“[The] perfect inheritance is enough money so that [children] feel they can do anything, but not so much that they could do nothing.” -Warren Buffett
A good estate planning attorney is part accountant, part attorney, and part therapist. You need to possess a high degree of empathy and be an expert listener. One of the things that attracted me to estate planning is the close bond formed between client and attorney in the process.
In addition to being able to hear and help a client, you must also be naturally interested and curious about a client’s life. You have to be part biographer. I enjoy reading biographies, and the best biographies are those that delve into a person’s thoughts, motivations, worldview, and emotions. They present a picture of a person you can’t get from reading their Wikipedia page. I enjoy learning a client’s “story”: their hopes, dreams, worries, and perspective. Beyond the technicalities and tax issues, drafting an estate plan is partly telling a client’s story; rendering their accomplishments, aspirations, and values onto paper.
Traverse City, Michigan is a unique area to practice law. It’s an area where people aspire to live because of its natural beauty and recreational opportunities, so it attracts a lot of successful people. One worry that seems to dog many successful clients is: how can I ensure that the money I leave my heirs does not cause them to lose their ambition or allow them to live a dissolute aimless life? A recent survey found that two-thirds of high net worth individuals are concerned about leaving too large an inheritance to their heirs, with the most common concern being that the money would be used irresponsibly. Every parent wants their child’s life to have purpose, meaning, success, and happiness. It is true that sometimes wealth hampers a person’s ambition and enables entitlement and poor behavior. But I believe that this phenomenon, and the tendency for parents to worry about it, are highly overblown.
Estate planning and beliefs regarding inheritance vary wildly across cultures. In America, our frontier past and lack of hereditary aristocracy fosters a reverence for the “self-made man.” We place great value on self-reliance, hard work, and entrepreneurialism. When inheritance is discussed in public, it’s often to score points against those we dislike. Famously, Donald Trump raised media eyebrows when he claimed his career in real estate began with a “small loan” of $1 million from his father. Maybe it’s the stories of dilletante socialites, or maybe it’s our need to see ourselves as successful independent of the contributions of others, but our anxiety about wealth creates a myth that obscures reality.
While people tend to diminish the impact of generational wealth on their own success, generational wealth provided an opportunity for some of our country’s most successful people to pursue their transformative endeavors. For example, our nation’s founding father, George Washington, inherited a 280 acre tobacco farm from his wealthy father at age twelve. Not content with living off his inherited wealth, Washington’s notorious ambition pushed him to lead the Continental Army to victory and serve as our first president. More recently, our current-day titans of industry often used a helping hand from their parents to start their businesses. Bill Gates’ influential mother used her connections to introduce her son to key IBM executives who were instrumental in securing Microsoft’s first major software contract. Jeff Bezos’ parents invested $245,573 in 1995 to help their son start Amazon. Mark Zuckerberg‘s parents entrusted their son with around $100,000 to start Facebook.
What George Washington, Bill Gates, Jeff Bezos, and Mark Zuckerberg have in common apart from their familial wealth are unusual talent and intelligence, and the innate drive and ambition to succeed. These personal qualities can’t be taught, and they are not sapped by financial comfort. However, these people are extraordinary, and let’s face it, most of us are ordinary people with more modest goals. Will your more “ordinary” heirs be negatively affected by your bequests? In my experience from observing a multitude of families in trust and estate administration, I can say the answer to this question is probably “no”, and here’s why:
The most important predictors of success and accomplishment are innate qualities like drive, persistence, intelligence, and charisma, that a person is either born with, or cultivated through diligent effort for personal reasons. You cannot impart these qualities to your children from beyond the grave. If you are trying to incentivize any behavior in your estate plan, you’re unfortunately too late. No matter how many incentives or penalties you put in your trust, your beneficiaries will almost certainly remain the same people they were prior to your death. I have never had a “problematic” heir pick up a check from my office and tell me “Now I can finally pursue my dream of studying quantum theory at Harvard!” Likewise, if you are worried that your generally responsible and productive children will become the proverbial “trust fund baby,” you can stop worrying. I have never had a beneficiary in my office exclaim “Great, now I’m going to sell my company/quit my job/stop making art and move to the Bahamas to sit in a beach chair for the rest of my life!” At most they will go on vacation for a couple weeks before getting bored and going back to whatever they were doing before their inheritance. As employers figured out awhile ago, money is highly overrated as a motivator.
