Some New Thoughts on Old Money

I think most of you would agree that the foundation for America’s best possible future can only be found in the bedrock of an enduring political system based on the rule of law, economic and civil liberties, a strong work ethic, and a superb educational system.  Although these principles are embedded in our nation’s DNA, many people believe that they are all in some danger of being lost.  They fear for the future of our children and grandchildren.  But, aside from political activism – an avocation most of us have neither the time nor temperament to attempt—what are any of us going to do about it?

The 2014 Edition U.S. Trust Insights on Wealth and Worth Report (TIWW) says that sixty percent of wealthy Americans believe it’s important to leave a financial legacy for the next generation.  For the very reasons suggested directly above, I believe that leaving a financial legacy has become increasingly important for virtually all Americans, not just the valde pecuniosus.  However, leaving such a legacy entails the further responsibility of providing an appropriate legal and philosophical framework to guide the future beneficiaries of our life’s work.

In the first place, I don’t want my heirs, nor do you want yours, squandering their inheritances, or otherwise doing themselves more harm than good with money they’re not prepared to manage wisely.

Secondly, I want our heirs to be prepared for any future contingency with a solid education, strong moral values, and the financial wherewithal to make the most of both their genetic endowments and their own productive interests.

Thirdly, you and I are “off-balance-sheet” liabilities of the federal government. ( Collectively—Social Security, Medicare, etc. to the tune of nearly $100 trillion.) Forgive me if I seem self-righteous, but that’s a moral issue, and our generation is on the wrong side of it. The least we can do, I say, is leave to future generations assets at least equivalent to that $10o trillion debt that we’ve created for them. Our generation—the wealthiest in human history—ought to be able to leave behind something other than a “train wreck”. We can, and should, bequeath our wealth wisely—preserving capital for investment by future generations—in the same way, and for the same reasons, that many farm families improve and bequeath their land (and values) to their offspring.

I’ll have much more to say about this in my forthcoming book, Old Money for the Middle Class Family, but for now, food for thought:

What is Equal in the Context of Family Inheritance?

One of the most challenging aspects of planning an inheritance is that families and family life are increasingly complex.  American families come in many forms, shapes, and sizes, but they mostly tend to fall into just a few broad categories. According to the Key Findings Report in the 2014 TIWW, those categories are:

Single person: About one-fifth of wealthy participants in a recent survey had never married or had not remarried after being divorced, separated, or widowed. A small percentage of those are cohabitating.

Traditional marriage: About three-fourths of affluent Americans are in their first marriage and two-thirds of those couples have children.

Blended marriage: The Silent Generation (twenty-four percent) and Baby Boomers (seventeen percent) are more likely than younger generations to have blended families, meaning they have remarried after being widowed or divorced, and they may have step-children.

Multi-generational household: Generation X (eleven percent) and Millennials (thirty-two percent) are more likely to live in multi-generational households, meaning they either live with siblings, parents, or grandparents; or they have adult children, parents, or grandparents living with them.

So, in the context of modern family legacy planning, what seems like the simplest choice – dividing assets equally among all of the children – can be problematic.  There are often personal histories and circumstances that cloud the definition of equality.  And, when you combine subjective judgments about fairness with the complexities of modern American family structure, legacy issues can become emotional dynamite.

Minimizing Inheritance Disputes

Determining an equitable division of assets is rarely easy, not even for single parents or couples in traditional families. One child may suffer a disability, have an addiction problem, or manage the family business.  Another may be less successful than his siblings, or have made lifestyle choices that the parents are uncomfortable supporting. If your family circumstances necessitate an uneven distribution of assets, there are many techniques you might use to minimize conflicts that may erupt among the children or other heirs. These could include:

Acting discretely. If you’ve decided an unequal division of assets is necessary, and know that one or more children will not be happy with your decision, consider establishing a discreet trust for each child. The advantages of discreet trusts are that they can be funded unequally and each one can have completely different distribution triggers and other conditions or terms of control. In addition, each child will be apprised only of the provisions of her own trust.  Be sure that the assets that will fund each trust are appropriately titled.

Establishing a shared trust. If you distribute the majority, but not all, of your estate equally among heirs, the remainder (perhaps one-fifth or one-quarter of the assets) can fund a shared trust to be used when an heir has an emergency need. The trust should have an objective third-party trustee who will be responsible for distributing funds fairly and according to the terms of the trust.  We have seen family members acting as trustees abuse their powers in this type of trust.

Choosing your executor carefully. Some say it’s best to follow family hierarchy and make your oldest child your executor or trustee. Others say it’s best to choose a family member who is organized, hardworking, honest, and a good communicator. Still others will suggest you appoint a committee of executors, because of the checks and balances a group provides.  I think that this decision is unique to each family, but in my own case, one of our children is our trustee and executrix, but we have named each of the others (in birth order) as her successors, if she is unable or unwilling to serve.  All of our children seem to be comfortable with our decision; so far, anyway.  No matter what you decide, my advice is to let all of your children know what your decision is while you’re still living and able to explain it.  That may save a lot of grief for your trustee or executor when you’re no longer on the scene.

Explaining your thinking. The difference between family harmony and an on-going feud may ultimately be determined by how clearly you communicate with your family. The Wall Street Journal suggests, “Whenever possible, try to be open about your inheritance plan while you are still alive, so that every family member understands it, minimizing the chances for suspicions to arise later. If you don’t want to have this difficult conversation while you are alive, you can write a letter or make a video elaborating the reasons and thought process behind your plan, making it clear that these decisions are yours alone.”  I think that’s good advice, but that doesn’t mean that you need to disclose to your heirs how much you have today.  In fact, I would not and have not.

Also, Linda and I tried to personalize our trust documents, telling our children that we truly love them, one and all, and detailing our purposes and intentions using our own words.  Your legacy documents do not have to be legal boilerplate (Legalzoom is not a friend who knows and understands you), and I think your documents should reflect your values and your personality, not just your wealth.  Your kids love you, too, you know; and it won’t hurt them at all to be reminded of you through the stories you choose to share within your trust documents.

It’s often said that there are no right or wrong answers when it comes to inheritance.  That idea just makes me crazy!  Of course there are right or wrong answers! The issue is:  Are they answers that are right or wrong for you and your family.  You should make your decisions based on your first-hand knowledge of your family’s internal dynamics and on the individual needs and values of your heirs. Indeed, The American Association of Individual Investors Journal (AAII Journal) suggests taking “a multi-faceted approach that combines psychology, good lawyering, a lot of self-awareness, and a good dose of common sense.”

If you haven’t done so recently, I invite you to visit with us about your legacy plans, before you embark on a rewriting of your will, trusts, and other estate planning documents.  With twenty-three years of professional experience, having advised hundreds of families on these issues, and more importantly, perhaps – I sincerely believe that I can help you frame your questions concisely and effectively, so that you and your attorney can create documents that really work for what you want.  To be perfectly clear, though, I am not an attorney nor a CPA, so I am not offering legal or tax advice; I am offering the wisdom and compassion that can only come from a love of the game, and a sincere desire to help your family prosper for many generations to come.  mh

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This information is not intended to be a substitute for specific individualized legal or tax advice.   We strongly suggest that before you make any final decisions regarding your estate plan, that you discuss your specific situation with qualified legal and tax advisors.

Source:  Much of this essay was prepared from material provided by, and with permission from, Peak Advisor Alliance, Omaha, Nebraska.