If you don’t have your own network to address the concerns of your advanced planning clients, you may want to bring in a private wealth specialist, as we examined in last month’s column. The private wealth specialist, who has a network of experts who work exclusively with high-net-worth clients, solves the typical planning issues such as preserving wealth for the next generation, as well as atypical, highly specific issues, such as resolving intricate business succession issues, taxation in multiple jurisdictions, valuing artwork, or creating foundations.
The greatest concern of people with money is keeping it. Overall, those with an investable net worth of more than $5 million (minus the value of their primary residence) worry most about protecting the assets they have, according to the 2007 Survey of Affluent Americans by U.S. Trust. Since 84% of survey respondents say their wealth is self made, not surprisingly they want to know more about tax laws, estate planning, and trust funds. This interest in wealth protection flows naturally from their drive for wealth accumulation–and their desire to leave money to their heirs.
Advanced planning clients can wrestle with the best way to transfer assets to their children–as well as their children’s ability to manage those assets (96% in this survey sample believe it’s important to teach their children how to manage money and 61% report that their children are already actively involved in managing their wealth). Estate plans can positively influence heirs’ future behavior and reduce family conflicts–or they can reinforce unproductive behaviors and create poor communication with lasting wounds. Clients will exhibit the range of family dynamics from healthy to challenging. It’s not the job of the advanced planning team to change a client’s personality or resolve decades of conflicts, but solutions can be devised that serve both the parents’ needs and those of the children.
Emotions vs. Wise Planning
Advanced planning clients don’t set out to create problems for their children, but private wealth specialists and family counselors have observed some common false steps. Gary Buffone, a psychologist who counsels families about business succession issues and is the director of The Family Advisory Group in Jacksonville, Florida, has observed four categories:
- Parents plan to distribute money before the children are emotionally ready.
- Parents wait to plan too late, such as the point when one parent is disabled or has died, an emotionally difficult time to navigate with a formal planning document.
- Parents hold on to assets too tightly, even when the children are emotionally mature adults.
- Parents give too much, thereby forfeiting tax savings through multi-generational planning and philanthropy.
The Family Chat
Good communication can avoid many of the potential planning conflicts between parents and children. In their book Silver Spoon Kids, psychotherapist Eileen Gallo and estate attorney Jon Gallo of Los Angeles discuss a well-to-do couple with two young children from their marriage and two older stepchildren from previous marriages. The oldest son was successful and wealthy on his own. The parents told him they were thinking of leaving all of their money to the other three children. He didn’t need the money, so he agreed. Since the discussion took place before documents were signed, there was no resentment later on.
It’s easy to imagine the son’s response being quite different. Many planners have counseled parents about the inherent challenges of leaving unequal amounts to siblings. Because children mature at different rates–or may have continuing emotional problems–equal is not always possible or smart. When a client does want to create separate distribution plans, the family chat at the time of planning provides a forum for discussion. It helps prevent future sibling friction, strained relations between a surviving spouse and the children, and even legal battles.
How Much and When?
Private wealth specialists recommend that clients not give too substantial an inheritance to children when they reach age 18 or 21, regardless of their apparent maturity at the time of planning. The survey shows, for example, that 27.4 years is the average age when children assume responsibility for managing their own money in HNW families. While some may demonstrate good judgment, not all children of wealth in their late teens or early twenties have the emotional maturity to manage the temptation that a substantial lump-sum distribution can bring.
Even if the children have shown some discipline in how they manage their own lives, acquaintances and entourages that gather around them can bring unwanted behavioral influences such as recreational drug use, prods to take advantage of so-called “great investment opportunities,” and other pressures for economic participation. In such circumstances, not having access to large amounts of assets until later in life can help the child endure such pressure while developing more maturity.
If a child shows less maturity or a continuing pattern of problem interactions, then private wealth specialists look to other techniques. In the U.S. Trust survey, about half of those with children and those without agreed that children should start managing their wealth between the ages of 25 and 34. For those few parents who claim they don’t care about the consequences of giving children lump sums, they’re left with a large responsibility before the day of inheritance to teach their children how to manage their finances.
One strategy to employ in transferring wealth to heirs is the Incentive Trust, which makes payments contingent on certain behavior patterns, such as completing college or being meaningfully employed. Alternatively, such trusts can reward heirs who forgo careers to raise children full time or those who pursue socially responsible activities, such as joining the Peace Corps or other volunteer work. Such trusts can also make different levels of payments: Someone returning to school for an advanced degree could receive a higher disbursement than a sibling fully engaged in well-paying career. Significantly, 80% of HNW parents view wealth as having a social responsibility element.
Of course, incentives can be too hard to define or too restrictive. Estate attorney Elizabeth Schurig of Giordani Schurig Beckett Tackett in Austin, Texas, tells the story of a father who was a very proud graduate of a Texas university. At the time of planning, he insisted that all distributions from his estate–even those for health emergencies and tuition–be contingent on his young children attending that same school. His wife completely disagreed to such an extent that they edged toward divorce. Eventually the father gave in, and none of his children ever attended his university.
Estate attorney Ed Koren of Holland & Knight in Tampa, Florida, has observed that estate planning is a poor substitute for not being able to communicate with your children. On the other hand, many or even most HNW families do communicate and plan well.
When Warren Buffett wrote his estate plan, he didn’t want to simply hand over his billions to his children. Instead, he devised an estate plan in which his daughter, a magazine editor, and his son, a farmer, would receive, “enough so they could do anything, but not enough so they could do nothing.” Under the plan, the bulk of his fortune will go to charity.