Robert L. Moshman: The Estate Analyst-The Art and Science of Disinheriting Heirs Part II: Benign Neglect, Noble Ambitions

By Robert L. Moshman

September/October 2014

A good man leaveth an inheritance to his children’s children:
and the wealth of the sinner is laid up for the just.
Proverbs 13:22, King James Bible


There are people who choose to give most or all of their fortune to charity and not to their own family. These are not disinheritances in the classic scenarios of cutting off a family member due to a hostile relationship or a feeble-minded patriarch being unduly influenced by his young nurse/wife.

These disinheritances are based on personal philosophies, ranging from an aversion to creating spoiled “trust fund kids” to a commitment to recycling wealth back to society.

How much money should wealthy parents leave to their children? Are considerations different for the super rich, i.e., when billions of dollars are involved? Here, we consider the examples of recent celebrities, historic estates, and how incentive trusts can be utilized to encourage productivity.

To My Children

Disinheritance is not the norm. In fact, when people leave most of their wealth to charity rather than to a family member, it is unusual enough to make headlines.

Consider the many celebrities and wealthy individuals who have left estates to their children utilizing wills and trust arrangements in a conventional manner.

Princess Diana left an estate of approximately $31 million to her two children, William and Harry. The money was left in a trust until the children turned 25. Utilizing a “variance,” the trustees obtained judicial permission to delay distribution until the beneficiaries turned 30.

Robin Williams established trusts for his three children in 2009, about five years before his death. His children, Zachary, Zelda, and Cody, would each receive one-third of their shares when they turned 21, then half of the remainder when they turned 25, and then the balance at age 30. Other assets appear to be left to the children in Williams’ will. The same garden variety formula is used in setting up many trusts in modest estates. Note: Williams may have also left other trust arrangements that have been kept private from media such as TMZ.

The ups and downs of Williams’ wealth provides a cautionary tale. At one time, his fortune was estimated to be $130 million. Two divorces and an expensive lifestyle once put Williams “on the verge of bankruptcy,” or so he claimed. Yet, according to some reports, at the time of his death, his wealth may have climbed back to $50 million.

Several observations may be made about this significant fluctuation of wealth. First, it is very wise to establish trusts for children so that funds for them are kept safe while the rest of the estate may fluctuate. Second, trusts are more private than wills and can remain private, but if trust documents are given to the wrong people, TMZ will end up publishing them.

Third, the amount left to one’s heirs may not be sufficient. People with $130 million can end up bankrupt. If you leave an heir $5 million outright and give another $95 million to charity, who is to say if the $5 million will last your heir for a lifetime? Will those funds provide assistance for more than a single generation? Bad luck, bad investments, accidents, and divorces are facts of life. But if some funds are left in trust and remain protected from creditors, divorces, wasteful spending, and bad investment decisions, then it is far more likely that financial security will be preserved for the future.

Consider what an impoverished heir might communicate to his wealthy forbearer:

“Dear Great-grandfather, Billionaire Jones,

Although you are now long gone (with the exception of a miraculous breakthrough that cures death and causes your cryogenic chamber to be thawed out), I write to you in the hope that someone invents a time machine to send you this message and fill you in about how your plan to give away the family fortune worked out.

I say “family fortune” in a general way, even though you decided to leave all your wealth to help dolphins and classical orchestras. Unfortunately, that “tough love” you wanted to bestow upon my grandfather (your son) didn’t work out. He committed suicide when his money ran out and his car was repossessed. It really didn’t help that the paparazzi located his rooming house and labeled him the “Tycoon of Skid Row.”

Unfortunately, I wasn’t a dolphin, or your foundation might have been able to help me out. (That was a joke, Great-grandfather). Anyway, I wish that you had put a few dollars aside to buy me a coat or a sturdy box and maybe some breakfast bars. It’s cold out here when you are hungry. Seriously, I’m really cold.

Your Great-grandson,

Empty Pockets Jones

P.S. If you get this, bury $500 by the corner of Skid Row and 7th Avenue. That’s where I am right now. I am going to dig a hole and look for that money. And please throw a coat or a sweater in with the money; it’s mighty cold out here.”

Denouncing Trusts

Philip Seymour Hoffman didn’t believe in marriage and didn’t want his children to become “trust fund kids,” so he left his entire estate to his girlfriend. On the positive side, his girlfriend is the mother of his children and might respect and carry out Hoffman’s specific preferences for where his children should grow up. Or not. That’s the problem with loose arrangements. Hoffman’s girlfriend may invest poorly, incur debt, marry, or disregard his instructions. Hoffman’s children could end up a lot worse off than as trust fund beneficiaries.

