EDUCATING THROUGH THE ESTATE PLAN:
   BECAUSE MONEY DOESN’T COME WITH
             INSTRUCTIONS
      Presented at the 52n...
I. INTRODUCTION

Having a proper perspective on money probably is one of the most important tools to living
a happy and su...
Educating Through the Estate Plan
Page 2

III.    DEFINING WHAT IT MEANS TO BE “GOOD WITH MONEY”

We all want our children...
Educating Through the Estate Plan
Page 3

Civil War bonds when no one else would, and then later in the debt securities of...
Educating Through the Estate Plan
Page 4

include, at the very least, the family’s style of living (do they drive Toyotas ...
Educating Through the Estate Plan
Page 5

viewed as trying to control the child’s life choices, incentive provisions may b...
Educating Through the Estate Plan
Page 6

            ·   Nationwide political apathy and lack of trust in leadership and ...
Educating Through the Estate Plan
Page 7

            ·   75% of college students have a Facebook account

            ·  ...
Educating Through the Estate Plan
Page 8

lesson that money comes as the result of work, and as the result of their own co...
Educating Through the Estate Plan
Page 9

money. Both Robbins boys gained an appreciation of planning for future purchases...
Educating Through the Estate Plan
Page 10

While the Fullers had always made common sense and values a part of the educati...
Educating Through the Estate Plan
Page 11

VI.     CHARITABLE ACTIVITIES AS A TRAINING GROUND

Incorporating charitable gi...
Educating Through the Estate Plan
Page 12

private foundation (or even a donor advised fund) should consider involving the...
Educating Through the Estate Plan
Page 13

about $6 million. This younger son has a history of substance abuse, and there ...
Educating Through the Estate Plan
Page 14

example: The trustee shall have the right to deny a withdrawal request if the t...
Educating Through the Estate Plan
Page 15

income.     Having the beneficiary be a co-trustee may provide a crucial educat...
Educating Through the Estate Plan
Page 16

granddaughter establish a career and a life without the burden of money, she no...
Educating Through the Estate Plan
Page 17

all four definitions of wealth. First of all, a family’s primary capital is hum...
Educating Through the Estate Plan
Page 18

                It can seem foolish to have a family sit around the dining tabl...
Educating Through the Estate Plan
Page 19

                 It can be tempting to assign roles to various family members b...
Educating Through the Estate Plan
Page 20

      7.      Does the family create opportunities and incentives for the next ...
Educating Through the Estate Plan
Page 21

                                       FURTHER READING

Cochell, Perry L. Beati...
Upcoming SlideShare
Loading in …5
×

Educating Through The Estate Plan: Because Money Doesnt Come With Instructions

1,454 views
1,381 views

Published on

A discussion of pitfalls in educating children about money values. This article also provides suggestions and examples of families that have successfully provided their children with an education that resulted in a healthy relationship with money.

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
1,454
On SlideShare
0
From Embeds
0
Number of Embeds
12
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Educating Through The Estate Plan: Because Money Doesnt Come With Instructions

