The Psychology of Inheritance

SECURING YOUR LEGACY

by Gary W. Buffone, Ph.D.

"We've put it off long enough. Nancy and I have to sit down and make some tough decisions about what to do with our estate," moaned Chuck Drysdale, a personal injury attorney who had amassed quite a fortune over the course of his long career. "Being a lawyer, you'd think I would have taken care of this years ago. It's facing the gut-wrenching decisions about the kids that makes this so difficult."

Many affluent parents identify with Chuck and Nancy's hesitation. Prosperous parents typically approach estate planning with a mixture of fear, dread and confusion. Not only can they can relate to the hard work and difficult emotional decisions stirred up in the process, they've also heard the horror stories of families destroyed by their wealth. Arthur Vanderbilt tells one such story in Fortune's Children, where he recounts the decadence and decline one of the nation's most conspicuous millionaire families.

You don't have to be a Vanderbilt or a Rockefeller to be anxious about handling the delicate issues of leaving money to your kids. These are some of the most challenging decisions parents will make in their lives. I would rank these decisions as just as important as getting married, having children or choosing a career. Let me offer a word of advice before you get started: get some good advice!

Questions of the Heart: Talking With Your Financial Advisors
Many affluent parents make the mistake of trying to handle all of the aspects of wealth transfer on their own. Refusing to consult professionals, sooner or later, they make foolish mistakes that prove costly, both financially and psychologically, resulting in bitter family legacies. Financial professionals can help you to avoid this heartbreak. With their assistance, you will be able to navigate around the traps that so often hurt those you've spent your life trying to help.

I've personally witnessed, a long parade of horrible, and often preventable, estate planning blunders. I've seen fortunes earned over lifetimes squandered in a few short years: the daughter who magnanimously bestowed her entire inheritance to a cult, the son who overdosed on the cocaine purchased out of his sudden windfall, the sibling who walked away with the money he received to care for his disabled brother. I've also observed nasty legal battles between the "good" kids and their "good for nothing" disinherited sibling. The bigger the fortune involved, the nastier the conflicts.

Whether you're dealing with matters of the head or the heart, begin by seeking the advice of trusted professionals. Your first team of advisors should involve a tax or probate attorney and in most cases your accountant or financial planner. Be sure your attorney and accountant specialize in estate planning, or at least work in a firm that employs such a specialist. You'll likely need to consult with your broker, insurance agent, banker, and an appraiser as well. The size of the team depends largely on the size and complexity of your assets.

Start building your estate planning team by meeting with a financial professional you already know and trust, then ask them to guide you in picking other team members. Set meetings to interview any prospective professional candidates to make sure you're comfortable with their style and competence. Don't be shy. These are some of the most important decisions you'll make in your lifetime. Don't hesitate to ask questions about their experience with issues that concern you, whether they're members of professional associations like the Council on Estate Planners, and how many estate plans they've done over their careers. If the professional won't or can't answer your questions, keep looking.

As a rule of thumb, families with more complex situations - business owners and people with substantial assets - should be prepared to work with a formidable team of professionals. Whatever the eventual make-up of your team, it is absolutely essential that your advisors communicate and coordinate with each other on your various plan components.

Your team of advisors will be particularly helpful in dealing with many of the legal and financial aspects of estate planning. But they're not likely to be able to help much with the more emotional facets of estate planning, the decisions of the heart. These aspects are every bit as important as the income statements and the legal forms. For guidance on these issues, seek the advice of a trusted priest, minister, family counselor, close friend or family member. These individuals can help you to better understand your own feelings, values, and needs throughout the estate planning process. They can also help in sorting out the messy family dynamics, like sibling rivalries or divided loyalties, that are often exacerbated when moneys involved. Try to locate a professional counselor who's also experienced and trained in the issues of family wealth counseling.

