Educating Through The Estate Plan: Because Money Doesnt Come With Instructions

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EDUCATING THROUGH THE ESTATE PLAN: BECAUSE MONEY DOESN’T COME WITH

INSTRUCTIONS

Presented at the 52nd Annual IICLE Estate Planning Short Courseby

Lauren J. Wolven, J.D.Horwood Marcus & Berk Chtd.

180 N. LaSalle St., Suite 3700Chicago, IL 60606

(312) [email protected]

Prepared byLauren J. Wolven, J.D.

and G. Scott Clemons, CFA

Brown Brothers Harriman & [email protected]

To comply with certain Treasury regulations, we state that (i) this material is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

These seminar materials are intended to provide the reader with guidance in estate planning. The materials do not constitute, and should not be treated as, legal advice regarding the use of any particular estate planning technique or the tax consequences associated with any such technique. Although every effort has been made to assure the accuracy of these materials, the authors, Horwood Marcus & Berk Chtd., and Brown Brothers Harriman & Co. do not assume responsibility for any individual’s reliance on these materials. The reader should independently verify all statements made in the materials before applying them to a particular fact situation, and should independently determine both the tax and nontax consequences of using any particular estate planning technique before recommending or implementing that technique.

© 2009 Lauren J. Wolven and G. Scott Clemons. All rights reserved. Portions of this outline are taken from an article by the authors scheduled to appear in the June 2009 issue of Estate Planning, a Thomson Reuters publication.

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I. INTRODUCTION

Having a proper perspective on money probably is one of the most important tools to living

a happy and successful life. Conveying this important value is crucial, yet individuals often

spend little time contemplating how to convey money skills to their children. Understanding

how to obtain, save, spend, donate and invest, the five key elements of an education in

money, is important to families with substantial wealth as well as those of modest means.

II. A SHORT HISTORY OF MULTI-GENERATIONAL WEALTH

Unfortunately, there is no one answer or simple way to educate the next generation, and the

preoccupation with making sure one’s heirs are capable of handling the family fortune is not

a modern phenomenon. It was a topic of the writings of Benjamin Franklin as early as 1758,

though the fact that the challenges associated with transitioning wealth to the next

generation predate the founding of the country is not necessarily comforting.

Benjamin Franklin printed a short treatise in 1758 entitled The Way to Wealth. It is the first

American book on personal finance, and is the source of such famous aphorisms as “early to

bed, and early to rise, makes a man healthy, wealthy and wise,” and “keep the shop, and thy

shop will keep thee.” Benjamin Franklin himself translated these precepts into a book for

children entitled “The Art of Making Money Plenty”, believing that it was never too early to

begin learning the concepts of financial management.

We still live in a world where the failure of wealth transfer gives rise to clichés such as

“shirtsleeves to shirtsleeves in three generations.” The first generation creates the wealth,

the second generation (under the watchful eye of the first) preserves it, and the third knows

no better and spends it. The fourth has to start all over again, from shirtsleeves to

shirtsleeves. And lest we slip into the assumption that the wealth transfer predicament is

particularly an Anglo-Saxon affliction, let us consider that many cultures have parallel

metaphors. The Dutch go “from clogs to clogs,” the Chinese “from rice paddy to rice

paddy,” and the Japanese “from kimono to kimono.” This cycle of wealth creation and

dissipation seems to be a human universal across cultures and throughout time.

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III. DEFINING WHAT IT MEANS TO BE “GOOD WITH MONEY”

We all want our children to be good with money. But what does it mean to be “good with

money?” This concept is most easily identifiable by what it is not. Someone who spends

everything they inherit and winds up reliant on welfare clearly is not good with money – that

is easy to see, and there are plenty of examples of that type of behavior. Yet, being good

with money is far more multifaceted: It involves the ability obtain money, save it, invest it,

spend it, and give it away. It is an exercise in balance.

The history of successful wealth transfer across generations is sobering. Roy Williams of

The Williams Group carried out a 25-year study and analysis of wealth transitions in

families, and on the basis of interviewing 3,250 wealthy families concluded that 70% of

wealth transitions fail, where failure was defined as involuntary loss of control of the assets,

either to taxes, economic downturns, economic losses, litigation or any other financial

reversal. Only 3% of the failures were due to legal or tax advice, and the balance resulted

from causes within the family itself.

There is an entire genre of literature devoted to the difficulties associated with family wealth

transfer. Unfortunately, the families themselves are not always good at hitting their own

targets. They often miss the mark when it comes to building trust and healthy dynamics

within the family group. In addition to the extensive written guidance, there also are

educational toy lines devoted to the concept of providing a “money education” to children.

