“A very rich person should leave his kids enough to do anything but not enough to do nothing.”
• An 85-year-old former university professor told us that he wanted his will to include a gift to his university. “Why wait?” we asked after reviewing his situation. We designed a structure that allowed him to make the donation and have the pleasure of seeing a chair named after him.
• A client owned a piece of historic designated real estate that she wanted to pass on to her family. She did not have the liquidity to just give it to her children, as she needed the tax benefits and a place to sleep, but she was willing to live with reduced benefits as time went by. She transferred the house to an LLC and every year she gifted a share of the LLC to a trust equal to the gift exclusion to her children. However, she got to live in the house and ensure her historic residence stays in the family.
• Another client had established a trust for her son. There was a clause in her will—a power of appointment—that allowed her husband to redirect a portion of their assets. Her intent was to make sure her husband would have financial options—especially the ability to donate to charity. After her death and his remarriage, he exercised the clause—but not for charitable reasons. Instead, he was determined to make null and void the intent of her entire will. He transferred the trust—which carried his son’s name—and all his other remaining assets to his second wife’s children. His own children were left without the trust or any of his assets in their name.
As these cases illustrate, creating a legacy is a challenging goal. This is especially true for high-net-worth individuals because of the size of their assets and the complexity of the vehicles they typically use to pass wealth to the next generation. The combination of money, emotion, family history and unresolved issues can be a volatile mix that brings out the worst in everyone. On the other hand, it can be a tool for sound lessons and wise decisions that strengthen family bonds.
Properly planning a client’s legacy requires attention, forethought and good advice—about financial and tax strategies, certainly, but also about the psychological and emotional impact of the decisions made. Should you transfer the bulk of your wealth while you are still alive? What structures and vehicles will you use? What lessons will your children learn—and are they the lessons you want them to learn?
Such questions are increasingly prevalent and increasingly urgent because we are in the midst of one of the greatest wealth transfers in history. The transfer of wealth in the U.S. from 1998 to 2052 will amount to at least $41 trillion and could be as high as $136 trillion, according to a study by the Boston College Social Welfare Research Institute. This will have a huge effect on not only high-net-worth families, but also on society as a whole.
Many people would rather just put these questions aside and defer any decisions. But the cost of inaction or taking too narrow a view on estate planning can be high. Some clients may only wish to focus on minimizing taxes, but it is far more important to have an overall plan. Clients need to know their financial picture, know their children and know what they want to accomplish. Only when they’ve taken a broad view and established their goals can you design an appropriate plan.
The emotional side of wealth transfers
Once you get past dealing with your own mortality, what makes the topic of legacies so difficult to discuss? Obviously, generational wealth transfers are not just financial transactions. Transferring wealth raises complex psychological and interpersonal issues that involve life goals and how children relate to them; the value of work versus the benefits of financial security; and long family histories that mix love, fierce conflict, expectations, ambitions, resentment, rebellion and respect.
On a more mundane and practical level, transferring wealth to the next generation can create real risk. Inheriting a great deal of money can lead the uninitiated or inexperienced into dangerous behaviors. There is no shortage of cautionary tales: unprepared children who go on spending sprees and who make bad life decisions, such as dropping out of school, quitting jobs and falling into a variety of addictions. They might lose their drive for success, give up on their ambitions and accomplish less than they would have if their wealth had not been guaranteed.