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Protecing Wealth After Transfer
by Kenneth L. Baker and Charles C. Keller
How wealthy should we make our children? We are increasingly encountering a worrisome phenomena among our clients who prepare wills or do estate planning. How do you protect the wealth you sacrificed to accumulate from wasteful dissipation by the next generation?
Let us illustrate. An elderly couple has seen their life savings balloon to $1.2 million. They lived through the depression and learned to live economically and save what they could. A lively stock market and reinvested earnings over years caused those savings to grow. Unfortunately, their children (or other relatives) were products of the "Now Generation." The couple worries their gifts will be spent quickly on autos, homes, vacations, etc., and nothing will remain for education, health care, retirement and savings for the next generation.
The couple also worries about divorces, bankruptcies, fraudulent scams, special needs for disabled or mentally unstable children, drug and alcohol issues etc. They recognize their children have little experience in investing and managing real wealth. These issues raise deep concerns. One other pitfall deserves mention. Receiving unaccustomed wealth (lottery winnings, bequests, etc.) has a demoralizing effect on many people. Some quit working or retire early, only to find boredom or family discord. Others are inundated by family, friends or causes for money.
Some people feel their only obligation to children is an education and secure upbringing. The rest of their estate will be spent, or given to charity for long-term good. But most people want to leave something of value to children. As relatives become more distant or remote, the feeling of obligation diminishes.
We have advised clients a number of courses are available to them, either alone or in combination, to maximize beneficial use and minimize the risk of unearned wealth transfer.
- Education - While children are at home, training in saving and value-spending pays lifelong dividends. If they are adults and scattered, it may not be too late to encourage them to develop a financial support team -- lawyer, accountant and financial planner.
- Testing the waters - If in doubt, periodic gifts of up to the gift tax exempt limit (now $12,000) will allow a chance to observe how they will respond to gifted wealth.
- Gifts to your university, church, community foundation, or favorite charity can be tailored to guarantee long term and constructive use of your wealth. This technique can often be combined with other steps providing interim education or other benefits, for example, to loved ones.
- Leaving money to relatives in trusts provides a device to spread out estate gifts over a period of time. A trustee, be it individual or corporate, can hold the amount to be passed on to the children or other beneficiaries. Income and/or principal can be available to the beneficiaries as the client directs in the trust document. The Trustees in addition to following the instructions of the client as to distribution will be responsible to invest and manage the funds. The trust can be designed to minimize the risk posed by creditors, divorce, government claims or other dangers and to address special needs. Income and even principal (as needed) can be provided to assure education for grandchildren, or healthcare or retirement aid. Payment of the balance may be paid in fractions at age 22, 25 and 30 or any age.
- Trust funds can also be used to provide incentives and rewards for progress and accomplishments, such as college completion, graduate degrees, workplace promotions, etc. Payout from the trust corpus can be planned at significant milestones in the donee's life, or to match or augment income from useful occupations with limited compensation, such as social work, counseling, healthcare, religious vocation, etc. Distribution of a set amount from a trust to a beneficiary may even be scheduled on the birth of a child, or each child. Final distribution of the trust fund might be conditioned on the beneficiary achieving a continuous 3-year period of gainful employment and earnings at a specified level, or a predetermined net worth.
The risks of wealth transfer to unprepared or troubled beneficiaries are indeed real. We counsel clients regularly to plan carefully. Every situation is different and balancing risks against benefits and the emotions of familial love with considered judgment offer a real challenge to even the best intentioned of us.
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