The fact is, however, that there is no precise answer to the question “How do I teach my

children about money and values?” What we can do, however, is look at successes and

failures and draw guidance to help set the younger generations on the right path.

Hetty Green is a classic example of what it looks like when a child does not learn the

exercise in balance that is required to have a successful relationship with money. Hetty

Green was born in New Bedford, Massachusetts in 1834, the daughter and granddaughter of

prosperous whalers. Upon the death of her father in 1864, she inherited the vast sum of $7.5

million while still a single woman. She married in 1867 and made her husband (who had

wealth of his own) sign what amounts to an early pre-nuptial agreement. Preserving the

family wealth was important to Hetty. She managed her own finances carefully, investing in

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Civil War bonds when no one else would, and then later in the debt securities of railroads.

She more than held her own in a very male-dominated world of Wall Street, and when she

died in 1916 she left an estate valued somewhere between $100-200 million dollars, or about

$2-4 billion in today’s currency. At first glance, it seems Hetty Green was good with money.

Or was she? Throughout her life, Hetty refused to pay for either heat or hot water in her

homes. Every extant picture of Green has her in a black dress, because it did not have to be

laundered as often. Indeed, there are some biographers of Green who believe that she is

always pictured in the same black dress – her only black dress, because why would you need

two black dresses? Her oldest son Ned fell and broke his leg as a child, and, rather than take

him to the hospital, Hetty set the leg herself in her kitchen. Poor Ned developed gangrene

and lost his leg not too long afterward. And despite her vast wealth and a desire to be close

to Wall Street, Hetty refused to live in Manhattan because she could not justify the price of

real estate. Instead she spent her life in apartments in Hoboken and Brooklyn Heights. One

of her final acts of excessive frugality was refusal of a hernia operation because it cost $150.

It is believed that refusal may have hastened her death.

Looking beyond the value of Hetty’s bank account reveals that she was not that good with

money after all. She certainly knew how to obtain it and make it grow, but she did not really

have any concept of how to use it. Her miserly ways earned her the title “The Witch of Wall

Street”, and no less an authority than the Guinness Book of World Records lists her as the

greatest miser of all time. Clearly, Hetty was not provided with a financial education that

gave her proper perspective on money.

IV. UNDERSTANDING THE NEXT GENERATION

You could fill a large bookcase with volumes advising how to have your children avoid

becoming Hetty Green. These books suggest many different approaches to educating the

next generation about money, and each tells of success stories when the theories are applied.

So which one has the right answer? The right answer is that there is no right answer.

The one universal truth that you can learn from all those who have gone before and put their

best ideas in writing is that each family’s circumstances must be considered in creating the

proper wealth education and transition plan. This analysis of family circumstances should

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include, at the very least, the family’s style of living (do they drive Toyotas or Bentleys?),

the money behaviors of the parents, the ages and personalities of the family members, the

existing family relationships, and the socio-economic surroundings (neighborhood, social

circle). Most importantly, these factors need to be considered in the estate plan.

Incentive trusts have been a hot topic in the last decade. These are trusts that contain

provisions specifically targeted at encouraging or discouraging particular behaviors. Some

common trust provisions include the following:

Income Matching

The Trustee shall distribute to Betty each calendar year, no later than 15 days after

receiving a copy of Betty’s final Federal income tax return for the year, an amount equal to

Betty’s adjusted gross income (AGI) as reported on such return.

College Education

Upon any beneficiary receiving a Bachelor’s degree from an accredited institution of higher

education, the trustee shall distribute $25,000 to such beneficiary.

Premarital Agreements

If Betty and her fiancé execute a premarital agreement valid under the laws of Betty’s state

of residence at the time of her marriage, which agreement addresses the treatment of her

separate property and the division of marital property upon divorce, then the trustee shall

distribute $40,000 to Betty on or before the date the wedding is solemnized.

Other examples of incentive trusts include rewards for achieving a certain GPA or a specific

educational degree, attending a particular educational institution, entering a family business,

achieving a certain level of professional recognition, selection of a specific profession,

reaching a particular wedding anniversary, or staying home to take care of the children. As

advisors, we should be aware of the messages incentive provisions send, and we should alert

our clients accordingly so they properly reflect their values in their documents. Incentive

provisions require care because they truly may represent “bad psychology.” If they are

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viewed as trying to control the child’s life choices, incentive provisions may be more likely

to produce rebellion than compliance.