  1. 1. EDUCATING THROUGH THE ESTATE PLAN: BECAUSE MONEY DOESN’T COME WITH INSTRUCTIONS Presented at the 52nd Annual IICLE Estate Planning Short Course by Lauren J. Wolven, J.D. Horwood Marcus & Berk Chtd. 180 N. LaSalle St., Suite 3700 Chicago, IL 60606 (312) 606-3239 lwolven@hmblaw.com Prepared by Lauren J. Wolven, J.D. and G. Scott Clemons, CFA Brown Brothers Harriman & Co. scott.clemons@bbh.com To comply with certain Treasury regulations, we state that (i) this material is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. These seminar materials are intended to provide the reader with guidance in estate planning. The materials do not constitute, and should not be treated as, legal advice regarding the use of any particular estate planning technique or the tax consequences associated with any such technique. Although every effort has been made to assure the accuracy of these materials, the authors, Horwood Marcus & Berk Chtd., and Brown Brothers Harriman & Co. do not assume responsibility for any individual’s reliance on these materials. The reader should independently verify all statements made in the materials before applying them to a particular fact situation, and should independently determine both the tax and nontax consequences of using any particular estate planning technique before recommending or implementing that technique. © 2009 Lauren J. Wolven and G. Scott Clemons. All rights reserved. Portions of this outline are taken from an article by the authors scheduled to appear in the June 2009 issue of Estate Planning, a Thomson Reuters publication. 650750/1/88888.LWOLVEN
  2. 2. I. INTRODUCTION Having a proper perspective on money probably is one of the most important tools to living a happy and successful life. Conveying this important value is crucial, yet individuals often spend little time contemplating how to convey money skills to their children. Understanding how to obtain, save, spend, donate and invest, the five key elements of an education in money, is important to families with substantial wealth as well as those of modest means. II. A SHORT HISTORY OF MULTI-GENERATIONAL WEALTH Unfortunately, there is no one answer or simple way to educate the next generation, and the preoccupation with making sure one’s heirs are capable of handling the family fortune is not a modern phenomenon. It was a topic of the writings of Benjamin Franklin as early as 1758, though the fact that the challenges associated with transitioning wealth to the next generation predate the founding of the country is not necessarily comforting. Benjamin Franklin printed a short treatise in 1758 entitled The Way to Wealth. It is the first American book on personal finance, and is the source of such famous aphorisms as “early to bed, and early to rise, makes a man healthy, wealthy and wise,” and “keep the shop, and thy shop will keep thee.” Benjamin Franklin himself translated these precepts into a book for children entitled “The Art of Making Money Plenty”, believing that it was never too early to begin learning the concepts of financial management. We still live in a world where the failure of wealth transfer gives rise to clichés such as “shirtsleeves to shirtsleeves in three generations.” The first generation creates the wealth, the second generation (under the watchful eye of the first) preserves it, and the third knows no better and spends it. The fourth has to start all over again, from shirtsleeves to shirtsleeves. And lest we slip into the assumption that the wealth transfer predicament is particularly an Anglo-Saxon affliction, let us consider that many cultures have parallel metaphors. The Dutch go “from clogs to clogs,” the Chinese “from rice paddy to rice paddy,” and the Japanese “from kimono to kimono.” This cycle of wealth creation and dissipation seems to be a human universal across cultures and throughout time. 650750/1/88888.LWOLVEN
  3. 3. Educating Through the Estate Plan Page 2 III. DEFINING WHAT IT MEANS TO BE “GOOD WITH MONEY” We all want our children to be good with money. But what does it mean to be “good with money?” This concept is most easily identifiable by what it is not. Someone who spends everything they inherit and winds up reliant on welfare clearly is not good with money – that is easy to see, and there are plenty of examples of that type of behavior. Yet, being good with money is far more multifaceted: It involves the ability obtain money, save it, invest it, spend it, and give it away. It is an exercise in balance. The history of successful wealth transfer across generations is sobering. Roy Williams of The Williams Group carried out a 25-year study and analysis of wealth transitions in families, and on the basis of interviewing 3,250 wealthy families concluded that 70% of wealth transitions fail, where failure was defined as involuntary loss of control of the assets, either to taxes, economic downturns, economic losses, litigation or any other financial reversal. Only 3% of the failures were due to legal or tax advice, and the balance resulted from causes within the family itself. There is an entire genre of literature devoted to the difficulties associated with family wealth transfer. Unfortunately, the families themselves are not always good at hitting their own targets. They often miss the mark when it comes to building trust and healthy dynamics within the family group. In addition to the extensive written guidance, there also are educational toy lines devoted to the concept of providing a “money education” to children. The fact is, however, that there is no precise answer to the question “How do I teach my children about money and values?” What we can do, however, is look at successes and failures and draw guidance to help set the younger generations on the right path. Hetty Green is a classic example of what it looks like when a child does not learn the exercise in balance that is required to have a successful relationship with money. Hetty Green was born in New Bedford, Massachusetts in 1834, the daughter and granddaughter of prosperous whalers. Upon the death of her father in 1864, she inherited the vast sum of $7.5 million while still a single woman. She married in 1867 and made her husband (who had wealth of his own) sign what amounts to an early pre-nuptial agreement. Preserving the family wealth was important to Hetty. She managed her own finances carefully, investing in 650750/1/88888.LWOLVEN