Conversely, when it's hardcore financial advice you need, trust your team to give you the straight scoop. Friends and relatives are there for emotional support, not expert advice. That favorite uncle who knows you so well is best qualified to help you understand some of the personal needs and beliefs embedded in major life decisions. But beware the friend or cousin dispensing financial advice. If you do listen, take what they offer with at least a few grains of salt.

The true bottom line for parents is to strike a balance between professional and personal advice when deciding what to do with your estate. Finding the right answers takes time and careful deliberation. Sometimes all the technical and friendly advice in the world isn't enough. If, after digesting the advice of your estate planning "dream team," you still find yourself uncertain about what to do, call for a second opinion.

Let's look at the ways some parents have negotiated this passage.

Golden Giving: Smart Moves in the Transfer of Wealth
Warren and Susan Buffet and Bill and Melinda Gates have one thing in common. No, it's not the fact that they are both multi-billionaires.

They've both announced that they are leaving their substantial estates largely to charity.

Warren Buffet didn't disinherit his children because he disapproved of their career choices or their character. In fact at the time he made this announcement, his daughter was an administrative assistant to the editor of US New and World Report and his son a successful farmer. His desire was to "force them to carve out their own place in the world." He was determined to leave them "enough money so they could do anything, but not so much that they could do nothing."

The Buffets' and the Gates' decisions reflect a broader trend: affluent parents are becoming seriously concerned about the effects of passing on large estates to their offspring. They recognize that flooding their children with oceans of unearned income can drown their psyches.
Andrew Carnegie, the wealthy steel magnate, wrote, "I would as soon leave my son a curse as the almighty dollar." Mr. Carnegie was not alone in his sentiment. This is an idea that has gained increasing momentum over the last several years. Now, more then ever, rich parents are more carefully considering the potential negative fall-out of large gifts, and are becoming more creative in these transfers of wealth.

I interviewed a number of estate attorneys, accountants, and financial planners: specialists who work daily with affluent families, helping them figure out how to best transfer wealth from one generation to the next. Many of these financial professionals told their own sad stories about clients whose wealth had become more of a burden than a blessing. They also shared with me the keys to avoiding this tragedy.

Their number one piece of advice: make sure you have a will. Although most owners of substantial estates make a formal estate plan, 60% of all estates in America transfer without a will or trust. If you fail to make a will before you die, the courts refer to you as having "died intestate," and then step in to make one for you. They will decide how to disburse your property, pick a guardian for your children and select an administrator. Without a formal will, you will lose the chance to have your personal wishes legally protected.

Act now. Look at the lessons you can teach your kids. It's a great opportunity to practice some of what you've learned about financial parenting.

Getting the Estate Planning Ball Rolling
If you haven't yet developed your inheritance plan-and the majority of you probably haven't-there are a few things you must do, preferably in consultation with experts in the field. To begin, write a basic statement of your wishes: who will inherit, what they will receive, when the inheritance will occur, and any special conditions that apply. If you have kids, name an executor who will carry out your instructions. Many people automatically leave everything to their spouse, and ultimately to their kids. But what if your present mate isn't your first, or you have two sets of children? The dynamics of giving become particularly tricky in blended families. Don't trust the courts to dispose of your estate-you know your family better than any judge could.

Besides the directives on distributions of assets, some parents are drafting what are called ethical wills. Ethical wills focus on passing on your most cherished values, with the hope that these gifts of the heart, mind and spirit will be preserved and cherished. Author Barry Baines offers guidance in this process in his book, Ethical Wills: Putting Your Values on Paper.

If your children are not yet 18, you also need to specify a guardian to care for your minor dependents. Your guardian, or trustee, may be a trusted sibling, friend or a professional.

Name a back-up person for both the job of executor and the job of trustee, and make sure they all know where your will is kept. Most people maintain the original in a safe deposit box with a copy in their attorney's office. Make sure the beneficiaries on your brokerage and retirement accounts and insurance policies conform to your will.