Incentive provisions also can be risky because if crafted in a manner that is too restrictive or

inequitable, they can be a source of litigation. Provisions that encourage divorce or are

otherwise contrary to public policy (for example, In re Estate of Max Feinberg, decided by

the Illinois Court of Appeals in June 2008, which invalidated a clause disinheriting any

descendant who married outside the Jewish faith), will be voided. In addition to

occasionally skirting the line of permissible restrictions in a trust, the incentives provided

may not strike a chord with the next generation. On the flip side, incentive provisions can

be useful if the beneficiary is old enough when the provision is drafted to make it possible to

understand that beneficiary’s driving forces. Incentives that are overly restrictive or bind the

beneficiary to a course not his or her own will not be likely to produce a happy and well-

adjusted adult, and certainly not one who has a good perspective on money. When crafting

estate plan provisions, it is important to consider the personalities of the members of the

generation to whom the wealth will be transferred.

Understanding the beneficiaries of an estate plan, as well as their relationships with their

parents and grandparents, necessitates a basic understanding of the world in which the next

generation is living. In 2008, the “next generation” likely is a member of Generation X

(born 1965-1982) or Generation Y (born 1983-2002). Early members of Generation Z are

just reaching the age to start learning about money and values, and the Baby Boomers

(1946-1964) are probably at a point in their lives past which their money values will be

changed unless the Boomer makes a deliberate decision to re-make his or her life.

Generation X probably is the primary generation that those with wealth and their advisers

currently are working (or hoping) to educate about proper values as they relate to money.

This group encompasses what is known as the “MTV generation”, and most grew up with

personal computers in their homes. Most Gen Xers learned to use the Internet in high school

or during post-graduate education, and are comfortable with and willing to embrace new

technologies. In addition to leaps of technology, the following social and political issues

had a big influence over the members of Gen X as they became adults:

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• Nationwide political apathy and lack of trust in leadership and government

• Increase in divorce (Gen X is really the first generation of latchkey kids)

• Increase in mothers in the workplace

• Broad availability and acceptance of use of birth control pills

• Changed work force requiring ever increasing academic requirements and

intellectual skill

• Increased awareness of and advocacy related to environmental destruction

and ecological issues

• The end of the Cold War

• General increase in wealth in the United States

Consideration of wealth transition today also is likely to involve consideration of children or

grandchildren who are a part of Generation Y. This generation is the biggest since the Baby

Boomers, and approximately three times the size of Generation X. The fluency with

technology that they have known since birth has altered Gen Y’s methods of communication

and, some argue, their ability to communicate without their electronic intermediaries.

Reynol Junco and Jeanna Mastrodicasa, authors of Connecting To The Net.Generation:

What Higher Education Professionals Need To Know About Today's Students, found in their

survey of U.S. college students that:

• 97% own a computer

• 94% own a cell phone

• 76% use Instant Messaging.

• 15% of IM users are logged on 24 hours a day/7 days a week

• 34% use websites as their primary source of news

• 28% author a blog and 44% read blogs

• 49% download music using peer-to-peer file sharing

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• 75% of college students have a Facebook account

• 60% own some type of portable music and/or video device such as an iPod.

Like Gen Xers, the members of Gen Y are likely to take longer to move out of their parents’

homes. In part, this may be due to the continuation of increasing education requirements to

access many of the work force opportunities. More likely to have grown up watching

Hannah Montana than the Flintstones, Gen Y is often considered to be better informed about

world events and more sophisticated at a younger age than their predecessors. Saying that

Gen Y grows up sooner might not be accurate, but rather, they are exposed to adult issues at

an earlier age than preceding generations. Ironically, Gen Y, and to a certain extent, Gen X,

are both accused of entering their work lives without any true sense of the real world.

V. THE PRICE OF TUITION

So how do you take all of this information and help these late alphabet generations

understand balance in the acquisition and use of money? How do you make sure that the

next generation is responsible? The answer is both simple and complex – if you want the

next generation to be responsible, give them responsibility with wealth as early as possible,

but only to the extent that the price of tuition (experience) is not too great. While there is no

one perfect course to teach equilibrium in the proper role of money in one’s life, we (the

authors) have run across many wealthy families that have developed their own methods

which have proven mostly successful across the generations. As you will see, each family

has adapted the education to the family circumstances and the values they wish to convey.

A. The Welch Family – Early Lessons In Earning, Spending and Saving

The Welch family has four young children, 8-year old twins, a 6-year old and a 4-year old.

Far too young, you might think, to begin an education in the concepts of wealth and money

management. Most commentators agree, however, that it is never too early to start teaching

the basics of good money behavior, both by lesson and example. The Welch family has

developed its own practical education tool.