  4. 4. Educating Through the Estate Plan Page 3 Civil War bonds when no one else would, and then later in the debt securities of railroads. She more than held her own in a very male-dominated world of Wall Street, and when she died in 1916 she left an estate valued somewhere between $100-200 million dollars, or about $2-4 billion in today’s currency. At first glance, it seems Hetty Green was good with money. Or was she? Throughout her life, Hetty refused to pay for either heat or hot water in her homes. Every extant picture of Green has her in a black dress, because it did not have to be laundered as often. Indeed, there are some biographers of Green who believe that she is always pictured in the same black dress – her only black dress, because why would you need two black dresses? Her oldest son Ned fell and broke his leg as a child, and, rather than take him to the hospital, Hetty set the leg herself in her kitchen. Poor Ned developed gangrene and lost his leg not too long afterward. And despite her vast wealth and a desire to be close to Wall Street, Hetty refused to live in Manhattan because she could not justify the price of real estate. Instead she spent her life in apartments in Hoboken and Brooklyn Heights. One of her final acts of excessive frugality was refusal of a hernia operation because it cost $150. It is believed that refusal may have hastened her death. Looking beyond the value of Hetty’s bank account reveals that she was not that good with money after all. She certainly knew how to obtain it and make it grow, but she did not really have any concept of how to use it. Her miserly ways earned her the title “The Witch of Wall Street”, and no less an authority than the Guinness Book of World Records lists her as the greatest miser of all time. Clearly, Hetty was not provided with a financial education that gave her proper perspective on money. IV. UNDERSTANDING THE NEXT GENERATION You could fill a large bookcase with volumes advising how to have your children avoid becoming Hetty Green. These books suggest many different approaches to educating the next generation about money, and each tells of success stories when the theories are applied. So which one has the right answer? The right answer is that there is no right answer. The one universal truth that you can learn from all those who have gone before and put their best ideas in writing is that each family’s circumstances must be considered in creating the proper wealth education and transition plan. This analysis of family circumstances should 650750/1/88888.LWOLVEN
  5. 5. Educating Through the Estate Plan Page 4 include, at the very least, the family’s style of living (do they drive Toyotas or Bentleys?), the money behaviors of the parents, the ages and personalities of the family members, the existing family relationships, and the socio-economic surroundings (neighborhood, social circle). Most importantly, these factors need to be considered in the estate plan. Incentive trusts have been a hot topic in the last decade. These are trusts that contain provisions specifically targeted at encouraging or discouraging particular behaviors. Some common trust provisions include the following: Income Matching The Trustee shall distribute to Betty each calendar year, no later than 15 days after receiving a copy of Betty’s final Federal income tax return for the year, an amount equal to Betty’s adjusted gross income (AGI) as reported on such return. College Education Upon any beneficiary receiving a Bachelor’s degree from an accredited institution of higher education, the trustee shall distribute $25,000 to such beneficiary. Premarital Agreements If Betty and her fiancé execute a premarital agreement valid under the laws of Betty’s state of residence at the time of her marriage, which agreement addresses the treatment of her separate property and the division of marital property upon divorce, then the trustee shall distribute $40,000 to Betty on or before the date the wedding is solemnized. Other examples of incentive trusts include rewards for achieving a certain GPA or a specific educational degree, attending a particular educational institution, entering a family business, achieving a certain level of professional recognition, selection of a specific profession, reaching a particular wedding anniversary, or staying home to take care of the children. As advisors, we should be aware of the messages incentive provisions send, and we should alert our clients accordingly so they properly reflect their values in their documents. Incentive provisions require care because they truly may represent “bad psychology.” If they are 650750/1/88888.LWOLVEN
  6. 6. Educating Through the Estate Plan Page 5 viewed as trying to control the child’s life choices, incentive provisions may be more likely to produce rebellion than compliance. Incentive provisions also can be risky because if crafted in a manner that is too restrictive or inequitable, they can be a source of litigation. Provisions that encourage divorce or are otherwise contrary to public policy (for example, In re Estate of Max Feinberg, decided by the Illinois Court of Appeals in June 2008, which invalidated a clause disinheriting any descendant who married outside the Jewish faith), will be voided. In addition to occasionally skirting the line of permissible restrictions in a trust, the incentives provided may not strike a chord with the next generation. On the flip side, incentive provisions can be useful if the beneficiary is old enough when the provision is drafted to make it possible to understand that beneficiary’s driving forces. Incentives that are overly restrictive or bind the beneficiary to a course not his or her own will not be likely to produce a happy and well- adjusted adult, and certainly not one who has a good perspective on money. When crafting estate plan provisions, it is important to consider the personalities of the members of the generation to whom the wealth will be transferred. Understanding the beneficiaries of an estate plan, as well as their relationships with their parents and grandparents, necessitates a basic understanding of the world in which the next generation is living. In 2008, the “next generation” likely is a member of Generation X (born 1965-1982) or Generation Y (born 1983-2002). Early members of Generation Z are just reaching the age to start learning about money and values, and the Baby Boomers (1946-1964) are probably at a point in their lives past which their money values will be changed unless the Boomer makes a deliberate decision to re-make his or her life. Generation X probably is the primary generation that those with wealth and their advisers currently are working (or hoping) to educate about proper values as they relate to money. This group encompasses what is known as the “MTV generation”, and most grew up with personal computers in their homes. Most Gen Xers learned to use the Internet in high school or during post-graduate education, and are comfortable with and willing to embrace new technologies. In addition to leaps of technology, the following social and political issues had a big influence over the members of Gen X as they became adults: 650750/1/88888.LWOLVEN