You should also draft what's called a standby guardianship proxy for your children's guardian to be kept right next to your will. This document authorizes the guardian to make decisions about your child's health and finances until the court certifies guardianship. The designated trustee, if different than your guardian, should have a standby power of attorney. Additionally all parents, no matter what their age or their kids' ages, should have a fully executed health care proxy as well as a living will or medical directive. These documents instruct the health-care provider whether to take certain steps to prolong your life.

Do your kids a favor. If you lack any of this basic paperwork, put it together now. You don't want to wait until you're incapacitated and can't communicate, or even worse, dead. I've seen firsthand how this kind of procrastination has caused devastating problems for the surviving family members. Look at this as another great opportunity, perhaps your last, to teach your kids some valuable financial and life lessons.

When you have it all together, make sure your attorney has a copy of your will, durable power of attorney, medical directives, funeral and burial instructions and trust documents. Your safe deposit box or home safe should contain deeds and titles, birth certificates, military discharge papers, marriage licenses, home inventory, divorce decrees, stock certificates, Social Security cards, pension plans, insurance policies, wills, medical directives, a list of brokerage and bank accounts, certificates of deposit, seven years of tax returns, credit card accounts, and a list of any other legal documents you've left with your attorney.
If this all sounds like a lot of work, it is. But do it anyway.

Protecting Your Money and Your Kids
While increasing numbers of parents are considering charitable giving, others still wish to leave their assets to their kids, but they want to be sure these gifts bring blessings instead of curses. As the bulk of this book illustrates, their concern over the impact of wealth is well founded.

Naturally, parents consult with advisors every day, searching for strategies that will affect their children and grandchildren in positive ways. What parent hasn't, at some time or another, wanted to influence the behavior of their children? We've talked about using allowances and other consequences to teach children responsible behavior from age three. Even when we get to estate planning, parenting's final frontier, the same principles still apply. As our children get older, the tools we use to influence them just become a bit more sophisticated.

Where once we encouraged responsible behavior through our children's allowances, we will now do the same thing by establishing their trusts, which can function like allowances for big kids. Trusts are simply legal documents that spell out the conditions by which assets will be distributed. They also protect the trustee who is carrying out the donor's wishes from frivolous liability. Trusts are for anyone with young children, older "problem children" or aged parents for whom you wish to provide. Trusts can also keep Uncle Sam's tax bite to a minimum.
Let me mention a few cautions about using trusts. First, don't make the mistake of thinking trusts are only for the super-rich. Trusts are for anyone with after-death assets of more than a few thousand dollars. Don't forget that life insurance proceeds alone can swell a modest nest egg into a sizeable chunk of cash. Second, be realistic. No legal document, no matter how cleverly drafted, can make up for years of lousy child rearing. At best, it may keep the damage from going forward. As you work with your attorney preparing these types of documents, be crystal clear about what you want to accomplish, but don't expect miracles from a mere piece of paper.

Your trust can help you promote certain behaviors, although it is by no means a guarantee. If your intention is to encourage entrepreneurship, state this clearly. If your want your children to complete their college degree as a condition of inheritance, say so.
It's better to figure out these objectives before you start the meter with your lawyer. Also, make sure that the trustee you choose to manage the trust, be it a family member, friend, or professional, is strong, firm, fair and up to the job. It's also a good idea to name a back-up trustee in the event your first pick becomes unable, or unwilling, to serve.

Trust Funds for the Good, the Bad and the Ugly
What behaviors do most parents want to address in their children's trusts?

The Good: At the top of the list for most of the parents I've dealt with is the pursuit of an education. Most of these parents set up trusts to reimburse the child for all educational expenses, from private secondary school straight through to their post-graduate or professional degrees. Few would argue against the value of a good education.

Many parents seek to encourage a positive work ethic by their gifts. This goal is often attempted by the by the use of incentive trusts, which reward hard work and accomplishment-or in other words, prompt late-bloomers to "get a life." Incentive trusts reward beneficiaries when they accomplish certain specific objectively measurable criteria. For example, children may receive a specified amount of money when they graduate from college, join the family business, earn a graduate degree, overcome a drug or alcohol problem or give something back to the community through charitable volunteer work.
Many parents also wish to encourage altruism. I've seen this more in established wealth, where the heads of the family want to communicate the value of service to their offspring. In these cases the donors provide special supplements for those children who become nurses, teachers, college professors, artists, social workers and the like.