Each of the kids gets a nominal weekly allowance for helping mommy and daddy out around

the house – picking up toys, cleaning up after themselves, etc. The kids learn the obvious

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lesson that money comes as the result of work, and as the result of their own contribution to

the household. Once a week, the family goes down to the local variety store, where each

child is given the opportunity to spend that week’s allowance. The parents commented that

the first few times they went to the store, the kids spent all their money on the very first

thing that caught their eye. In these early trips, the prospect of having complete control over

their own spending money was just too much to bear, and these ventures to the store quickly

emptied the wallets of this very young next generation.

Following the initial visits to the store, the children began to change. After a few

disappointing purchases of toys that broke or became uninteresting before the family even

returned home, the kids became more savvy buyers. Trips to the store took longer as

options were considered, real wants were examined, and price was compared to value before

a decision was made.

In a further twist to the education, the Welch parents decided to match whatever money the

children had not spent during the shopping trip. There is no pressure not to spend, just the

lesson that, to quote Benjamin Franklin, “a penny saved is a penny earned.” These children

are too young to learn about the mechanics of investing and the stock and bond markets, but

the mere lesson that unspent money can lead to future money is a powerful one. Over time,

the parents have found themselves increasingly having to ante up when the children return

from the store and convene at the kitchen table to count their “savings.”

B. The Robbins Family – The “Feeling” Of Inheritance

The Robbins family has two boys in their teens. At age 13, each son received a lump sum of

$3,000 from a fictitious “Uncle Louis”, who has been a “member” of the family for three

generations. The boys were able to use the money for whatever they wanted. The boys

knew that Uncle Louis was not real, but the ruse was used to remove any overtones of

parental oversight or control of the money.

Three thousand dollars is a lot of money for most 13-year olds, and the overwhelming

temptation was to blow it quickly and without much thought. In this case, both boys gave in

to that temptation with part of the money, but then realized what it feels like to burn through

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money. Both Robbins boys gained an appreciation of planning for future purchases, saved

part of the Uncle Louis money to have enough for those purchases, and even gave part of it

away. The older of these two boys surprised his parents by giving $500 to relief funds

following Hurricane Katrina. Clearly these parents had been teaching certain values to their

children in earlier years, however, the practical application of these financial values was a

critical experience.

The size of Uncle Louis’ bequest is a bit arbitrary, but the intent is to make the gift large

enough to be meaningful and to allow the scope for spending, investing and giving without

depleting the funds through any one choice. The Robbins parents make themselves

available to provide advice or guidance in implementing what the boys want to do, but the

ultimate decision rests with them.

The Robbins technique is a different sort of experience than the Welch family’s educational

structure where the kids are “paid” for “work.” Behavioral finance teaches us that it is

human nature to label money differently depending on where it comes from, where it is kept,

or for what it is intended. Our language reflects these differences: retirement money, found

money, play money, plastic money, rainy day money, new shoes money and silly money are

all very different concepts, and even though $10 is still $10 no matter what label it carries,

there is some benefit in thinking of those funds differently. You would not want to confuse

retirement money with play money, for example. For families that need to deal with the

label “inherited money”, it is important to give children a firsthand experience of how that

feels. Hence, Uncle Louis for the Robbins family.

C. The Fuller Family – Charity As A Larger Lesson

The children of the Fuller Family are at yet a different stage in their lives than the Robbins

children. Two of these children are college age and one is in high school. While the Fullers

always lived a comfortable life, their fortunes changed a few years ago when the patriarch

sold the family business and everyone, somewhat unexpectedly, received a financial

windfall.

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While the Fullers had always made common sense and values a part of the education they

gave their children, they were faced with preparing children already in their late teen years

and early twenties with an education about inheritance. They wisely chose to build on the

values they had been teaching to impart this new lesson quickly and effectively.

As a family, the Fullers had always been charitably inclined, both with their time and their

money. With a portion of their proceeds from the sale of the business, they established a

private foundation. A few times each year, they would meet as a family to review the assets

of the foundation, the investment performance, and the distributions. Each family member

(including the children) had an equal vote, and all parties were expected to come to the

meetings with suggestions for possible recipients or specific charitable projects that should

be funded.

Aside from the obvious benefit of guiding children to appreciate the obligation of wealth to

society, involvement in the family’s philanthropic activities provided an ideal training

ground. In addition to involving the children in charitable activities, it instilled in the Fuller

children the sense that wealth has a purpose beyond the physical and emotional comfort of

themselves and their family. The family’s philanthropic discussions provided a forum to

experience and develop family dynamics, to learn how to present ideas and critique

proposals, to begin how to think analytically and to discover the power of cooperation

toward a common goal.

The primary common thread we see in the Fuller Family and others we have worked with

that successfully educate the next generation of wealth owners is that in all cases the money

alone is not the instructor. Real-life experience and actual responsibility are the educators.