  7. 7. Educating Through the Estate Plan Page 6 · Nationwide political apathy and lack of trust in leadership and government · Increase in divorce (Gen X is really the first generation of latchkey kids) · Increase in mothers in the workplace · Broad availability and acceptance of use of birth control pills · Changed work force requiring ever increasing academic requirements and intellectual skill · Increased awareness of and advocacy related to environmental destruction and ecological issues · The end of the Cold War · General increase in wealth in the United States Consideration of wealth transition today also is likely to involve consideration of children or grandchildren who are a part of Generation Y. This generation is the biggest since the Baby Boomers, and approximately three times the size of Generation X. The fluency with technology that they have known since birth has altered Gen Y’s methods of communication and, some argue, their ability to communicate without their electronic intermediaries. Reynol Junco and Jeanna Mastrodicasa, authors of Connecting To The Net.Generation: What Higher Education Professionals Need To Know About Today's Students, found in their survey of U.S. college students that: · 97% own a computer · 94% own a cell phone · 76% use Instant Messaging. · 15% of IM users are logged on 24 hours a day/7 days a week · 34% use websites as their primary source of news · 28% author a blog and 44% read blogs · 49% download music using peer-to-peer file sharing 650750/1/88888.LWOLVEN
  8. 8. Educating Through the Estate Plan Page 7 · 75% of college students have a Facebook account · 60% own some type of portable music and/or video device such as an iPod. Like Gen Xers, the members of Gen Y are likely to take longer to move out of their parents’ homes. In part, this may be due to the continuation of increasing education requirements to access many of the work force opportunities. More likely to have grown up watching Hannah Montana than the Flintstones, Gen Y is often considered to be better informed about world events and more sophisticated at a younger age than their predecessors. Saying that Gen Y grows up sooner might not be accurate, but rather, they are exposed to adult issues at an earlier age than preceding generations. Ironically, Gen Y, and to a certain extent, Gen X, are both accused of entering their work lives without any true sense of the real world. V. THE PRICE OF TUITION So how do you take all of this information and help these late alphabet generations understand balance in the acquisition and use of money? How do you make sure that the next generation is responsible? The answer is both simple and complex – if you want the next generation to be responsible, give them responsibility with wealth as early as possible, but only to the extent that the price of tuition (experience) is not too great. While there is no one perfect course to teach equilibrium in the proper role of money in one’s life, we (the authors) have run across many wealthy families that have developed their own methods which have proven mostly successful across the generations. As you will see, each family has adapted the education to the family circumstances and the values they wish to convey. A. The Welch Family – Early Lessons In Earning, Spending and Saving The Welch family has four young children, 8-year old twins, a 6-year old and a 4-year old. Far too young, you might think, to begin an education in the concepts of wealth and money management. Most commentators agree, however, that it is never too early to start teaching the basics of good money behavior, both by lesson and example. The Welch family has developed its own practical education tool. Each of the kids gets a nominal weekly allowance for helping mommy and daddy out around the house – picking up toys, cleaning up after themselves, etc. The kids learn the obvious 650750/1/88888.LWOLVEN
  9. 9. Educating Through the Estate Plan Page 8 lesson that money comes as the result of work, and as the result of their own contribution to the household. Once a week, the family goes down to the local variety store, where each child is given the opportunity to spend that week’s allowance. The parents commented that the first few times they went to the store, the kids spent all their money on the very first thing that caught their eye. In these early trips, the prospect of having complete control over their own spending money was just too much to bear, and these ventures to the store quickly emptied the wallets of this very young next generation. Following the initial visits to the store, the children began to change. After a few disappointing purchases of toys that broke or became uninteresting before the family even returned home, the kids became more savvy buyers. Trips to the store took longer as options were considered, real wants were examined, and price was compared to value before a decision was made. In a further twist to the education, the Welch parents decided to match whatever money the children had not spent during the shopping trip. There is no pressure not to spend, just the lesson that, to quote Benjamin Franklin, “a penny saved is a penny earned.” These children are too young to learn about the mechanics of investing and the stock and bond markets, but the mere lesson that unspent money can lead to future money is a powerful one. Over time, the parents have found themselves increasingly having to ante up when the children return from the store and convene at the kitchen table to count their “savings.” B. The Robbins Family – The “Feeling” Of Inheritance The Robbins family has two boys in their teens. At age 13, each son received a lump sum of $3,000 from a fictitious “Uncle Louis”, who has been a “member” of the family for three generations. The boys were able to use the money for whatever they wanted. The boys knew that Uncle Louis was not real, but the ruse was used to remove any overtones of parental oversight or control of the money. Three thousand dollars is a lot of money for most 13-year olds, and the overwhelming temptation was to blow it quickly and without much thought. In this case, both boys gave in to that temptation with part of the money, but then realized what it feels like to burn through 650750/1/88888.LWOLVEN
