Volume 1, Number 4
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Talking About Estate Planning
On successful completion of the bar exam in California, an applicant is admitted to practice as an attorney and counselor-at-law. According to the American Heritage Dictionary, a counselor is a “knowledgeable person who provides advice and guidance.” Much of the advice and guidance that estate planners provide deals with highly technical issues, ranging from structuring marital deduction trusts to explaining the issues involved in choosing between a grantor retained annuity trust and an installment sale to an intentionally defective grantor trust.
Just think of some of the personal issues an estate planner needs to address: How and when should clients discuss their estate plans with their children? How can adult children who are worried about their parents’ lack of estate planning raise the topic? When the client (or the client’s child) comes to an estate planner to discuss a prenuptial agreement, what advice should accompany the agreement? And how generally should the estate planner counsel the client?
John Levy, a pioneer researcher on the effects of money on children and an advisor to wealthy families in Northern California, observes that not only is it common not to share estate plans with children but “when kids work up the courage to ask their parents for specifics, they often get slapped down.” Perhaps the most common reason parents give for why they do not share their estate plan (and their net worth) with their children is that “knowing how much we have and what they are going to inherit will harm them; it will demotivate them.” Levy believes that this belief is built on two underlying concepts:
• “Making a lot of money is the most important thing for my child to do. I don’t want to do anything that interferes with this goal; if my child knows she has a trust fund or that I’m worth a lot of money, she may not work hard or may select a job that doesn’t produce a high income”; and
• “I’m raising a child who lacks both a work ethic and a sense of responsibility.”
The first underlying concept—making a lot of money is the most important thing for my child to do—overlooks the fact that for some people, making a lot of money is far less important than becoming a writer, artist, or teacher or giving money away through philanthropy. The world needs poets as well as successful entrepreneurs. Clients should be reminded that affluence, handled properly, makes it possible to help their children become either.
The second underlying concept—my child lacks both a work ethic and a sense of responsibility—is an unfortunate fact of life that many estate planners see in their day-to-day practices. If clients raise their children with a strong work ethic and a sense of responsibility, the children will want to do the best they can no matter what career path they take or how much is in the trust fund. On the other hand, clients who have raised children who lack both a work ethic and a sense of responsibility probably should think twice before telling them how much they are going to inherit. Doing so will likely do nothing more than increase their sense of entitlement. If clients find themselves in this situation, they have more important issues to worry about than whether to discuss their estate plan with their adult Peter Pan.
Do trust funds really demotivate children? Many of the wealthiest American families have worried about creating too large a trust fund. “The parent who leaves his son enormous wealth,” Andrew Carnegie wrote in an 1891 essay, “generally deadens the talents and energies of the son and tempts him to lead a less useful and less worthy life than he otherwise would.” Warren E. Buffett, the richest man in America until he was unseated by Bill Gates, was quoted in the 1990s as saying that he was in favor of giving his children enough money that they can do anything but not so much they could do nothing. Other families, such as the Waltons, have done exactly the opposite, leaving vast fortunes to their children. It hasn’t seemed to harm some of them, at least from what is reported about them in the news. Sam Walton’s oldest son, S. Robson Walton, worth $20 billion or so (some of which is through trust funds), is a Columbia Law School graduate, an Iron Man tri-athlete, and chairman of the board of the world’s largest retailer. He certainly does not seem unmotivated.
Freud observed that each person has two major needs in life: to be loved by another and to feel competent. If the clients’ children are economically secure and can maintain at least a middle-class lifestyle without working, they need to develop a purpose that helps guide their lives. If they have such a guiding interest, the trust fund is not a disincentive to responsible behavior. Without a guiding interest, problems can and often do occur. As the mother of three adult children who began receiving distributions from their grandfather’s trust at age 18 observed to the authors, a trust fund can enable children to live a “half life,” in which they neither have to work nor have a guiding interest that gives meaning to their lives. Instead, the trust distributions might simply “buffer them from harsh reality.” One of her children found himself in agreement. He commented that he wished he had not received the money at such a young age because it created problems of self-worth. Although society expected him to work, he did not have to, and even though it gave him the room to explore different lifestyles, too much money too early made it “tough to gain a sense of the value of money and easy to burn through it.”
