Photo by Hillary Ehlen
Thoreson Steffes Trust Company Co-founders Rick Thoreson and Kelly Steffes have around 50 years of combined experience in the financial industry. As CIO and CFO, respectively, they’re very well-versed in managing money, financial planning and much more.
“I think it comes down to communication that’s intentional about passing on the values and the vision of what we want this wealth to do. With wealth comes great responsibility, but it’s also an opportunity for you to maybe do things you wouldn’t otherwise be able to do” – Kelly Steffes
Fargo Inc! sat down with Thoreson and Steffes to discuss the generational transfer of wealth, what factors go into making decisions about transferring money and what people can do to be more prepared to receive or give wealth.
Transferring wealth can create both challenges and opportunities for the wealth management industry. Can you speak about what may arise when transferring money from one generation to another?
Rick Thoreson: The biggest challenge most advisors have is when family members don’t communicate well with their children. People of German and Scandinavian descent in particular seem to be more private about their finances with their kids, and that can create missed opportunities from a standpoint of giving their kids a chance to plan for either what they might inherit or what they might leave to their kids.
Kelly Steffes: I recently read a statistic that 90 percent of heirs change advisors when they inherit money, so that creates a risk and an opportunity. Our approach is somewhat unique in that we work with multiple generations within a family and promote communication not just about the value of money but the personal values surrounding money. As a result, we haven’t experienced anything close to that 90 percent attrition.
Another challenge is that the next generation may have different goals, needs and interests than their parents. As advisors, we need to be more flexible and open-minded.
RT: The transition from Baby Boomers to millennials, in particular, is going to be a challenge because millennials want their investments to have an impact. They’re far more conscious of what they’re investing in other than just profit, so impact investing has become a movement in the investment management industry. And it’s a challenge as a manager to understand what exactly social responsibility is to my clients, and how do I address that individually?
Financial advisors can be a bridge between generations, but that only happens if the kids are actively asking questions of their parents. Sometimes the advisor has to push the parents to share the information with kids, and that’s not always easy. There’s a real fear among parents that their kids will feel entitled if they’re aware of their parent’s wealth.
I have to admit beneficiaries of trusts we’ve worked with have been extremely responsible with money and very interested in what their parents’ values were, not necessarily agreeing and carrying them on, but interested and at least asking that question.
News sources disagree on whether the wealth transfer that Baby Boomers may pass on of about $30 trillion is true or a myth. What are your thoughts on this concept and how much truth it holds?
KS: I think there’s truth that that money’s going to transfer; I just don’t think it’s going to transfer in the way that people are expecting. It’s going to go over a great period of time, 30 to 40 years probably…
RT: And demographics have changed so much. Think about when Social Security started. The retirement age was 65 and life expectancy wasn’t much longer than 65. Now life expectancy is mid to late 80s, and some actuaries say by the time Baby Boomers are fully in retirement, we could see a life expectancy extending out well into the 90s. So that $30 trillion gets spread over so many years that I don’t know if it is going to be anything that people notice in terms of economic or market impact.
KS: And how much of it will get spent rather than transferred? Prior generations seemed to be more concerned about passing as much wealth to their children as possible. I think Baby Boomers tend to spend more than prior generations, and while they are still interested in passing wealth to the next generation, they aren’t quite as concerned about the amount.
RT: Very true.
KS: I think Baby Boomers tend to think, ‘I’ve given them their education, we’ve helped them out and they can earn their way.’ They still may want to leave some money for their kids, but their priority is more about enjoying an active, happy retirement and less about living frugally so that they can pass wealth on to their children. I see a difference.
RT: Yeah, I think there is. Retirement has changed because we have fewer defined benefit plans out there from large corporations, so most retirement is self-funded. People are living off their own wealth rather than a regular income from the company they worked at for 30 years, and that creates a different mentality toward wealth because pensions were never inherited. But I don’t know that Baby Boomers are that interested in seeing wealth passed on to their heirs as people born during the Great Depression and shortly after that were because they grew up in tougher times and they didn’t want to see their kids go through that. Baby Boomers, for the most part, have lived through pretty prosperous times.
$30 trillion is not the astronomical number it sounds like. There’s $21 trillion of federal debt that future generations also ‘inherit,’ so will they actually be that much better off? That’s going to be a daunting challenge for the next couple generations.
A 2004 Stanford study said 60 percent of family fortunes are squandered due to a lack of communication and trust. Have you encountered that or any other pitfalls with your clients, and how do you handle that?
KS: The first generation that earns the money tends to be more fiscally responsible because they worked hard for it. That next generation saw the sacrifices their parents made to accumulate the wealth, so I think they tend to be a little bit more respectful of it. The further removed you get from the earning of those assets, the greater the risk to squander it.
I think it comes down to communication that’s intentional about passing on the values and the vision of what we want this wealth to do. With wealth comes great responsibility, but it’s also an opportunity for you to maybe do things you wouldn’t otherwise be able to do.
I think it’s important to share the goals and values behind that money and what’s expected of the generations inheriting it.