  10. 10. Educating Through the Estate Plan Page 9 money. Both Robbins boys gained an appreciation of planning for future purchases, saved part of the Uncle Louis money to have enough for those purchases, and even gave part of it away. The older of these two boys surprised his parents by giving $500 to relief funds following Hurricane Katrina. Clearly these parents had been teaching certain values to their children in earlier years, however, the practical application of these financial values was a critical experience. The size of Uncle Louis’ bequest is a bit arbitrary, but the intent is to make the gift large enough to be meaningful and to allow the scope for spending, investing and giving without depleting the funds through any one choice. The Robbins parents make themselves available to provide advice or guidance in implementing what the boys want to do, but the ultimate decision rests with them. The Robbins technique is a different sort of experience than the Welch family’s educational structure where the kids are “paid” for “work.” Behavioral finance teaches us that it is human nature to label money differently depending on where it comes from, where it is kept, or for what it is intended. Our language reflects these differences: retirement money, found money, play money, plastic money, rainy day money, new shoes money and silly money are all very different concepts, and even though $10 is still $10 no matter what label it carries, there is some benefit in thinking of those funds differently. You would not want to confuse retirement money with play money, for example. For families that need to deal with the label “inherited money”, it is important to give children a firsthand experience of how that feels. Hence, Uncle Louis for the Robbins family. C. The Fuller Family – Charity As A Larger Lesson The children of the Fuller Family are at yet a different stage in their lives than the Robbins children. Two of these children are college age and one is in high school. While the Fullers always lived a comfortable life, their fortunes changed a few years ago when the patriarch sold the family business and everyone, somewhat unexpectedly, received a financial windfall. 650750/1/88888.LWOLVEN
  11. 11. Educating Through the Estate Plan Page 10 While the Fullers had always made common sense and values a part of the education they gave their children, they were faced with preparing children already in their late teen years and early twenties with an education about inheritance. They wisely chose to build on the values they had been teaching to impart this new lesson quickly and effectively. As a family, the Fullers had always been charitably inclined, both with their time and their money. With a portion of their proceeds from the sale of the business, they established a private foundation. A few times each year, they would meet as a family to review the assets of the foundation, the investment performance, and the distributions. Each family member (including the children) had an equal vote, and all parties were expected to come to the meetings with suggestions for possible recipients or specific charitable projects that should be funded. Aside from the obvious benefit of guiding children to appreciate the obligation of wealth to society, involvement in the family’s philanthropic activities provided an ideal training ground. In addition to involving the children in charitable activities, it instilled in the Fuller children the sense that wealth has a purpose beyond the physical and emotional comfort of themselves and their family. The family’s philanthropic discussions provided a forum to experience and develop family dynamics, to learn how to present ideas and critique proposals, to begin how to think analytically and to discover the power of cooperation toward a common goal. The primary common thread we see in the Fuller Family and others we have worked with that successfully educate the next generation of wealth owners is that in all cases the money alone is not the instructor. Real-life experience and actual responsibility are the educators. The participation and guidance of the parents (or other senior family members) is crucial, as is the example these senior family members have set both with their values and their use of funds. Note that the words “participation” and “guidance” are used. The children must be given actual control or a meaningful vote for the experience to be something other than an education in futility. 650750/1/88888.LWOLVEN
  12. 12. Educating Through the Estate Plan Page 11 VI. CHARITABLE ACTIVITIES AS A TRAINING GROUND Incorporating charitable giving structures into an estate plan is another way to further the financial education of the next generation. Not only do these activities develop a child’s philanthropic values, but the responsibility associated with this involvement can unveil skills and talents that may be portable to the individual in other areas of life. One client who does quite a bit of public speaking attributes his love of and talent for public speaking to a childhood and young adulthood where he regularly presented grant proposals and follow up reports to his family’s foundation. We are often asked at what age children should become involved with philanthropy, and our answer generally is as young as possible and to the fullest extent reasonable based on the age and understanding of the child. The Barnett family has 6-year-olds on the family foundation advisory board. They do not interact much with the investment advisors, but they do become involved in screening charities. Surprisingly, these 6-year-olds express firm opinions about which charities are worthy of consideration. Even though these young children are not able to take as active a role as the adults on the foundation advisory board, they are gaining valuable experience and education simply by watching and listening to the way their family elders interact. Participating in the family’s philanthropic discussions also lays an early framework for the child’s charitable values. The Barnett Family Foundation’s advisory board is chaired by a 21-year-old, who is a neophyte in the investment world, but is blossoming into a talented and passionate environmental advocate. Her family’s shared belief in environmental advocacy led them to give her this position of leadership. More life experienced family members sit on the board as well to provide advice and to help her as she learns about investing and sustainable distribution policies. On the whole, this is one of the best functioning family foundations we have seen, and we think the full embrace of younger generations is the reason why. It is never too early to start the education of the next generation, and experience is the best teacher. Trial and error, with appropriate oversight, is necessary to an effective learning experience and development of a proper perspective on money. Each family must find the right method that fits within its value system and family structure, and families that have a 650750/1/88888.LWOLVEN