The participation and guidance of the parents (or other senior family members) is crucial, as

is the example these senior family members have set both with their values and their use of

funds. Note that the words “participation” and “guidance” are used. The children must be

given actual control or a meaningful vote for the experience to be something other than an

education in futility.

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VI. CHARITABLE ACTIVITIES AS A TRAINING GROUND

Incorporating charitable giving structures into an estate plan is another way to further the

financial education of the next generation. Not only do these activities develop a child’s

philanthropic values, but the responsibility associated with this involvement can unveil skills

and talents that may be portable to the individual in other areas of life. One client who does

quite a bit of public speaking attributes his love of and talent for public speaking to a

childhood and young adulthood where he regularly presented grant proposals and follow up

reports to his family’s foundation.

We are often asked at what age children should become involved with philanthropy, and our

answer generally is as young as possible and to the fullest extent reasonable based on the

age and understanding of the child. The Barnett family has 6-year-olds on the family

foundation advisory board. They do not interact much with the investment advisors, but

they do become involved in screening charities. Surprisingly, these 6-year-olds express firm

opinions about which charities are worthy of consideration. Even though these young

children are not able to take as active a role as the adults on the foundation advisory board,

they are gaining valuable experience and education simply by watching and listening to the

way their family elders interact. Participating in the family’s philanthropic discussions also

lays an early framework for the child’s charitable values.

The Barnett Family Foundation’s advisory board is chaired by a 21-year-old, who is a

neophyte in the investment world, but is blossoming into a talented and passionate

environmental advocate. Her family’s shared belief in environmental advocacy led them to

give her this position of leadership. More life experienced family members sit on the board

as well to provide advice and to help her as she learns about investing and sustainable

distribution policies. On the whole, this is one of the best functioning family foundations we

have seen, and we think the full embrace of younger generations is the reason why.

It is never too early to start the education of the next generation, and experience is the best

teacher. Trial and error, with appropriate oversight, is necessary to an effective learning

experience and development of a proper perspective on money. Each family must find the

right method that fits within its value system and family structure, and families that have a

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private foundation (or even a donor advised fund) should consider involving the younger

generations at an early age.

For example, a family might form a special committee within its private foundation to

examine a specific area of charitable giving, such as health care or battered women’s

shelters. The children could be the members of this committee and might be given a specific

budget of a few thousand dollars that they can grant to the charities selected by the

committee. With the internet, it should be fairly easy for the children to do research on

different charities and develop a “pitch” to their special committee. Depending on the ages

and abilities of the children, an adult may take a more or less active role in “guiding” the

committee.

Philanthropic activity often is an excellent method to educate children about the various

definitions of wealth, while exposing them to precepts they need to manage financial wealth

in particular. Because the funds are going to charity, there is low risk of harm in the

experience.

VII. PLANNING FOR PROPER TUITION

It is important to give the next generation control over money at an early age (or, in the case

of the Fullers, as early as possible). The student needs to be given control over enough

money so that there is a full sense of sadness, pleasure, satisfaction, etc. to enable the next

generation to learn from the experience. At the same time, the amount of money or

responsibility given to the child should not be so much that the tuition is burdensome, either

financially to the family or emotionally to the student. When thought is not given to the

estate plan and the amount of responsibility it imposes upon a child, the results can be

devastating.

We know one family that created trusts for their sons, each of which distributes in its

entirety and without restriction on the young man’s 21st birthday. The oldest, who has

already received his distribution of about $5 million, blew through it by the age of 27. He

was not prepared to handle significant wealth at that age, and the tuition was expensive. He

is a good person who learned his lesson at a very steep price. He hopes that he is an object

lesson for his younger brother, who is 20 years old and will soon receive his distribution of

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about $6 million. This younger son has a history of substance abuse, and there is some fear

that his tuition could be life-threatening. The parents did not intend for the trusts to become

this large, and unintentionally created a bigger educational pool than was needed or wanted.

One reaction to this sobering tale is to leave the wealth in trusts until the children are fully

grown and ready to handle it. Leaving money in trust and restricting the next generation to

only income or regular small distributions, however, may preclude the members of the next

generation from making their own mistakes and learning from them. The following are

some ideas for consideration when drafting a trust agreement that will have children or

grandchildren as future beneficiaries.

“Learning Sized” Distributions

Many trust agreements stagger a beneficiary’s access to trust assets. Often, this access is

granted in three tranches, starting around age 25 or 30. If a trust is worth a million dollars,

is $333,000 too much for a “test run” with financial responsibility? Consider giving the

beneficiary a smaller amount at a younger age so they have some time to practice with

money management and basic financial skills before the broader access rights take effect.