If the clients have concerns about the effect of gifts to their young adult children, whether outright or in trust, they should consider discussing their concerns and their expectations with the children before making the gifts. If the gifts are being made with strings attached, the children should know in advance. Even if there are no express conditions, there may be expectations that should be articulated. Clients may have expectations about how their children should express gratitude for their largesse. Estate planners can help their clients identify and articulate those expectations. If the client is giving her son and his wife $100,000 for the down payment on a house, does she expect to be invited over to the new house for dinner regularly? Does she expect them to buy a house in a certain price range? Does she expect them to look for a house in her area? The client may also harbor expectations about how the children will manage the money and end up judging their every expense.
Daniel M. Stern, C.F.P., and psychiatrist Deborah Nadel, M.D., are a husband and wife consulting team who live and work in Santa Monica, California. They suggest that estate planners should not only help their clients identify their expectations but also help them examine and clarify them before communicating them to their children. Are the strings that are attached reasonable ones? The parents who give their married child money for the down payment on the couple’s first house may expect regular dinner invitations or want the children to buy a house in their neighborhood. They need to consider whether they are using money as a means to control their children rather than fostering their growth. Helping the clients examine their motivations will lead to a healthier interaction between parent and child.
Many estate planners deal with clients who impulsively change their estate plans as a way of rewarding or punishing their children or grandchildren. If they have a fight with a child, their first step is to call the lawyer and change their will to reduce the child’s share of the estate. If a grandchild does something memorable, perhaps the grandchild’s share of the estate is increased. Several months later, after thinking things through, they usually tell their lawyer to revise the will again so that everyone is treated equally. An estate planner working with one of these people should strongly recommend that the client not convene family meetings to announce who is in and who is out of the will this week. Such an approach tends to be highly destructive.
Stern and Nadel recommend that estate planners should try to persuade their clients to step back and look at what they are doing. Clients should not immediately change their estate plans under stressful circumstances. They should take sufficient time to reflect and determine carefully whether the conflict justifies or should result in a change in inheritance rights. Encouraging clients to make reasonable, constructive, and meaningful decisions, not impulsive and punitive ones, will benefit both the clients and their children.
Prenuptial agreements involve other sensitive areas, especially when considerable disparity in wealth exists between the two spouses-to-be. Quite frequently, the parents of the wealthier spouse-to-be raise the subject of a prenuptial agreement. The estate planner may have helped the clients transfer substantial wealth to their child through various estate planning techniques. Now, the clients want to protect their child’s wealth in the event the marriage does not work out. The young couple, on the other hand, are madly in love, cannot imagine that their marriage would ever run into trouble, and may be upset over what they perceive as the clients’ lack of trust. The problem is enhanced if the clients have not talked to their children about the family wealth.
Prenuptial agreements that are imposed by the parents result in a couple who feels coerced. The less wealthy spouse is also likely to conclude that his or her spouse values wealth more than their relationship. Prenuptial agreements cause the least damage to the relationship when both parties participate in the process and agree with the agreement’s provisions. In some instances, resistance to a premarital agreement is so great that abandoning the concept should be recommended to the parents. Instead, a premarital inventory can be prepared to facilitate tracing assets in the event of future marital difficulties.
Estate planning can be a microcosm of a family’s relationships. If clients can talk about these issues in a healthy way, it will nurture healthy family relationships and transmit positive values for generations to come.
Copr. (C) 2005 West, a Thomson business. No claim to orig. U.S. govt. works. This article is reprinted with permission from West, a primary sponsor of the General Practice, Solo and Small Firm Division.