For example, Kurt Cobain’s wife, Courtney Love, recently revealed that she has wasted $27 million of the Nirvana fortune she inherited.

Other well-known people have also indicated that their wealth will not go to their children. Gloria Vanderbilt has said that she will not be leaving her fortune ($200 million by some estimates) to her son Anderson Cooper or her other heirs. Yet her opportunities in life were made possible in large part because of a $5 million trust fund that provided for her when her father died in 1925. Not that CNN anchor Anderson Cooper is destitute, but perhaps Ms. Vanderbilt will leave him something for a rainy day.

Sting (the musician Gordon Sumner, not the wrestler) indicates that his fortune, which exceeds $300 million is mostly to be given away, with only a small portion to be left to his six children. He was quoted in the Daily Mail as saying, “I certainly don’t want to leave them trust funds that are albatrosses ’round their necks.”

Simon Cowell, a judge on singing competitions, is leaving his $300 million fortune to “help kids and dogs,” as opposed to his son. Other celebrities voicing similar philosophies include actor Jackie Chan, Facebook founder Mark Zuckerberg, and KISS star Gene Simmons.

Bill Gates, a founder of Microsoft, has gone beyond stating that he will not leave his fortune to his children; he has established a formal “Giving Pledge.” As the world’s wealthiest person for much of the past 25 years, Gates could give away many billions in life, donate billions more at death, and still leave billions of dollars to his children. Even 1% of his wealth would be a staggering fortune. So everything is relative. Were he to leave his children $5 million apiece, for example, any of them could face a financial reversal later in life and be unable to provide their own children with the same quality of life or education as they undoubtedly received, or the same opportunities to open businesses or advance new causes.

Industrialist Philanthropy

Many people have earned the title of “world’s wealthiest person” over the past two centuries. John J. Astor, who built a fortune trading furs, opium, and goods internationally, parlayed his fortune into the world’s largest by investing in large swaths of New York City. Notably, he purchased a 70-acre farm that covered the land west of what is now Broadway between 42nd and 46th Streets. He owned what would become the entire theater district.

At his death in 1848, Astor was the wealthiest person in the United States. His $20 million estate was equal to $110 billion in 2006 dollars. Although he left funds to build a library (which later became part of the New York Public Library), Astor left most of his wealth to one of his sons. These monies were spread through the Astor family for many generations and spawned at least one philanthropist, Brooke Astor, whose elderly son was eventually jailed for taking portions of her money. Yet other members of the Astor clan lost their money several generations ago. Several lived in a 43-room mansion on a 420-acre estate, which fell into disrepair. Without long-term trusts, the money has been dissipated.

By contrast, Andrew Carnegie retired in 1901 as the wealthiest person on Earth. He then proceeded to give away his entire fortune. Carnegie ascribed to the “gospel of wealth,” i.e., that it was the moral obligation of the wealthy to give back to society. His wealth helped establish a system of 2,000 free public libraries in America.

The Paradigm of Philanthropy

John D. Rockefeller, founder of Standard Oil, revolutionized—and ruthlessly monopolized—the oil industry. He also became the wealthiest American of all time and established the model for long-lasting family trusts and foundations. He was always charitably inclined and would tithe his earnings to his church, but after meeting Swami Vivekananda, Rockefeller began a long-term campaign to finance public health and educational causes. The family and charitable trusts he established provide the blueprint for how long-term philanthropy and family wealth can be sustained.

Perhaps Bill Gates has become the modern-day version of Swami Vivekananda, insofar as the “Giving Pledge” he has promoted along with Warren Buffet has inspired scores of billionaires to pledge the majority of their wealth to charitable causes.

Of course, the devil is in the details. A pledge is not enforceable. Someone with $10 billion can donate a “majority” of $5.1 billion and still have $4.9 billion to give to family members.

Dissenting Opinions

Just having serious wealth does not make one transcendent. Capitalizing on luck and opportunity is a rare blessing, but boatloads of money don’t arrive along with an instruction manual or vision about how to give it back out to improve the world.

Retired New York hedge-fund mogul Robert W. Wilson was determined to give away his entire fortune in the manner of Carnegie rather than Rockefeller. By 2013, he had given away $600 million. But, in 2010, he referred to the Giving Pledge being promoted by Bill Gates as “practically worthless” because the pledge allows signers to gift their wealth to a family-controlled foundation. Wilson favored direct and immediate gifts rather than long-term entities.