This is not to say that incentives in an estate plan are useless. They are useful insofar as they carry out your intent. If you wouldn’t want your money to be used in a certain fashion, then that’s important. If you want your heirs to know you share their joy in celebrating their accomplishments, then including provisions and gifts for education, marriage, and other life milestones can be an effective way to leave a legacy for the coming generations. I’ve had multiple heirs tell me that their education trust is the gift they most appreciate from their parents or grandparents, and that they are grateful for the way this gift reminds them of the giver and what that person valued.
Like Warren Buffett alluded to, money is useful because it provides freedom. A person with ample money has the freedom to take risks and pursue opportunities that may not be immediately profitable. As another one of our Founding Fathers, John Quincy Adams, said: “I am a warrior, so that my son may be a merchant, so that his son may be a poet.” Much of what gives our lives meaning: beauty, art, family, spirituality, love, has nothing to do with money, and may in fact be profaned by it. Historically, most of our great art and music was only possible due to the financial patronage of the aristocracy and other wealthy patrons. If what your child is spending their life on now is not providing any personal fulfillment, then a gift that frees them to pursue their passion and take a risk is much more meaningful than distributions to heirs who feel duty-bound to the controls you put in your estate plan. Consider our poor record of appreciating the value in so many novel ideas (the internet, e-sports, social media, Van Gogh’s paintings, and Emily Dickinson’s novels as a few examples), and you can begin to appreciate the futility of trying to predict the future through your estate plan.
I’m reminded of two cases from my career that illustrate these points. Names and identifiable facts are changed to protect confidentiality, but these are based on real people and estate plans.
One of my favorite clients is a guy I’ll call Bill. Bill is the beneficiary of a large trust set up by his grandfather who ran a manufacturing concern. He’s one of those rare type of people that are simultaneously relaxed but incredibly energetic. He has a ton of hobbies and interests, and the time and money to pursue them. I doubt he would be as happy and optimistic if he didn’t have the security of his trust. One of his hobbies is custom cars, which is usually one of the primary ways an heir depletes an estate. However Bill turned his hobby and passion into a profitable business. Because of his pervasive knowledge of a particular type of car, his expertise is highly sought after as an appraiser, consultant, and dealer. For the first year his business barely made a profit, but because he didn’t have to worry about paying his bills, he was able to dedicate himself entirely to the business. He now makes more money than most doctors and lawyers while doing something he loves. All of this is possible thanks to the work and generosity of his grandfather.
In another case I was hired to administer a multi-generational trust. This particular grantor had a highly detailed trust with many restrictions and stipulations for how his money was supposed to be used. Part of the trust property was allocated to an education sub-trust that stipulated the beneficiary could only receive funds if they attended a four-year university, with additional incentives and bonuses for obtaining graduate degrees. A curious situation developed: two of the heirs had multiple graduate degrees from institutions with dubious reputations. Neither heir was employed in a field that used their degrees and neither had any published work in their fields of study. It was apparent that all the conditions and incentives of the trust were creating a perverse incentive for the heirs to stay in school and avoid the next phase of their lives. Meanwhile, another heir who wasn’t as academically inclined but gainfully employed as a welder, couldn’t get the same benefit from the trust. We attempted to reform the trust to allow a distribution to this heir to start a welding business, but it was determined the modification could not be allowed. I doubt this situation was what the trust’s grantor would have intended or wanted for his family.
To conclude, the most important thing you can give to your children can only be given during your lifetime. The values you instill in them are what will guide them throughout their lives. Money cannot take them away, and money cannot be used to teach them something they failed to learn while you were alive. The character of a person is almost entirely independent of their bank account balance. I suspect that the only difference between the miscreant socialites on the cover of gossip rags and the people featured in the “crime” and “foreclosure notices” sections of the local paper is the amount of money at their disposal. In planning your estate, focus on your own legacy, not the possible actions of your heirs. What do you want to be remembered for? What do you value? Understand that circumstances, institutions, and people can change in ways that you cannot anticipate or control. With that in mind, err on the side of generosity and remember that money is best put to use to increase freedom, not diminish it.