For example: Upon the beneficiary attaining age 21, the trustee shall distribute $100,000 to

the beneficiary.

Withdrawal Rights In Lieu of Mandatory Distributions

Trust agreements often direct a trustee to distribute a portion of the trust to the beneficiary at

certain ages or other triggering events. Instead of requiring distribution, why not simply

grant the beneficiary a right to withdraw funds at those ages or triggering events? If a

beneficiary cannot be responsible enough to write a letter to the trustee to request a

distribution to which he is entitled, why force the trustee to write the beneficiary a check?!

For example: Upon the beneficiary attaining age 25, the beneficiary shall have the right to

direct distribution of no more than one-third of the assets of the trust. Such right must be

exercised by a written direction signed by the beneficiary and delivered to the trustee.

If granting withdrawal rights or requiring mandatory distributions, consider giving the

trustee authority to hold back the funds or postpone distributions for good reasons. For

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example: The trustee shall have the right to deny a withdrawal request if the trustee

suspects the beneficiary is using or is addicted to a substance that might adversely impact

the beneficiary’s ability to manage, invest and conserve property.

The Educated Co-Trustee

Parents often give children the right to elect to become a co-trustee upon attaining a certain

age. What virtues does achieving a particular age bestow that qualifies a beneficiary to

manage a trust estate? Perhaps life experience, but there is nothing to predict whether that

life experience will touch in any way on fiscal perspective. Instead of a triggering age as the

sole criteria, consider requiring the beneficiary to take a course in money management or

have similar training. The acting trustee or an independent third party could be given the

discretion to determine whether the beneficiary has received the proper education to assume

the role of a co-trustee. This is not a fool-proof method but, again, why just hand it to the

beneficiary as opposed to making them demonstrate some responsibility? Possible language

might read: The primary beneficiary shall have the right to become a co-trustee of the trust

upon the later of such beneficiary attaining the age of 25 years or completing a course of

study in financial management. Whether the primary beneficiary has satisfied the

requirement of completion of a course of study in financial management shall be determined

in the sole discretion of [insert name].

“Guided” Revocable Trusts

Sometimes planning has been finalized well before anyone realizes the amount of money

that will be put into the hands of an unprepared beneficiary. Often times grandpa will give

away pieces of the family business to trusts for the grandchildren, which trusts require that

all income be distributed to the child on an annual basis. If the business grows exponentially

and sells for a large sum, suddenly the income produced by the trust assets may be 10 or 100

times what anyone expected. Once the grandchildren reach the age of majority, consider

asking them to establish a revocable trust that has an experienced trustee or co-trustee and

that is amendable only with the consent of an experienced adult. The restrictions can always

be removed when the beneficiary is ready, and this structure will permit a guided use of the

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income. Having the beneficiary be a co-trustee may provide a crucial educational

opportunity, as typically the trust will start small and grow over time as income is added.

Failing to properly plan for the tuition of a financial education is not the only oversight

many families make. In his first documentary, Born Rich, Jamie Johnson, an heir to the

Johnson & Johnson fortune, interviews several of his ultra wealthy friends who also all

inherited their wealth. The documentary provides an eye-opening look at the jet set. Two of

the individuals on the documentary were both raised believing that the family was not

wealthy. One pre-teen discovered his family’s wealth when a schoolmate pointed out the

father’s name on the Forbes list. The other, brought up believing he was poor, was taken to

the city for a day by his uncle, who proceeded to point out all the buildings this pre-teen’s

family owned. From their interviews, it is clear that both individuals were deeply affected,

and perhaps scarred, by the abrupt revelation of their enormous wealth.

In our own practice, we have seen some families attempt to hide their wealth from the next

generation. Not only does that approach waste years of valuable time to educate children

about achieving balance with money, but it also ignores the child’s ability to observe his

surroundings. In most cases, the children were aware of the wealth through comments of

peers or observations about family vacations or material possessions. These children grow

up believing money to be a taboo, or something to be ashamed of. They have a very

uncertain relationship with money, and often possess many habits with regard to money that

are difficult to un-learn.

Sometimes, this hideaway approach comes to a tragic head when the possessor of the wealth

dies unexpectedly, thinking they still had time to educate the next generation or, perhaps

thinking that there was no education needed. We know of one individual in her mid 40s

who has spent her entire career so far as a teacher. A few years ago she received a call from

a lawyer she had never met, informing her that her grandfather had passed away and left her

a trust of which she was the sole income beneficiary. All of a sudden, at the age of 42, she

began receiving an annual income in the mid six figures. She was totally unprepared for this

sort of wealth. Since inheriting, she has been through a divorce and is questioning her

choice of career. While her grandfather had the noblest of intentions, to see his

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granddaughter establish a career and a life without the burden of money, she now has to deal

with the weight of wealth anyway, but without the benefit of proper education and

preparation.