RT: One of the things that I think is going to be interesting about this generation is, because we’re having fewer kids, the wealth stays more concentrated than it used to, and I think that’s creating some of the income and wealth disparity you see in this country. Family fortunes tend to be perpetuated a little bit more because there are fewer offspring, but I think the challenge is in how you retain those family values so they don’t see the family fortune lost.
KS: It really comes down to not how much you make but how you spend it. I think failure to communicate and develop a concept of wealth in the next generation can cause the heirs to be like a lottery ticket winner. They think it’ll last forever and that they can’t ever really spend it. Well, they can.
A Gransnet survey of 1,000 grandparents aged 50-70 showed one in six intends to spend their money before they die. Is this a trend you see mirrored in your clients?
KS: That’s a question I’m struggling with. I’m not sure if it’s because they don’t want to save it for their kids or that they don’t have enough to save for their kids. It’s really surprising how little some people have saved for their retirement.
RT: We’ve seen people with incomes of $350,000 or $400,000 retire with $2 million in assets and they don’t understand why they can’t continue to spend $300,000 a year. Well, you can, for seven years, and then you’re broke. They don’t really appreciate how much more it takes when you’re living off your wealth rather than building your wealth. Retirement requires a very different mindset.
I think because of our clientele, they’re far more likely to leave a large sum to their kids, so their interest is not so much in how they spend it, but what their kids do with it.
KS: We’ve had clients say, ‘My goal is to leave at least X number of dollars to each of my kids.’ I don’t see that being the goal of our younger clients. They’re more concerned about having enough money for their retirement, and then how do we transfer what’s left to their kids? I don’t see them being concerned with wanting to spend it all.
RT: I think Baby Boomers also placed a higher value on education than their parents. They are much more focused on education as an asset. It’s a legacy that they give their kids versus just money.
How can firms communicate better with clients and their heirs when it comes to transferring wealth?
KS: Fostering those conversations, which can be a challenge. I think it comes down to communication and getting our clients to open up to their kids.
Knowledge is always power. I think those conversations can help the next generation understand the ‘why,’ versus just the ‘here it is,’ and give them an opportunity to ask questions, express concerns and develop that understanding. What we’ve found with some of our clients and then the next generation is that they like what their parents did so much, they want to create a similar plan and keep that going, and so, to some degree, we’ve broken that cycle of the three generations to spend it.
RT: There’s an old adage, and it’s funny because it goes across cultures. Shirtsleeves to shirtsleeves in three generations: one to make it, one to keep it, one to blow it. It’s amazing how universal it is.
I think the other generational transition of wealth that’s a challenge is within a generation. How do you make sure the parents communicate why they did what they did to the kids so that each of the kids understands it and doesn’t blame their sibling for something they think is unfair? You may have one child who doesn’t handle money as well as the other siblings, and leaving money in trust for that child while the other kids get their money outright may actually be doing that child a favor. They may not see it that way, but that’s where you may be treating the kids equally in terms of what they get but unequally in terms of how they receive it and what protections you’ve put around it. I think that’s a real challenge because if mom and dad don’t communicate that to their kids, it can create a lot of hard feelings.
Kelly: It’s interesting because sometimes the biggest fights are over personal property: dad’s watch, mom’s ring. Sometimes it’s not even items of great value. Sometimes it’s just sentimental, those things that you can’t divide, and having that parent express to their kids why they made the decision that they did is helpful.
Is there a certain time when it would be good for that conversation to occur between clients and their heirs just so they all have a better understanding?
KS: I’m sure the research shows sooner rather than later, but I don’t know that. I know that with our clients, it tends to be when they start to need help, they’re more receptive to bringing in that next generation to understand what’s in place.
RT: They refer to Baby Boomers as the Oreo generation: they’re taking care of their parents and their kids, the college student who moves back in with mom and dad. That has prompted Baby Boomers to start to be a little bit more open with their children because they see what mom and dad’s needs are and they see what’s happening to their own parents as they age. They’re living longer, but maybe not functioning as well as they had, and they start to think about bringing their kids into this conversation so that they understand what their own parents need.
KS: I think there’s a lot of reluctance to share that information because parents are afraid that their kids will be less motivated. It used to be that parents would leave money in a trust for their kids and they’d give the first third of the money to their kids when they were 18, they’d give half of what was left when they were 21 and the balance when they were 25. Now we’re seeing those numbers get higher like 40, 45 or 50, or 50, 55 and 60. Some people say, ‘My kids spend every penny they have, and this is their retirement someday.’ Others are trying to protect it in case their children divorce. Sometimes I get hung up on those ages, but then realistically, absent a premature death, usually the kids are at those ages anyway at the point that they inherit it. I think it still comes down to family values and the communication.
RT: I think one of the challenges in our business is getting clients to understand what vehicles are out there and that there is more you can do than just a will that says, ‘here’s your money.’ There are ways to control when they get it, how they get it, what they can do with the assets and who gets control of buying and selling what’s there.
KS: I think it’s helpful for the next generation to understand this is not mom’s and dad’s way to control them from the grave or even protect them from themselves. It’s responsible gifting. I’ve seen people develop an appreciation for the gifting vehicles when they understand the purpose. Some even choose to do the same for their children.