A common kin to altruism is philanthropy. Many well-off parents with philanthropic tendencies feel the "noblesse oblige," the responsibility of the wealthy to create good. They want to see these obligations carried on into the next generations. They seek to accomplish this goal by involving their children early and consistently in philanthropic activities such as family foundations, donor advised funds, charitable trusts and the like.
These parents gently guide the younger generation's experience in their work as trustees, general partners or asset managers. In this way, kids learn the value of stewardship while being exposed to the practical process of building and preserving assets for future generations. Some families make this a tradition, and pass it down from one generation to the next.

The Bad: On the other side of the coin, estate planning sometimes forces parents to take a stand against certain problematic behaviors in their adult kids. Interestingly, one of the biggest problems affluent parents try to discourage is reckless consumption. This is ironic, since many of these same parents are themselves prodigious consumers, and have often promoted that very behavior in their children. Sometimes these anti-squander plans will hold up an immature child's inheritance until the risk of dissipation is gone-or at least minimized. If the situation justifies delay until your children are in their forties, fifties or sixties, then so be it. By delaying allocation until then, you have protected the family money from your child and for your child.

Many parents also want to discourage sloth and laziness. Typically, their kids don't really intend to join the work-a-day world and would rather subsist on whatever they can wheedle out of their parents, grandparents, and trustees. These loafers are usually good candidates for incentive trusts.

One father I counseled set up an incentive trust to support his son's working. In this "earn a dollar, get a dollar" arrangement the trustee was authorized to pay the exact amount annually equal to the sons "wages, tips, salaries as indicated on line seven of his U.S. tax return for the previous year." Another set of parents established a trust that distributed the sum of $10,000 on the 15th of each month only if their son was gainfully employed during the whole of the preceding month. Gainful employment was verified when the child presented a valid pay stub that indicated he had been paid for at least 80 hours the prior month. I've seen many variations on this same theme.

The Ugly: Just as the wild spender and chronic loafer present challenges to parents, so also does the child or grandchild with obvious self-destructive behavior. This most often takes the form of alcohol or drug abuse, criminal behavior, or frank mental illness. In these situations the planning and drafting of economic incentives is focused primarily on discouraging destructive behavior while supporting more positive alternative choices. Parents want to avoid, at all costs, "enabling" their child's destruction. Incentive trusts were designed for just this type of dilemma.

I often advise parents to align their influence with their deepest concerns. In these scenarios the donor parent needs to replace handouts, often motivated by guilt, pity or fear, with well-thought-out standards for distributions from the trust. The goal is to remove subjective factors and feelings that work against the best interest of the child. Similarly, the parent, trustee and donor need to eliminate sympathy and manipulation as a basis for discretionary distributions.

Incentive trusts aren't a panacea for such problems, but they have their advantages. They can eliminate the emotional blackmail beneficiaries often inflict upon their parents and trustees. By introducing objectivity, the incentive trust creates a clear contract and restores the adult child's dignity. Now they can decide for themselves, of their own free will, whether they want to go along with their parent's wishes or not.

Again I think it's important for parents to be reasonable in their goals. I discourage parents from using incentive trusts to attempt to control a child's choice of spouse, faith, occupation or school. Wisdom dictates that we not try to coerce compliance when compliance is unlikely.
Incentive trusts come with a few inherent disadvantages. By design, they aren't as flexible as discretionary trusts. Additionally, incentive trusts often require some measurement on the part of the trustee. Whether it's checking pay stubs, drug tests, or transcripts, somebody has to monitor behavior and make decisions about consequences.

