Beyond Traditional Estate Planning: Addressing The Personal Impact Of Inherited Wealth

Traditional estate planning involves minimizing estate taxes, reducing administrative costs and drafting documents to accomplish non-tax goals.  However, well-written documents do not assure clients that their heirs will use transferred wealth constructively and lead meaningful, happy and fulfilling lives.  The transfer of substantial wealth will have a significant impact on the recipient.  A critical question a transferor needs to ask is what can be done to maximize the possibility that the recipient will not be adversely affected by this wealth transfer or, conversely, how wealth can enhance the well-being and behavior of the inheritor.  This article explores how parents and other transferors can better make the transfer of wealth a constructive and positive event.

                       
UNDERSTANDING THE IMPACT OF WEALTH

When questioned, parents often voice serious concerns outside the scope of traditional estate planning about wealth transfers, such as the following:

How can my children be prepared so that wealth is a force for good in their lives and not a burden?

How will wealth change the lives of our heirs?

Will our children's values and initiative be changed for the worse when they receive our wealth? 
          
Will someone try to marry our child just because he or she is wealthy?

How will inherited wealth affect my child's marriage and his or her spouse's attitudes?

What should we and our heirs do to prepare for the additional challenges our heirs will face?

Some clients feel they can avoid addressing these problems because they aren't "that" wealthy or because they have decided to leave a "smaller" amount to their children.  However, this may be a false assumption.  One million dollars received by a child can generate $129,500 a year for 10 years (when earning 5% annually after tax) if the beneficiary chooses to consume principal, a decision which may obviate the incentive to find a job.  A 25-year old who knows he or she is going to receive $500,000 in a few years may well decide to be a surf bum until he or she receives what is believed to be enough to take care of him or her for years.  Three million dollars can generate $210,000 a year - plenty for most people to avoid having to work - if the beneficiary is willing to draw down 7% a year. So parents need to be mindful that what may seem to be a modest sum to the parent can have an enormous impact on the behavior of their child.

In any event, at the time the estate plan is created, it is usually too late to begin teaching good values.  The parents can only consider what future acts will make it more likely that the wealth will help and not hurt their children.  Obviously the earlier the parents begin to do whatever it is that may help, the better. It is said that the establishment of attitudes toward wealth and responsibility is developed in the preteen years.¹

It is critical that all parents fully understand and appreciate the fact that transferred wealth WILL impact the recipients.  The impact of wealth can be enormously destructive. Psychologist and inheritor, Thayer Cheatham Willis, in Navigating The Dark Side Of Wealth², delves into the "loneliness and guilt and isolation suffered by people who have so much money that they never need work".³  She examines her life and those of her clients, and she concludes that those who inherit substantial wealth have a much harder time achieving a sense of purpose and competence.  In her experience, all too often inheritors struggle with guilt, low self-esteem, relationship problems, apathy, and lack of discipline.  Another author and consultant, John Levy, reports that inheritors often worry that they have received wealth with no effort or virtue of their own, while others, equally deserving, have to struggle for theirs.⁴  The result, says Levy, can be alienation, excessive gifts and loans, suspiciousness, poor self-discipline and feelings of inferiority, as well as the symptoms described above by Willis. 

In my practice, where many of my clients have received very substantial inheritances, I frequently see depression, addictions, narcissism and self-centeredness as well as the absence of generosity.  Life is not exciting for these heirs and joie de vivre is non-existent. Often, they feel (sometimes not unjustifiably) that people only care for them because of their money. I believe that the destructive force of money may be significantly greater than the positive power of wealth.  Wealth is unlikely to suddenly create happiness and meaning where none existed before.  Still, the receipt of wealth can be a constructive event by freeing up time to engage in creative efforts, parenting, self-education, community activities, philanthropic efforts, and spiritual development.

PREPARING HEIRS FOR WEALTH 

The easiest part of the challenge parents face is recognizing that the impact of wealth on the lives of their children. How to avoid the negative consequences of a wealth transfer is far more challenging.  Parents and other transferors should not expect that they can successfully direct the priorities and values of their heirs with newly acquired wealth on the basis of well-written estate planning documents.  Yet there is a new cadre of estate planners, trust companies, accountants and investment advisors who tout "dynasty trusts" which limit access of funds to multiple generations of heirs and prescribe monetary incentives and disincentives in an attempt to control behavior.  Heirs receive more money if they go to graduate school and even more money if they become successful doctors, lawyers or business persons.  They receive less money if they don't go to college or if they are convicted of certain crimes.  However, there is no data showing this approach correctly anticipates problems heirs will face many years from now or creates fulfilling and joyous lives for heirs. 

An important first step is for parents to prepare a written mission statement which focuses on the intended purpose of the family's wealth such as providing a level of material comfort, preserving assets for future generations, providing educational and experiential opportunities, and funding business or philanthropic goals.⁵  The mission statement should be more expansive and less legalistic than the estate planning documents. While the process of developing the mission statement will help identify goals and issues, it will not cause the heirs to have self-esteem, a work ethic or any of the other constructive outcomes outlined above.

