The Restraint Continuum In Passing On Wealth
In September 1986, Fortune magazine published an article on how many of Americas wealthier citizens had decided not to pass their wealth to their families. In the years since, this theme has been repeated in numerous other national publications.
In many cases, the articles focused on the extreme ends of the spectrum: to provide a sizable inheritance to heirs (to their potential damage) or to provide a majority of the inheritance to charity (and substantially disinherit family).
The articles, in many cases, adopted an overly simplistic view of estate planning. Most planning is not done at the extreme ends, but somewhere in the middle. If we look at the alternatives along a continuum, with at one extreme, disinheritance, and the other, fee-simple inheritances, most planning lies in between.
Many planners believe the primary goal of estate planning is to “pass as much wealth to the next generation, as tax-free as possible.” Assets and tax savings, not the family, have become the pivotal focus. Compare the number of articles in professional publications discussing tax-saving techniques to articles that discuss the practical, non-tax issues of family inheritance. Needless to say the comparison is a bit lopsided to the tax-driven side.
However, an evolution is building in estate planning. Increasingly, clients are concerned about the impact of providing unearned wealth to family. From news articles, experiences of friends and personal experience, wealthy clients are increasingly concerned about the detrimental impact of their wealth on their families and are increasingly refusing to have taxes drive the planning process. Many clients have come to believe their families have more to fear from an unrestricted inheritance than they do from excessive estate taxes.
The evolution is the result of this changing perspective about inherited wealth. The pivotal goal of estate planning is becoming to “protect and preserve the family” not “ protect and preserve the assets.” It is not that the preservation of family funds is unimportant; it just pales in significance when compared to protecting family.
Why is this distinction important? Because when the assets serve as the focal point, maximizing wealth transfer is the key planning goal. When the family is the focal point, the planner is forced to concentrate on other issues, such as:
1) Taking account of the personality, family situation (e.g., divorce-prone marriage) and character of each inheritor.
2) Minimizing the sources of potential family conflicts.
3) Aiding the clients desire to pass on productive values to future generations.
4) Creating opportunities and incentives for family, without providing an unearned lifestyle.
5) Placing reasonable restraints on inherited wealth.
In most cases, some form of restrained wealth lies at the core of each of these issues.
This new perspective is the direct result of a number of demographic and societal changes. First, there has been an explosion of wealth in this country in the last two decades. It is estimated that somewhere between $41 trillion and $136 trillion will pass in the next 40-50 years. It is not just the wealth, but also the demographics of that wealth (and related perspectives and implications) that are driving the revolution. A study by US Trust, A Portrait of the Affluent in America Today, noted that only 10% of todays millionaires inherited their wealth.
Second, most millionaires have an abiding desire to use their wealth to help, but not support, their adult heirs.
According to the US Trust study, 83% of todays millionaires expect their children to contribute to the cost of their own education on the assumption that something given is never as valuable as something earned. Ninety-one percent of the women and 80% of the men expect their children to support themselves entirely from their own earnings. They will provide opportunities, but unrestricted lifestyle support is not generally in the cards.
Third, the estate tax confiscation of family assets has been diminishing the last several years. Although it is unlikely that the estate tax will be eliminated in 2010, it will be reduced for the vast majority of taxpayers, increasing the concerns about too much wealth passing to family.
Fourth, clients are increasingly examining estate-planning approaches that provide for asset protection to the clients and their heirs. For example, more than 40% of first marriages end in divorce and clients are increasingly reviewing how to protect their heirs from the expectation of divorce.
Finally, many clients have an abiding fear that they have failed to teach their children financial responsibility. As a consequence, they are unwilling to place sizable inheritances in the hands of a proven spendthrift.
Restraints on an inherited wealth have always been a part of estate planning. For example, Q-TIP trusts have long been used to provide current benefits to a surviving spouse, while assuring that the decedent, not the spouse, governs ultimate disposition of the trust assets. Transfers to young beneficiaries are often delayed for years after they reach adulthood, allowing them to mature before receiving the inheritance.