Inherited wealth comes with many
advantages, but it also has disadvantages. Depending upon which source you
consider, between $10 trillion and $30 trillion will pass by gift or
inheritance by the year 2030. More of our clients, be they older with adult
children or younger with small children, are becoming increasingly concerned
that passing large sums of money may not be in the best interests of their families.
Over the last 30 years, the
focus in estate planning has been upon reducing gift, estate or
generation-skipping transfer taxes. The intent was to minimize the amount of a
client's estate that was "shared" with the IRS. However, with the
increased exemption creating a decreased focus on the tax implications of inheritances,
more of our clients now focus on how distributions to their children may affect
their lives. They worry about children losing the motivation to accomplish
something of worth. They also worry about the significant complexity added to
their children's lives when they acquire wealth and suddenly have a variety of
relatives and strangers trying to tell them what to do with those newfound
assets. Some clients even worry about their children engaging in addictive or
self-destructive behavior or even a spendthrift lifestyle that causes them to
spend their money too quickly.
I believe it was Warren
Buffett who said, "You should leave your children with enough money so
that they can do anything, but not so much they can do nothing." With similar thoughts in mind, clients are
starting to look at incentive clauses to discourage unproductive behavior and
encourage worthwhile pursuits. Access to the trust funds may now be subject to
incentive clauses, such as
•
Tying distributions to a
demonstration of some type of personal accomplishment, such as receiving
educational degrees (but making sure you avoid creating "professional
student", contribution to charitable pursuits or distributions to equal
income earned.
•
Requiring financial
training to be able to manage wealth responsibly.
•
Matching earned income, at
least up to a certain point
•
Providing funds for
"extended family vacations" to encourage continuation of family
relationships after the death of parents
•
Requiring periodic testing
to provide knowledge of any substance abuse issues and limitations of
distributions therefore
•
Matching contributions to
retirement savings to encourage a beneficiary to save for retirement
•
Requiring a prenuptial
agreement in order to protect the "family assets" from being lost to
an ex-spouse.
Each of these incentive
clauses, and many others, can have many benefits, but clients should also
consider the drawbacks. Matching earned income with the trust distribution may
work against those beneficiaries who have chosen public service, a religious
vocation or chosen to be stay-at-home parents. Incentive clauses can be
excellent ways to protect and pass on family assets, but should be considered
carefully with assistance from qualified professionals.
When discussing such
provisions with clients we take the position that it is not our place to tell
the clients what action to take. Instead, we serve as an advisor, informing
them of the potential consequences of their actions and allowing them to make
the decision that they feel is best for their loved ones. This method allows
the clients to achieve their goals while minimizing the chance that their
intentions will be subverted after they are gone.
