What is estate planning? Many people would say it is a plan to transfer assets from an owner to a beneficiary, usually family members or descendants. In the family context, parents usually want their assets to take care of each other, and then upon their death, to ensure care for their children. Is it that simple? Is the only thing we want to bequeath to our children is our “stuff,” or do we want to pass on something more? Do we simply want to pass on our wealth, or do we want to pass on our wealth with wisdom?
In the modern world, trusts have become the vehicle for transferring wealth to future generations. There are many reasons people set up such trusts, most commonly to avoid the cost of probate court and to retain control over what happens to their wealth. In fact, trusts can be employed to control wealth down through future generations. However, there is more to protect than investment accounts and real estate. Quite often, the settlor of a trust seeks to protect, if not enhance, the legacy the settlor spent a lifetime building.
For example, it has been said that passing on family values and life lessons to descendants and others is considered the most important legacy by more than 75% of baby boomers and their parents. Cindy Perman, “What’s More Important to Baby Boomers Than Money,” CNBC (Feb. 8, 2012), www.cnbc.com/id/46313097; see generally, Al W. King III, “Unique and Creative Trust Planning in Uncertain Times” Western Dakota Estate Planning Council (May 2017). However, our experience here at the Private Trust Consortium (“PTC”) has shown that many beneficiaries might not even know the names of their grandparents – let alone their occupation or if they created wealth, the story behind the sacrifices endured, or what obstacles had to be overcome to create that wealth.
It is commonly accepted that many family fortunes and businesses don’t last beyond three generations from the person who built such wealth. This axiom may be expressed slightly differently across the globe – in America, shirtsleeves to shirtsleeves in three generations; Great Britain– clogs to clogs in three generations; China – sandals to sandals in three generations; Japan – the third generation ruins the house; and Italy – from stables to stars to stables. It seems no matter where you are, one generation creates the wealth, the next generation manages the wealth, and the third generation spends the wealth. According to the Conway Center for Family Business approximately 30% of all family-owned businesses make the transition into the second generation. However, only 12% will still be viable into the third generation, and only 3% of all family businesses are operating at the fourth-generation level and beyond.
Case in point is the famous Vanderbilt family. Cornelius, the patriarch or “robber baron” of the Vanderbilts, built a fortune from railroad and shipping interests during the mid-1800s. Adjusted for the size of the economy, he was the second richest American ever, worth over $200 billion — well above Bill Gates. Yet his children — and especially, his grandchildren — lived lavishly, building huge mansions in New York City, Newport, R.I., and elsewhere, and did little to preserve the fortune. By the 1970s, the family held a reunion with 120 members attending, and there wasn’t a millionaire among them, wrote Michael Klepper and Robert Gunther in their book, “The Wealthy 100.”
Thus, it’s easy to understand why one in three baby boomers would rather transfer their money to charity instead of their families and 61% of wealthy parents aren’t confident that their children are well prepared to handle a financial inheritance. Al W. King III, “Preserving Family Values by Encouraging Social and Fiscal Responsibility with Modern Trust Structures,” Allied Professionals, Orange County, Calif. (September 2017). Additionally, only 33% of wealthy parents have disclosed their wealth to their children. Ibid. 50% plan to do this when the children are 25 to 34 years old and t25% when the children are at least 40 years old. Ibid. 33% of baby boomers believe that their children didn’t inherit their family’s commitment to giving. Ibid.
You might think this is a problem for only the extremely wealthy. However, sudden wealth of any amount can be a tremendous burden upon beneficiaries if they are not ready to handle and manage that bequest. Is your sole focus to just distribute your wealth to your children, or would you like to distribute your wealth with wisdom and preserve your legacy? In the trust context, this is where the knowledge and education resources at your disposal with a PTC membership can provide settlors and trustees with the guidance needed to overcome the challenges posed by the risk factors commonly encountered in the world of estate planning.
The next article will cover the basics of what a good estate plan (in the trust context) and what it should contain to provide protection for you and your family. More importantly, this series will discuss the various methods of distributions that can be made to trust beneficiaries. We will discuss not only the most common ways people leave their money to their heirs, but also uncommon ways that are designed to reflect your family’s values and virtues. Notice the fine distinction between values and virtues. Values can change from generation to generation, but virtues are timeless. For example, education is a value, while honesty is a virtue.
In our next article, we will explain each method of estate planning in detail, with special emphasis upon passing values and virtues to successive generations, the inherent tax implications of each method, and the practical administration of each distribution method. Our hope is that this series will inspire you to join The Private Trust Consortium (PTC) to complete your transformation into an educated consumer of estate planning services. Key to such a transformation is acquiring the knowledge and practical “know how” that a PTC membership can provide you with. Stay tuned!!