Naturally, some kids resent having to report in. They may decide they'd rather forgo the economic benefits than subject themselves to a monthly urinalysis. That's their prerogative. But what if they try to cheat? Your trustee could be in for endless headaches, trying to determine whether the lab tests were altered, or whether the beneficiary really worked the hours. It's not possible to plan for every contingency.

In my consultation with families I've seen incentive trusts work best in truly desperate situations-usually as a last resort. If a parent is preparing to disinherit a child for his dysfunctional behavior, an incentive trust gives the child one last opportunity to change in order to avoid disinheritance.

Discretionary trusts are usually preferable to incentive trusts because they afford trustees greater flexibility in their decisions. However, you do need to spell out clear guidelines as to the exercise of discretion. As a rule of thumb, the healthier the family, the better chance they can afford the greater flexibility of a discretionary trust. In these more flexible arrangements, some parents let their children have access to their money for specific purposes such as education, buying a house, or to supplement healthcare costs. Other parents dole out inheritances in installments, say one-third at age 25, another third at 30, and the remainder at 35.

Incentive and discretionary trusts are just a few examples of the dozens of wealth transfer options open to you. There are a myriad of tricky family situations-disabled children, multiple marriages, surviving spouses, taxes and so forth-that are well beyond the scope of this book. Fortunately there are some excellent resources available. Do some research, ask what your friends are doing, talk to an attorney, and then consider which legal vehicle best suits your particular family circumstances.
Once you've made your decision and put it all down on paper, you're ready for the next big hurdle: what to tell the kids.

Avoiding Inheritance Battles: Clearly Communicating What's What
As a parent, you know how important it is to talk to your children about sex, drugs, alcohol and other uncomfortable topics. But as we age, we seem to become more reluctant to talk about such subjects as money and the distribution of our belongings. As uncomfortable as it may be, these discussions are some of the most important talks we'll ever have with our children.

We've talked about the importance of openly discussing finances with children from an early age. Kids feel more secure when their parents encourage questions about money, and answer them frankly. Unfortunately, many parents keep their children in the dark about their inheritances. Some do it to control their behavior; more parents withhold this information trying to protect them from what they believe is a burdensome responsibility. Overly protective, they subscribe to the "what they don't know won't hurt them" school or parenting.

The truth is, what they don't know can hurt them.

Kids need to know what they can expect, even if it's bad news. If you don't discuss the stipulations of the wills or trusts before your death, your inheritors will be left with the difficult task of interpreting your meaning and intent on their own. This will only add confusion to the grief and loss they're already experiencing. You can only save them this pain by openly discussing your estate plans with your heirs. If you're favoring one beneficiary over another, it's important that they know why. With time and luck, they will understand and accept your decisions. In some instances, these confrontations trigger healthy change. Try to resolve any conflicts and differences, and make peace before it's too late.

I believe a parent's job, and often their last great gift, as tough as it may be, is to make decisions about the distribution of their assets and communicate those decisions to their loved ones.

Tips on Holding The Family Money Meeting
Take the bull by the horns. Arrange a meeting with your family to talk about your estate. Be sure to have a complete understanding of your net worth. If you haven't totted up everything you own, the chore is probably overdue. Once you fully understand your estate, sit down with your kids and cover all of the relevant financial information at one time. If you expect things to be particularly difficult or unpleasant, think about bringing in an objective third party to serve as a mediator. You could invite your attorney or financial professional, or if you're fearful of your child's reaction, you may wish to bring in a family psychologist.

Sometimes an experienced family wealth counselor can help you present this type of delicate information, and can head off problems before they develop. Even in extremely sticky situations, a counselor can minimize the squabbles that often arise. The key is to anticipate the conflict. Get this help before you have the actual discussion of your estate. Once you've announced your estate, the damage is done. It then becomes impossible to get the proverbial horse back into the barn.

Before you hold your meeting, decide precisely what it is you wish to accomplish. Be sure you and your spouse are on the same page. If you disagree on key points, iron this out between yourselves before you involve the children or make any public statements. Create a list of the people who should be there. Choose what you wish to say, and think of how best to say it. You may even want to rehearse your talk beforehand. Anticipate problems. Create a fallback plan. Do whatever you need to do to prepare yourself emotionally for what could happen. Be prepared for the worst, but hope for the best.

