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Ensuring Successful Transfer of Assets to HNW Client’s Children

Key strategies utilized by advanced planning teams revealed.

December 20, 2007
by Lewis Schiff

In Part One of this series I elaborated on how an advanced planning process can address client concerns as they consider how to structure their heirs’ inheritance. Here, we take a closer look at some of the strategies utilized to ensure that assets of high-net-worth individuals (HNWs) are protected while being transferred to the next generation.

How Much and When?

Private wealth specialists recommend that clients not give too substantial an inheritance to children when they reach age 18 or 21, regardless of their apparent maturity at the time of planning. The 2007 Survey of Affluent Americans by U.S. Trust shows, for example, that 27.4 years is the average age when children assume responsibility for managing their own money in HNW families. While some may demonstrate good judgment, not all children of wealth in their late teens or early 20s have the emotional maturity to manage the temptation that a substantial lump-sum distribution can bring.

Even if the children have shown some discipline in how they manage their own lives, acquaintances and entourages that gather around them can bring unwanted behavioral influences such as recreational drug use, prods to take advantage of so-called “great investment opportunities” and other pressures for economic participation. In such circumstances, not having access to large amounts of assets until later in life can help the child endure such pressure while developing more maturity.

If a child shows less maturity or a continuing pattern of problem interactions, then private wealth specialists can look to other techniques. In a recent U.S. Trust survey, about half of those with children and those without, agreed that children should start managing their wealth between the ages of 25 and 34. For those few parents who claim they don’t care about the consequences of giving children lump sums, they’re left with a large responsibility before the day of inheritance to teach their children how to manage their finances.

NOTE TO READERS: Lewis Schiff will be holding workshops to introduce the newest solutions for your high-net-worth clients at select U.S. cities. For more information, click here.

Creating Incentives

The Incentive Trust is one strategy for high net clients to employ in order to transfer wealth to heirs. This type of trust makes payments contingent on the beneficiary reaching certain goals, such as completing college or being meaningfully employed. Alternatively, such trusts can reward heirs who forgo careers to raise children full-time or those who pursue socially responsible activities, such as joining the Peace Corps or other volunteer work. Such trusts can also make different levels of payments: Someone returning to school for an advanced degree could receive a higher disbursement than a sibling fully engaged in a well-paying career. Significantly, research shows that 80 percent of HNW parents view wealth as something that comes with an implied social responsibility element.

Of course, incentives can be restrictive or hard to define. Estate attorney Elizabeth Schurig of Giordani Schurig Beckett Tackett in Austin, Texas, tells the story of a father who was a very proud graduate of a Texas university. At the time of planning, he insisted that all distributions from his estate -- even those for health emergencies and tuition -- be contingent on his young children attending that same school. His wife completely disagreed to such an extent that they edged toward divorce. Eventually the father gave in, and none of his children ever attended his university.

Estate attorney Ed Koren of Holland & Knight in Tampa, Fla., has observed that estate planning is a poor substitute for not being able to communicate with your children. On the other hand, many or even most HNW families do communicate and plan well.

When Warren Buffett wrote his estate plan, he didn’t want to simply hand over his billions to his children. Instead, he devised an estate plan in which his daughter, a magazine editor, and his son, a farmer, would receive, “enough so they could do anything, but not enough so they could do nothing.” Under the plan, the bulk of his fortune will go to charity.

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Lewis Schiff is the principal of Advanced Planning Group, a private wealth specialist for accountants and advisors. His forthcoming book, The Middle-Class Millionaire, will be published in February 2008.