Full family involvement in the wealth transfer process is very helpful.  However, when to discuss a mission statement, a family's wealth, estate planning documents and expectations with children is a difficult question.   It depends on the children's ages and maturity as well as the size and current management of the family wealth.  If the family has had a large family foundation for years and the children are in their late twenties, working and self-sufficient, the answer will be very different than for a family where the kids are indulged teenagers and the parents have just inherited their wealth.

In any case, if the estate plan and mission statement are not shared, there can be no discussions with heirs about the purpose and impact of family wealth transfers, and the parents are leaving outcomes to chance.  Open and frank family discussions will allow the parents to express their goals.  The appropriate scope and format for charitable giving in each child's life will be better understood.  The heirs will have the chance to talk about how their lives may change and what challenges can be anticipated and prepared for before they receive the wealth.  The impact of buried resentment and sibling rivalries on the use of transferred wealth may be better understood. The intricacies of the estate plan can be discussed openly, such as outright distributions versus trusts.  Parents can receive feedback on how children feel about standards for determining when distributions from trusts are to be made. How to transfer specific assets, such as businesses, in an equitable and amicable way to those children who can and want to manage such assets can be considered.   Discussions about long-term estate planning may also bring into the open sensitive subjects such as homosexuality and infertility.  Asking the children for their comments and suggestions on the estate plan is an opportunity for the children to buy into and "own" the estate plan.  Thus, absent compelling reasons, parents should involve adult/mature children in discussions about a mission statement and the estate plan.

TESTING THE ESTATE PLAN

One way to anticipate how children will react to receiving substantial wealth is to test the desired estate plan outcomes.  Parents can use a donor advised fund as an opportunity to have family meetings to see if there will be a shared philanthropic vision and cooperation among the children.  Parents may see that their children have very different politics and charitable goals, and that deciding where to give money may be a low priority for their children.  In that case, outright charitable gifts instead of a family foundation should be considered.  Loaning or giving money to children in their twenties creates a perfect opportunity to see how the children may act when they get much larger sums after the parents die.    Asking a presumptive trustee to get involved in discretionary distributions and investment decisions now is a great way to see how the trustee will act later. 

SUCCESSFUL VALUES-BASED ESTATE PLANNING

The preceding discussion still does not directly address question of how to transmit and maintain family values when the children receive the family's wealth.  Willis makes several suggestions about educating children.  She stresses the importance of educating the children about finances and wealth:  Make use of allowances for young children; require young adults to maintain budgets; encourage children to make and monitor investments; and ask heirs to consider and make their own charitable contributions.  She especially stresses the role of work.  Inheritors who are not motivated by the need for earned income may "lack the tenacity to see their endeavors through, never achieving the sense of fulfillment for which they yearn. It is as if they are trapped by a shadow; the dark side of wealth".⁶  Ultimately, she believes, all of us need some form of work to feel a sense of self-worth and fulfillment.  Levy believes that inheritors who engage in substantial philanthropic involvement are the happiest and most fulfilled.⁷  He also suggests giving young adults a sizeable sum without conditions so as to convey a sense of trust and the opportunity to exercise initiative and take responsibility for the consequences of one's actions.⁸ 

Families should engage in frank discussions about the essential challenges to successful transfer of wealth, considering questions such as the following:

What are the personal responsibilities attendant to being wealthy?

What specific steps can the children take to prepare themselves to use their future wealth most constructively? 

What support systems can heirs use to make better use of their wealth? 

How can each child define and measure what constitutes a successful value-based wealth transfer?

Should consequences be built into the wealth transfer structure to deal with failures to overcome the destructive forces of wealth?
 
How can the family institutionalize regular and productive meetings to work through these issues?

The quest for successful value-based estate planning should not be a solitary struggle.  Parents and children should seek to increase their knowledge about successful value-based estate planning and not focus solely on tax savings and estate planning document preparation.  There are numerous books and conferences dealing with these issues.  For example, the Emotional and Psychological Issues of Estate and Financial Planning Committee of the American Bar Association has a lengthy reading and resource list on its website.⁹    There may be wealthy friends who can act as role models and mentors to the children.  Also, there are many 'wealth counselors' and 'coaches' who can act as facilitators.  However, families should be aware that there is an entire industry focusing on these issues and one needs to be cautious and critical in selecting consultants.  Ultimately, many of   these issues are the same, though magnified, as those facing the not-so-rich, and children and parents may both gain much from individual therapy sessions as well as using therapists to act as facilitators in family meetings.  Successfully confronting the challenges stemming from inherited wealth is not easy, but acknowledging the problem, preparing a mission statement, bringing the heirs into discussions, and making judicious use of outside experts will be far more valuable than relying only on traditional estate planning strategies.  

This article appeared in California Trusts and Estates Quarterly, Vol. 12, Issue 1 (Spring 2006).  Copyright William H. Soskin 2006.