Whether it is the Welch, Robbins or Fuller approach, or some other different method that fits

the circumstances, each family must actively make a decision to participate in the education

of the next generation. Trust structures need to be considered for flexibility and durability,

as well as appropriateness and educational value.

VIII. SPANNING THE GENERATION GAP

Thus far, we have considered questions related to the preparedness of heirs to handle wealth,

how to educate them and how to transfer wealth. When we hearken back to Roy Williams’

study on the failure of wealth transitions, however, we remember that the real obstacle to

avoiding the “shirtsleeves to shirtsleeves” threat lies within the family. Twelve percent of

the failures were due to lack of a shared mission or vision, and a staggering 60% were due to

a breakdown in family trust or communication. In other words, almost 3 out of 4 failures

were due to issues other than poorly-delivered advice or poorly-educated heirs. This may be

due to the fact that most families spend far more time considering the HOW of wealth

transfer than they do considering the WHY of wealth transfer. Many families do not take

the time to define their wealth, thereby allowing it to define them.

As interested as mom and dad may be in transitioning wealth, what they really want to

transition (usually) is values. Stark examples of this are the statements made by owners of

significant wealth such as Warren Buffett and Bill Gates. Buffett has already committed the

vast majority of his wealth to charitable purposes. When asked how much money one

should leave to children, Buffett wittily answered “enough so that they can do whatever they

want, but not so much that they can do nothing.” Gates has said that what he most desires to

leave his children is the enjoyment gained by the application of intellect and creativity to

hard work. Both Buffet and Gates have defined wealth for their families beyond mere

financial wealth.

Charles Collier in his excellent book Wealth in Families talks about four distinct kinds of

wealth owned by families, and makes the point that families need to recognize and manage

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all four definitions of wealth. First of all, a family’s primary capital is human capital, the

brothers, sisters, aunts, uncles, nieces, nephews and spouses which make up a family, and

the unique abilities and talents they have and contributions they make. This definition is

qualitative, including a family’s health, happiness, ethics, morality and character. A second

form of capital is intellectual. What do people know, either from formal education or life

experience? What is the intellectual legacy of the family? Social capital describes how the

family contributes both human and intellectual capital to the communities in which they live

and the wider world. Finally, we have old-fashioned financial capital, whether in liquid

assets, a family business, real estate, or other assets.

Collier notes that most families only manage their financial capital, and, even if they

recognize the existence of these other forms of capital, they conclude that the best way to

enhance them is to focus all their energy and effort on the financial side. Careful

management of human, intellectual and social capital, however, is essential to the

preservation of financial capital. A final benefit of understanding these various forms of

capital is that all members of a family can contribute to their growth. Not everyone will be

able to add to the financial capital of the family, but everyone can help to grow capital

broadly defined.

That is a nice theory, but how does it find expression in the real world? The following is a

checklist of questions we ask families who wrestle with these issues of multi-generational

wealth transfers and the education of the next generation. The core of this comes from work

done by Roy Williams and Vic Preisser in dealing with wealthy families, along with some

variations of our own.

1. Does the family have a mission statement that spells out the purpose of the

family’s wealth?

• This is probably the single most important step in preserving wealth across

generations.

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• It can seem foolish to have a family sit around the dining table and write a

mission statement, but it is instructive that seriously wealthy families have

done just that.

• Affords the opportunity to discover and consider that a dollar’s worth of

happiness for one person may look very different from that same dollar’s

worth for the person’s sibling.

• It helps keep wealth in perspective, it reminds the family that wealth is more

than financial, and it enables outside advisors to gain a thorough picture of

what the family needs.

• Including family history in the discussion can be helpful in developing the

broader mission.

2. Has the family developed a method for allowing all members of the family to be

heard and participate in important decisions?

• It is important not to let the control of financial wealth also control the other

aspects of family wealth.

• When families divide into “those in the know” and “those whose opinion

does not matter,” the breakdown of family communication is well on its way.

3. Do all family members participate in some way in preserving and transferring the

various forms of wealth?

• In many families, those individuals creating or managing the financial wealth

are resentful of other family members who do not contribute.

• Broad participation by the entire family across all skill sets helps to protect

against divisiveness.

4. Have roles been assigned to family members without inquiring as to the

individual’s desire to fulfill the job?

