All investments involve some risk, and no single allocation model fits every financial goal. Keep those qualifications together when discussing investment choices with an heir.
What does rebalancing involve?
Rebalancing brings a portfolio back to its original allocation mix. The SEC describes three approaches:
- Sell investments in categories that have become overweight and use the proceeds to buy investments in underweight categories.
- Buy additional investments in underweight categories.
- Redirect ongoing contributions toward underweight categories until the portfolio returns to balance.
Before choosing a method, consider whether it would trigger transaction fees or tax consequences. The SEC resource in Resources to check out explains allocation, diversification and rebalancing together.
For conversations with an investment professional, use the interview questions in Common questions.
Financial capability has three building blocks
The CFPB describes financial capability through three interconnected building blocks. Its framework gives parents and caregivers several areas of learning to discuss:
- Executive function: Planning ahead, focusing attention, remembering information, practicing self control and managing multiple tasks.
- Financial habits and norms: Values, standards, routine practices and rules used in everyday financial life.
- Financial knowledge and decision making: Understanding financial matters and making informed financial decisions.
Developmental stages are general benchmarks. Thinking skills develop at different rates, and access to financial experiences and opportunities varies between individuals. Use this framework for financial education, rather than as an inheritance readiness score or a rule setting a distribution age.
For activities suited to a child's developmental stage, see the CFPB conversation resource below.
Further reading on trust information and inheritance terms
For beneficiary information rights and discretionary distributions, see the family governance guide. For inheritance ages and readiness, see the related inheritance answer.
Common questions
What can parents use to start money conversations?
Parents and caregivers can use the CFPB's Money as You Grow activities and conversation starters to teach money skills. Adapt the conversation to the child's developmental stage. The resource link below provides a place to begin.
What should heirs ask an investment professional?
Heirs can ask about experience with similar clients, regulatory registration, disciplinary history, offered products, compensation, incentives, fees and communication before hiring an investment professional. The SEC's investor bulletin organizes those interview questions.
- What experience do you have with people in circumstances like mine?
- Are you registered with the SEC, a state securities regulator or FINRA, and have you been disciplined by a regulator?
- What products do you offer, and do you receive incentives or benefits for selling them?
- How are you paid, how is your firm paid, and what product and service fees would I pay?
- How often should I expect contact, and how often will you review or monitor my account?
The bulletin is investor education, neither a legal interpretation nor a statement of SEC policy. Registration does not guarantee safety, and these interview questions do not establish a uniform legal duty for every financial professional.
Resources to check out
- CFPB: Money as You Grow: Activities and conversation starters for parents and caregivers teaching everyday money skills.
- SEC: Questions to Ask When Hiring an Investment Professional: Interview questions about experience, fees, incentives and communication.
- SEC: Asset Allocation, Diversification and Rebalancing: An introduction to investment goals, risk and portfolio review.
- IFC: Family Business Governance Handbook: Suggested practices for family education, career development and governance.