“These foundations become, more often than not, bureaucracy-ridden sluggards,” Wilson emailed Gates. “I’m going to stay far away from your effort.”

Gates responded that signing the pledge could inspire younger donors.

Wilson was not convinced. “You, being a liberal, think you can change people more than I think,” he wrote. “When I talk to young people who seem destined for great success, I tell them to forget about charities and giving. Concentrate on your families and getting rich—which I found very hard work. When people reach 50 and are beginning to slow down is the time to begin engaging them in philanthropy.”

Wilson donated $100 million each to the World Monuments Fund, the Nature Conservancy, the Environmental Defense Fund, and the Wildlife Conservation Society. He was a champion of Catholic schools, even though he was an atheist. “I realised that Catholic schools were closing all over the country, and Bill Gates probably didn’t have enough money to save them,” he told Bloomberg News in 2010, in a final shot at Gates.

Incentive Trusts

For parents who want to protect but not spoil their children, incentive trusts can be designed with appropriate conditions. Those who want their children to continue to build a business or investment empire they have started can set up appropriate arrangements to allow that to happen. Philanthropy can eventually follow; not every wealthy person needs to end their wealth arc by signing a Giving Pledge. Future generations can distribute wealth when the time is right, and the world will still need new benefactors.

Incentive trusts can be customized to the variables in each family. They can reward education and hard work, provide funds for ambitious enterprises, delay the distribution of funds, and set guidelines as incentives. This option is a lot less severe than cutting off funds entirely to build character.

Here are several considerations in setting up the right trust.

  • Goals: A key starting point is to determine what grantors actually want. The discussion may begin with typical goals, such as achieving a college education, but there are often other values and goals that may arise. Grantors may want to discourage drug use or encourage religious activity. Grantors may want to provide funds to assist with athletic, business, or musical endeavors.
  • Coordination with an Estate: Different considerations may apply to a free-standing incentive trust as opposed to a trust designed for some other purpose, which has an incentive clause incorporated within it. It is quite possible to have incentive clauses built into a typical testamentary trust that is, for example, distributing portions of the estate when children reach 18, 21, 25, 30, and other pre-designated ages. Incentive clauses might also fit well in Crummey trusts, college education trusts, and many other trust arrangements.
  • Duration of Trust: If trustees are going to be monitoring and rewarding the behavior of children and grandchildren for an extended period of time, long-term trust management must be provided in a manner that supervises investments effectively, remains impartial, and remains flexible enough to adapt to new circumstances.
  • The Beneficiaries: What are the ages of the intended beneficiaries? Are there multiple beneficiaries? Are there siblings or competitive rivalries involved over a business? An incentive trust that encourages one beneficiary while triggering conflict within the family may not meet the grantor’s goals.
  • Asset Protection: Trusts are extremely useful in protecting assets from the debts and liabilities of beneficiaries. A beneficiary who gets divorced—or who is sued for malpractice in his professional career, or who falls into debt for any number of reasons—can quickly exhaust an inheritance. An incentive trust may be directed to reward various accomplishments, but it can’t lose sight of the consequences of outright distribution of assets.
  • Objective Criteria: Who gets to decide whether a beneficiary has accomplished the goals that qualify for a reward? Are there objective tests and objective fiduciaries?

Three Layers of Incentives

One way of breaking down the various considerations surrounding an incentive trust is to see whether the trust is harmonious on three levels. Focusing first on the component of personal development, the trust should be realistic in terms of the age, wealth, and lifestyle of the beneficiary and how other family members, such as siblings, would be treated.

A second focus is the harmony with the world of business and finance. The pertinent inquiry is whether the incentive trust will have a positive influence in encouraging career accomplishments and success in business and investment endeavors. Having a beneficiary jump through incentive hoops for years may not make sense if the same beneficiary may be a successor in the family business or if cousins, siblings, or other contemporaries of the beneficiary are benefiting from the grantor’s estate without the “strings” that come with an incentive trust.

And, finally, does the trust promote the grantor’s philosophies in some way? Are the provisions in harmony with the grantor’s philanthropic, religious, scientific, or other objectives or beliefs? Has the incentive trust (or related documents) fully articulated those philosophies?

This is critical. Why have an incentive trust if it is not effectuating what the grantor actually wants? And if the trust is to last for a considerable time, how shall the grantor’s personal values be communicated in a manner that will help guide the trust in the future? Along with the terms of the trust document itself, a handwritten letter from the grantor to the trustee can be extremely valuable and meaningful.