Go over as much detail as you think is necessary. We've all heard tales of heirs raiding the parent's home after the funeral. It's often the smallest items, particularly if they hold strong sentimental value, that cause the longest-lasting emotional reaction and potential damage.

When it comes to dividing up the antiques, silver, jewelry, and photos, people never forget it if they didn't get what they thought they had coming to them. If you've promised a certain item to a certain child, keep your promise.

Most parents prefer to divide their assets equally among their kids for a number of reasons. They don't want to show favoritism; they love them equally; or they don't want there to be bad blood among the kids once they're gone. The Gediman study noted that, "you can treat your children unequally while you're alive, but after you die it becomes 'official,' a kind of immortal black mark."
"I don't want to be cussed from my grave," one client told me.

If you do decide to make unequal distributions, such as with a handicapped child, think it through and discuss it with your advisors.

Clarify all of these decisions and document them in your will or living trust. If you want to keep this information about your possessions private, put it in a side letter. Some parents tag or photograph possessions to keep track of them. However you go about this process, just be sure you've talked openly about the division of property.

Head off the obvious problems wherever possible. If you can visualize your kids wrestling over the Jaguar keys in the driveway of the funeral home, sell it and decide how to split the proceeds.

If you care about maintaining family harmony, leave your money and property to your kids equally, regardless of their economic circumstances. To fail to do so can leave deep emotional wounds that never heal. I've heard siblings complain bitterly about their favored sister getting an extra piece of jewelry twenty years after their mother's death. This kind of perceived "parental favoritism" can lead to family breakups, lawsuits, and in some cases, violence. This becomes particularly dicey when there are children from a second marriage involved.
This equal economic treatment should have begun well before your kids receive their inheritance. It should apply to all the gifts you give to your kids over their lifetime. If you paid for one son's college, or gave him a down payment for a first home, then do something equivalent for the other kids. If you leave the family business to our oldest, work out something comparable for the siblings

Of course, use common sense. You don't have to leave your unemployed alcoholic a lump of cash just because you gave his physician sister a medical school education. Don't reward failure and punish success. Tailor your gifts carefully, in the best interest of each child.

Don't get stuck trying to make sure everyone's perfectly happy. Lay it out for them from the beginning: "It may not be what each of you thinks is fair, but it's the way I feel most comfortable dealing with the situation." If they don't like it, too bad. Tell your kids, "We love you and respect the choices you're making in your life, but it's our money, we made it, and this is what we've decided to do with it. At some point you will receive something from us but it won't be enough to live on easy street so you'll have to continue to work hard and build your own fortune."

Whatever you have to tell them, I'd advise parents to serve it up straight. Be frank with your kids about what they stand to inherit. Gather your children and tell them, "The fact that we have $3 million doesn't mean that you can quit your jobs tomorrow. There will be taxes, we have some charities we're giving to, and the rest will be split and placed in trusts to provide for certain needs. So don't sit around and wait for the big check. Go on with your lives."

If parents don't have that kind of dialogue, some kids hang out waiting for the big jackpot. It's a parental duty to deal directly with these issues. I think kids are ready for these talks at the youngest in their mid-teens-and at the latest, when they hit college age.

This kind of open, direct communication becomes especially important when one parent becomes ill, incapacitated, or may need to change their circumstances, such as when one parent is dying or requires placement in a long-term care facility. In such unfortunate circumstances, it's nearly impossible to pull this off without considerable hardship for all involved.
As I've said, don't wait until then. Do it now.

Excerpted from Choking on the Silver Spoon by Gary W. Buffone, Ph.D. Copyright © 2003 by Gary Buffone. Excerpted by arrangement with Gary W. Buffone, Ph.D. All rights reserved. $19.95. Available in local bookstores or call 800-247-6553 or click here.

 

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