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• It can be tempting to assign roles to various family members because it

seems like a good fit, without establishing whether or not the individual has

the desire to inhabit a certain role.

• Families need to gauge genuine interest, match that interest with genuine

need, and make sure that the necessary education is obtained for the

successful pursuit of the assigned roles (financial, philanthropic, or other).

5. Has the wealth possessing generation discussed its estate planning with the next

generation?

• In our experience, it is far more effective if the next generation knows about

the estate planning and financial planning of the prior generation.

• In many cases we have seen the next generation spend time, money and

energy trying to unwind financial planning that mom and dad put into place,

without the benefit of having mom and dad explain their reasons for what

they did.

• This is perhaps the most difficult conversation we ever have with owners of

wealth, because the natural tendency is to keep these issues quiet, private and

even secret from the next owners and managers of the wealth.

6. Is it better to trigger wealth transitions to the next generation based on readiness

as opposed to an arbitrary age?

• This type of transition is far easier said than done.

• For example, we have seen trusts that distribute to heirs based on subjective

criteria such as “the successful completion of a college degree plus five years

of gainful and successful employment outside of the family firm, as

evidenced by progress within a company unrelated to the family enterprise.”

• Language like this poses a challenge to the fiduciary, who would prefer a

precise trigger like age to the exercise of judgment on subjective grounds.

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7. Does the family create opportunities and incentives for the next generation to add

to the family’s wealth, once again broadly defined to include definitions other

than financial?

8. Does the family create opportunities for participation (even by younger

members), particularly in the area of philanthropy?

9. Do the senior generations work to create an appreciation of family cohesion,

even above issues related to finances?

• There should be discussion to create understanding of the various definitions

of wealth and how “family” brings about that wealth.

• The celebration of rituals and rites of passage support family cohesion: births,

graduations, marriages, and even deaths.

10. Is there regular and open communication?

IX. CONCLUSION

It is never too early to start the education of the next generation, and experience is the best

teacher. There is nothing like trial and error, with appropriate oversight, to learn about

wealth in its human, intellectual, social and financial forms. Each family must find the right

method of education that fits within its value system and family structure, and must carefully

structure the estate plan to consider the emotions involved and the education of the next

generation. Philanthropic activity often is an excellent method to educate children about the

various definitions of wealth, while exposing them to precepts they need to manage financial

wealth in particular.

None of these tasks is easy, and the process is almost certainly a matter of a few steps

forward followed by the inevitable one or two steps back from time to time. The payoff

from perseverance and thoughtful preparation of the next generation is enormous, and

putting in the effort is the only way for a family to break the human universal of shirtsleeves

to shirtsleeves in three generations.

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FURTHER READING

Cochell, Perry L. Beating The Midas CurseCollier, Charles W. Wealth In FamiliesGallo, Eileen And Jon. The Financially Intelligent Parent: 8 Steps To Raising Successful,

Generous, Responsible ChildrenGallo, Eileen And Jon. Silver Spoon Kids: How Successful Parents Raise Responsible

ChildrenHausner, Lee. Children Of Paradise: Successful Parenting For Prosperous FamiliesHughes, James E. Family Wealth – Keeping It In The Family: How Family Members And

Their Advisers Preserve Human, Intellectual, And Financial Assets For GenerationsHughes, James E. Family: The Compact Among GenerationsKinder, George. The Seven Stages Of Money Maturity: Understanding The Spirit And

Value Of Money In Your LifeLevine, Madeline. The Price Of Privilege: How Parental Pressure And Material

Advantage Are Creating A Generation Of Disconnected And Unhappy KidsLink, E.G. Family Wealth Counseling: Getting To The Heart Of The MatterMartel, Judy. The Dilemmas Of Family Wealth: Insights On Succession, Cohesion, And

LegacyMassie, Hugh. Financial DNA: Discovering Your Unique Financial Personality For A

Quality LifeO’Neill, Jessie H. The Golden Ghetto: The Psychology Of AffluenceSykes, Charles J. 50 Rules Kids Won't Learn In School: Real-World Antidotes To Feel-

Good EducationSykes, Charles J. Dumbing Down Our Kids: Why American Children Feel Good About

Themselves But Can't Read, Write, Or AddTurnier, William J. Materials On Family Wealth ManagementWilliams, Roy O. Philanthropy, Heirs & Values: How Successful Families Are Using

Philanthropy To Prepare Their Heirs For Post-Transition ResponsibilitiesWilliams, Roy O. Preparing Heirs: Five Steps To A Successful Transition Of Family

Wealth And ValuesWillis, Thayer Cheatham. Navigating The Dark Side Of Wealth: A Life Guide For

Inheritors