Perspectives on Inheritance - Part 2 of 3
Are your beneficiaries prepared?
Stephen Trefts, President
This newsletter will continue to explore pitfalls and provide insights to parents as they consider the impact of an inheritance on their family. The prior newsletter concluded by analyzing four legacy questions of, “What do you want your descendants to think when they hear your name?” In this newsletter, we will explore the preparedness of beneficiaries to manage the wealth they are being given.
Balancing the needs of our children
When I speak to clients who are thinking about their estate planning, some of the most common words that I hear are ‘equality’ and ‘fairness.’ Parents want to pass down their wealth in a way that shows their love and value for each of their children as equally as possible. However, a simple question must be asked before the questions of equality and fairness are addressed: “Are the beneficiaries prepared to manage the wealth I am giving them?” This requires a frank assessment of the beliefs and behaviors of future beneficiaries before the questions of equality and fairness can be answered. Is the beneficiary good with money? Are their relationships in life stable, or are they vulnerable? Does the beneficiary show past behavior that indicates he or she is a spendthrift?
A story of lack of preparedness
Several years ago, we received what should have been a large trust. Mother and father had two sons—one an electrical engineer and the other who lived with them most of his life and never really found his way (wanderer). They were in close contact with their wandering son, who had stayed close to home his whole life.
They decided to give their home to the wanderer and put him in charge of administering the trust while mother was alive and then to divide the balance equally after her life, somewhat out of practicality since he was living at home. The problem was that he was inexperienced and dishonest—and, therefore, unprepared to manage the trusts. Litigation ensued, and the Superior Court fired the wanderer for his breach of fiduciary duty and appointed us the successor trustee. The litigation has drained hundreds of thousands of dollars from the trust and is still not over yet. This waste of hard-earned family wealth points to the fact that giving an inheritance or management responsibilities to a child who can’t handle it is like throwing money away.
To be fair, most people I have counseled at the beginning of the estate planning process, do deeply think about the capabilities of their children, but it is still a very high hurdle for them to think, “How prepared are they to manage the wealth I am giving them?” Many times, I am faced with a future client who tells me that they have two children—one who is well-adjusted and capable and the other who has shown a pattern of bad choices. The knee-jerk reaction is to maintain fairness and equality and distribute the trust equally and under the same terms. It is much harder to prepare your children for the reality that their inheritance will look different due to their uniqueness.
The Vanderbilts and the Rothschilds
A startling contrast of two wealthy families illustrates the dilemmas posed above and gives a clear path to avoid the pitfalls, as explained by the Heritage Institute, LLC. When Cornelius Vanderbilt died in 1877, his estate in today’s dollars was valued at over $160 billion dollars. While he had excellent estate planning attorneys and advisors, he failed to prepare his heirs for their vast flow of wealth. He left over 90% of his estate to one son and divided the rest between a daughter and his wife. The family chaos that ensued included litigation between heirs, a suicide of one of Vanderbilt’s sons, and one direct descendant dying in poverty. By the mid-1900s most of the family wealth had been spent on palatial estates, racehorses and scandals. The great economist, John Kenneth Galbraith, stated that the Vanderbilts “dispensed their wealth for frequent and unparalleled self-gratification and very often did it with downright stupidity.” The dissipation of wealth was highlighted by the fact that at a family reunion in 1973 no one could claim to be a millionaire. William Kissam Vanderbilt, a grandson of Cornelius, retired to look after his yachts and racehorses and stated, “Inherited wealth is a real hardship to happiness. It has left me with nothing to hope for, with nothing definite to seek or strive for. Inherited wealth is as certain death to ambition as cocaine is to morality.”1
There is much written on ways to ameliorate this situation and the example of the Rothschild family stands out as not only a contrast but an example of how to prepare heirs for wealth transfer. This famous European family amassed its wealth through banking and finance in the 19th and 20th centuries. While the family used excellent financial and estate planning advisors, of primary importance was the stewardship training for the heirs. This included creating a family mission statement, explanation of core values in the context of family struggles and also encouraging well-rounded education for all heirs. Participation in family meetings and philanthropy became high priorities. Instead of outright distributions, family banks were created for the younger generation to use and learn life and business lessons. This forethought to train and prepare heirs has meant that the Rothschilds are still currently one of the wealthiest families in the world—over 200 years later.2
Much has been learned from the Vanderbilt and Rothschild wealth distributions. In order to avoid family train wrecks like the Vanderbilts’, current trusts often include structural and sequential payments such as one-third at 25, one-half at 30 and the balance at 35. More importantly, many families are comforted by giving the trustee discretion to actually withhold those distributions if, in the trustee’s judgment, the funds would be dissipated, squandered or lost. Beyond that, passing down values, beliefs, and financial behaviors is seen as the surest way to maintain wealth for generations.
In summary, we always recommend clients considering the preparedness of future beneficiaries in managing wealth and taking active steps in their estate plan to ensure that the wealth will benefit future generations. Subsequently, creating a fair and equal estate plan will become easier as clients address the uniqueness of each child and create a plan that will benefit him or her.
1. “A Tale of Two Families,” the Heritage Institute, LLC, http:// www.kintera.org/atf/cf/%7BE843D69F-BAF5-40AD-8006- A9A1D6BA11DC%7D/A%20TALE%20OF%20TWO%20FAMILIES.PDF
Print date: Fall 2017