  13. 13. Educating Through the Estate Plan Page 12 private foundation (or even a donor advised fund) should consider involving the younger generations at an early age. For example, a family might form a special committee within its private foundation to examine a specific area of charitable giving, such as health care or battered women’s shelters. The children could be the members of this committee and might be given a specific budget of a few thousand dollars that they can grant to the charities selected by the committee. With the internet, it should be fairly easy for the children to do research on different charities and develop a “pitch” to their special committee. Depending on the ages and abilities of the children, an adult may take a more or less active role in “guiding” the committee. Philanthropic activity often is an excellent method to educate children about the various definitions of wealth, while exposing them to precepts they need to manage financial wealth in particular. Because the funds are going to charity, there is low risk of harm in the experience. VII. PLANNING FOR PROPER TUITION It is important to give the next generation control over money at an early age (or, in the case of the Fullers, as early as possible). The student needs to be given control over enough money so that there is a full sense of sadness, pleasure, satisfaction, etc. to enable the next generation to learn from the experience. At the same time, the amount of money or responsibility given to the child should not be so much that the tuition is burdensome, either financially to the family or emotionally to the student. When thought is not given to the estate plan and the amount of responsibility it imposes upon a child, the results can be devastating. We know one family that created trusts for their sons, each of which distributes in its entirety and without restriction on the young man’s 21st birthday. The oldest, who has already received his distribution of about $5 million, blew through it by the age of 27. He was not prepared to handle significant wealth at that age, and the tuition was expensive. He is a good person who learned his lesson at a very steep price. He hopes that he is an object lesson for his younger brother, who is 20 years old and will soon receive his distribution of 650750/1/88888.LWOLVEN
  14. 14. Educating Through the Estate Plan Page 13 about $6 million. This younger son has a history of substance abuse, and there is some fear that his tuition could be life-threatening. The parents did not intend for the trusts to become this large, and unintentionally created a bigger educational pool than was needed or wanted. One reaction to this sobering tale is to leave the wealth in trusts until the children are fully grown and ready to handle it. Leaving money in trust and restricting the next generation to only income or regular small distributions, however, may preclude the members of the next generation from making their own mistakes and learning from them. The following are some ideas for consideration when drafting a trust agreement that will have children or grandchildren as future beneficiaries. “Learning Sized” Distributions Many trust agreements stagger a beneficiary’s access to trust assets. Often, this access is granted in three tranches, starting around age 25 or 30. If a trust is worth a million dollars, is $333,000 too much for a “test run” with financial responsibility? Consider giving the beneficiary a smaller amount at a younger age so they have some time to practice with money management and basic financial skills before the broader access rights take effect. For example: Upon the beneficiary attaining age 21, the trustee shall distribute $100,000 to the beneficiary. Withdrawal Rights In Lieu of Mandatory Distributions Trust agreements often direct a trustee to distribute a portion of the trust to the beneficiary at certain ages or other triggering events. Instead of requiring distribution, why not simply grant the beneficiary a right to withdraw funds at those ages or triggering events? If a beneficiary cannot be responsible enough to write a letter to the trustee to request a distribution to which he is entitled, why force the trustee to write the beneficiary a check?! For example: Upon the beneficiary attaining age 25, the beneficiary shall have the right to direct distribution of no more than one-third of the assets of the trust. Such right must be exercised by a written direction signed by the beneficiary and delivered to the trustee. If granting withdrawal rights or requiring mandatory distributions, consider giving the trustee authority to hold back the funds or postpone distributions for good reasons. For 650750/1/88888.LWOLVEN
  15. 15. Educating Through the Estate Plan Page 14 example: The trustee shall have the right to deny a withdrawal request if the trustee suspects the beneficiary is using or is addicted to a substance that might adversely impact the beneficiary’s ability to manage, invest and conserve property. The Educated Co-Trustee Parents often give children the right to elect to become a co-trustee upon attaining a certain age. What virtues does achieving a particular age bestow that qualifies a beneficiary to manage a trust estate? Perhaps life experience, but there is nothing to predict whether that life experience will touch in any way on fiscal perspective. Instead of a triggering age as the sole criteria, consider requiring the beneficiary to take a course in money management or have similar training. The acting trustee or an independent third party could be given the discretion to determine whether the beneficiary has received the proper education to assume the role of a co-trustee. This is not a fool-proof method but, again, why just hand it to the beneficiary as opposed to making them demonstrate some responsibility? Possible language might read: The primary beneficiary shall have the right to become a co-trustee of the trust upon the later of such beneficiary attaining the age of 25 years or completing a course of study in financial management. Whether the primary beneficiary has satisfied the requirement of completion of a course of study in financial management shall be determined in the sole discretion of [insert name]. “Guided” Revocable Trusts Sometimes planning has been finalized well before anyone realizes the amount of money that will be put into the hands of an unprepared beneficiary. Often times grandpa will give away pieces of the family business to trusts for the grandchildren, which trusts require that all income be distributed to the child on an annual basis. If the business grows exponentially and sells for a large sum, suddenly the income produced by the trust assets may be 10 or 100 times what anyone expected. Once the grandchildren reach the age of majority, consider asking them to establish a revocable trust that has an experienced trustee or co-trustee and that is amendable only with the consent of an experienced adult. The restrictions can always be removed when the beneficiary is ready, and this structure will permit a guided use of the 650750/1/88888.LWOLVEN
