Alternatives to sudden wealth transfer
To avoid such outcomes, many high-net-worth individuals are looking for alternative ways to transfer wealth to their children. Warren Buffett’s quote at the beginning of this article illustrates this outlook. Facebook founder Mark Zuckerberg and his wife, Priscilla Chan, recently announced in an open letter to their newborn daughter that they will donate 99% of their Facebook holdings, valued at $45 billion, during their lifetime to create the Chan Zuckerberg Initiative, which will seek to “leave the world a better place for you and all children.”
Only half of millionaire baby boomers think it’s important to leave money to their children, according to a recent U.S. Trust survey. A third of them said they would rather leave money to charity. In fact, U.S. Trust found that only 32 percent of baby boomers are confident their children will be prepared emotionally and financially to receive a financial legacy.
Boomers’ skepticism about large inheritances was also the subject of a recent CNBC article, which reported that boomers want their children to learn about struggle, hard work, failure and the joys of earned success—lessons they believe helped them become more successful. They also had doubts about their children’s ability to handle large sums of money.
If clients share these concerns, what are their options? Are there alternatives to a large, lump-sum inheritance that are worth considering?
The first step is to think through their concerns about creating an inheritance—not in the abstract, as we’ve done above, but in terms of the clients, their children and the issues that they face. That means thinking about how they as individuals would react to sudden wealth. Would it be an opportunity for the children to prosper? Or would it open the door to dangerous outcomes?
The second step is to realize that there are many alternatives to a traditional legacy. As clients review their challenges, some of these alternatives will naturally suggest themselves:
• Are there relationship issues? For example, is the family contending with divorces and other social conflicts with friends, ex-wives, the current spouse or in-laws that might result in future problems? The structure of the legacy should take these into account.
• Are the children burdened by huge student loans? Before you even begin to think about a legacy, you might consider clearing up this debt. College loans are usually expensive, and repayment comes due just as the children are first getting their start in life. A gift of debt relief can be truly meaningful. A parent can use the need for reduction of educational debt as an excuse to delay other gifts until the children mature.
• Do the children or grandchildren have a 529 plan? Think about contributing to this as part of a legacy plan. Contributions within the gift tax annual exclusion amount are generally free of both the gift tax and the generation-skipping transfer tax. Qualifying distributions for educational expenses are income-tax-free to the designated beneficiary.
• Could you pay for children’s or grandchildren’s tuitions directly to the university, since these are not considered taxable gifts?
• Can medical issues for a child or grandchild cause a financial hardship? Consider setting up a special needs trust to ensure proper attention is paid to the child when the client can’t.
• Does a child have a drug or gambling problem or other destructive addictions? Consider a trust. In every large lump-sum inheritance, there is the possibility that children may never do another day’s work and spend it all on vices or fast living. If there is already a known risk, why increase the odds of their falling prey to it? A well-managed trust and a good trustee can keep that from happening.
These are just a few examples. But they illustrate the kind of thinking you’ll want to do in planning how to pass on a client’s wealth. The point is to take into account the full reality of a family’s situation and think through every option. Clients need to know that they do not need to feel compelled to commit to a onetime, lump-sum wealth transfer. There may be powerful arguments against giving too much, too soon.
The planning process must address more than just family issues, of course. There are financial and tax strategies to consider as well. A thorough review will encompass financial planning; tax and legal issues; as well as a client’s goals, hopes, dreams and family realities.
Robert G. Kuchner, CPA/PFS, is a partner at the accouting firm Marks Paneth LLP, which is based in New York City.