  16. 16. Educating Through the Estate Plan Page 15 income. Having the beneficiary be a co-trustee may provide a crucial educational opportunity, as typically the trust will start small and grow over time as income is added. Failing to properly plan for the tuition of a financial education is not the only oversight many families make. In his first documentary, Born Rich, Jamie Johnson, an heir to the Johnson & Johnson fortune, interviews several of his ultra wealthy friends who also all inherited their wealth. The documentary provides an eye-opening look at the jet set. Two of the individuals on the documentary were both raised believing that the family was not wealthy. One pre-teen discovered his family’s wealth when a schoolmate pointed out the father’s name on the Forbes list. The other, brought up believing he was poor, was taken to the city for a day by his uncle, who proceeded to point out all the buildings this pre-teen’s family owned. From their interviews, it is clear that both individuals were deeply affected, and perhaps scarred, by the abrupt revelation of their enormous wealth. In our own practice, we have seen some families attempt to hide their wealth from the next generation. Not only does that approach waste years of valuable time to educate children about achieving balance with money, but it also ignores the child’s ability to observe his surroundings. In most cases, the children were aware of the wealth through comments of peers or observations about family vacations or material possessions. These children grow up believing money to be a taboo, or something to be ashamed of. They have a very uncertain relationship with money, and often possess many habits with regard to money that are difficult to un-learn. Sometimes, this hideaway approach comes to a tragic head when the possessor of the wealth dies unexpectedly, thinking they still had time to educate the next generation or, perhaps thinking that there was no education needed. We know of one individual in her mid 40s who has spent her entire career so far as a teacher. A few years ago she received a call from a lawyer she had never met, informing her that her grandfather had passed away and left her a trust of which she was the sole income beneficiary. All of a sudden, at the age of 42, she began receiving an annual income in the mid six figures. She was totally unprepared for this sort of wealth. Since inheriting, she has been through a divorce and is questioning her choice of career. While her grandfather had the noblest of intentions, to see his 650750/1/88888.LWOLVEN
  17. 17. Educating Through the Estate Plan Page 16 granddaughter establish a career and a life without the burden of money, she now has to deal with the weight of wealth anyway, but without the benefit of proper education and preparation. Whether it is the Welch, Robbins or Fuller approach, or some other different method that fits the circumstances, each family must actively make a decision to participate in the education of the next generation. Trust structures need to be considered for flexibility and durability, as well as appropriateness and educational value. VIII. SPANNING THE GENERATION GAP Thus far, we have considered questions related to the preparedness of heirs to handle wealth, how to educate them and how to transfer wealth. When we hearken back to Roy Williams’ study on the failure of wealth transitions, however, we remember that the real obstacle to avoiding the “shirtsleeves to shirtsleeves” threat lies within the family. Twelve percent of the failures were due to lack of a shared mission or vision, and a staggering 60% were due to a breakdown in family trust or communication. In other words, almost 3 out of 4 failures were due to issues other than poorly-delivered advice or poorly-educated heirs. This may be due to the fact that most families spend far more time considering the HOW of wealth transfer than they do considering the WHY of wealth transfer. Many families do not take the time to define their wealth, thereby allowing it to define them. As interested as mom and dad may be in transitioning wealth, what they really want to transition (usually) is values. Stark examples of this are the statements made by owners of significant wealth such as Warren Buffett and Bill Gates. Buffett has already committed the vast majority of his wealth to charitable purposes. When asked how much money one should leave to children, Buffett wittily answered “enough so that they can do whatever they want, but not so much that they can do nothing.” Gates has said that what he most desires to leave his children is the enjoyment gained by the application of intellect and creativity to hard work. Both Buffet and Gates have defined wealth for their families beyond mere financial wealth. Charles Collier in his excellent book Wealth in Families talks about four distinct kinds of wealth owned by families, and makes the point that families need to recognize and manage 650750/1/88888.LWOLVEN
  18. 18. Educating Through the Estate Plan Page 17 all four definitions of wealth. First of all, a family’s primary capital is human capital, the brothers, sisters, aunts, uncles, nieces, nephews and spouses which make up a family, and the unique abilities and talents they have and contributions they make. This definition is qualitative, including a family’s health, happiness, ethics, morality and character. A second form of capital is intellectual. What do people know, either from formal education or life experience? What is the intellectual legacy of the family? Social capital describes how the family contributes both human and intellectual capital to the communities in which they live and the wider world. Finally, we have old-fashioned financial capital, whether in liquid assets, a family business, real estate, or other assets. Collier notes that most families only manage their financial capital, and, even if they recognize the existence of these other forms of capital, they conclude that the best way to enhance them is to focus all their energy and effort on the financial side. Careful management of human, intellectual and social capital, however, is essential to the preservation of financial capital. A final benefit of understanding these various forms of capital is that all members of a family can contribute to their growth. Not everyone will be able to add to the financial capital of the family, but everyone can help to grow capital broadly defined. That is a nice theory, but how does it find expression in the real world? The following is a checklist of questions we ask families who wrestle with these issues of multi-generational wealth transfers and the education of the next generation. The core of this comes from work done by Roy Williams and Vic Preisser in dealing with wealthy families, along with some variations of our own. 1. Does the family have a mission statement that spells out the purpose of the family’s wealth? This is probably the single most important step in preserving wealth across · generations. 650750/1/88888.LWOLVEN
  19. 19. Educating Through the Estate Plan Page 18 It can seem foolish to have a family sit around the dining table and write a · mission statement, but it is instructive that seriously wealthy families have done just that. Affords the opportunity to discover and consider that a dollar’s worth of · happiness for one person may look very different from that same dollar’s worth for the person’s sibling. It helps keep wealth in perspective, it reminds the family that wealth is more · than financial, and it enables outside advisors to gain a thorough picture of what the family needs. Including family history in the discussion can be helpful in developing the · broader mission. 2. Has the family developed a method for allowing all members of the family to be heard and participate in important decisions? It is important not to let the control of financial wealth also control the other · aspects of family wealth. When families divide into “those in the know” and “those whose opinion · does not matter,” the breakdown of family communication is well on its way. 3. Do all family members participate in some way in preserving and transferring the various forms of wealth? In many families, those individuals creating or managing the financial wealth · are resentful of other family members who do not contribute. Broad participation by the entire family across all skill sets helps to protect · against divisiveness. 4. Have roles been assigned to family members without inquiring as to the individual’s desire to fulfill the job? 650750/1/88888.LWOLVEN
  20. 20. Educating Through the Estate Plan Page 19 It can be tempting to assign roles to various family members because it · seems like a good fit, without establishing whether or not the individual has the desire to inhabit a certain role. Families need to gauge genuine interest, match that interest with genuine · need, and make sure that the necessary education is obtained for the successful pursuit of the assigned roles (financial, philanthropic, or other). 5. Has the wealth possessing generation discussed its estate planning with the next generation? In our experience, it is far more effective if the next generation knows about · the estate planning and financial planning of the prior generation. In many cases we have seen the next generation spend time, money and · energy trying to unwind financial planning that mom and dad put into place, without the benefit of having mom and dad explain their reasons for what they did. This is perhaps the most difficult conversation we ever have with owners of · wealth, because the natural tendency is to keep these issues quiet, private and even secret from the next owners and managers of the wealth. 6. Is it better to trigger wealth transitions to the next generation based on readiness as opposed to an arbitrary age? This type of transition is far easier said than done. · For example, we have seen trusts that distribute to heirs based on subjective · criteria such as “the successful completion of a college degree plus five years of gainful and successful employment outside of the family firm, as evidenced by progress within a company unrelated to the family enterprise.” Language like this poses a challenge to the fiduciary, who would prefer a · precise trigger like age to the exercise of judgment on subjective grounds. 650750/1/88888.LWOLVEN
  21. 21. Educating Through the Estate Plan Page 20 7. Does the family create opportunities and incentives for the next generation to add to the family’s wealth, once again broadly defined to include definitions other than financial? 8. Does the family create opportunities for participation (even by younger members), particularly in the area of philanthropy? 9. Do the senior generations work to create an appreciation of family cohesion, even above issues related to finances? There should be discussion to create understanding of the various definitions · of wealth and how “family” brings about that wealth. The celebration of rituals and rites of passage support family cohesion: births, · graduations, marriages, and even deaths. 10. Is there regular and open communication? IX. CONCLUSION It is never too early to start the education of the next generation, and experience is the best teacher. There is nothing like trial and error, with appropriate oversight, to learn about wealth in its human, intellectual, social and financial forms. Each family must find the right method of education that fits within its value system and family structure, and must carefully structure the estate plan to consider the emotions involved and the education of the next generation. Philanthropic activity often is an excellent method to educate children about the various definitions of wealth, while exposing them to precepts they need to manage financial wealth in particular. None of these tasks is easy, and the process is almost certainly a matter of a few steps forward followed by the inevitable one or two steps back from time to time. The payoff from perseverance and thoughtful preparation of the next generation is enormous, and putting in the effort is the only way for a family to break the human universal of shirtsleeves to shirtsleeves in three generations. 650750/1/88888.LWOLVEN
  22. 22. Educating Through the Estate Plan Page 21 FURTHER READING Cochell, Perry L. Beating The Midas Curse Collier, Charles W. Wealth In Families Gallo, Eileen And Jon. The Financially Intelligent Parent: 8 Steps To Raising Successful, Generous, Responsible Children Gallo, Eileen And Jon. Silver Spoon Kids: How Successful Parents Raise Responsible Children Hausner, Lee. Children Of Paradise: Successful Parenting For Prosperous Families Hughes, James E. Family Wealth – Keeping It In The Family: How Family Members And Their Advisers Preserve Human, Intellectual, And Financial Assets For Generations Hughes, James E. Family: The Compact Among Generations Kinder, George. The Seven Stages Of Money Maturity: Understanding The Spirit And Value Of Money In Your Life Levine, Madeline. The Price Of Privilege: How Parental Pressure And Material Advantage Are Creating A Generation Of Disconnected And Unhappy Kids Link, E.G. Family Wealth Counseling: Getting To The Heart Of The Matter Martel, Judy. The Dilemmas Of Family Wealth: Insights On Succession, Cohesion, And Legacy Massie, Hugh. Financial DNA: Discovering Your Unique Financial Personality For A Quality Life O’Neill, Jessie H. The Golden Ghetto: The Psychology Of Affluence Sykes, Charles J. 50 Rules Kids Won't Learn In School: Real-World Antidotes To Feel- Good Education Sykes, Charles J. Dumbing Down Our Kids: Why American Children Feel Good About Themselves But Can't Read, Write, Or Add Turnier, William J. Materials On Family Wealth Management Williams, Roy O. Philanthropy, Heirs & Values: How Successful Families Are Using Philanthropy To Prepare Their Heirs For Post-Transition Responsibilities Williams, Roy O. Preparing Heirs: Five Steps To A Successful Transition Of Family Wealth And Values Willis, Thayer Cheatham. Navigating The Dark Side Of Wealth: A Life Guide For Inheritors 650750/1/88888.LWOLVEN

×