Inheritance Planning

A recent survey prepared by The Motley Fool found that two-thirds of high-net-worth individuals are concerned about leaving their descendants too much inheritance.[1] Interestingly, the larger the inheritance received by those participating in the survey, the more likely they were to express these concerns. The predominate concerns included:

  • Inheritance would be used irresponsibly (58.74%);
  • Beneficiaries are not prepared to manage large inheritances (56.54%);
  • Believe assets would have better use elsewhere, such as charity (56.03%);
  • Doing so would cause beneficiaries to be lazy (55.77%); and
  • Concern about the attention it would attract (54.84%).

Presumably based on these considerations, only approximately one-third of the participants planned to leave over 50% of their assets in an inheritance. Only about 60% felt it was important to leave any inheritance whatsoever.

In a similar survey, Ameriprise Financial found that almost 40% of respondents said family “should be responsible for making their own way without my financial help” and only 61% felt any responsibility to give money to family members at death at all.[2] This survey found that approximately two-thirds of respondents felt it important to pass along generational wealth. Survey participants ranked the following as most important in terms of their legacy:

  • Personal values (37%);
  • Memories of experiences shared with family (35%);
  • Financial assets (21%); and
  • Personal items with sentimental or monetary value (7%).

That said, while a number of parents talk to their children about their financial and charitable decisions,[3] many do not appear to be transparent with their heirs. Only 44% of those passing real estate to heirs have discussed their intentions with heirs. Of them, the most discussed topic was how much the real property is worth (51%) rather than their expectations or goals (31%). More generally, only 19% of those surveyed are completely transparent with relatives about their finances and estate planning.

I find it interesting that these surveys appear to point out a missed opportunity for families and their advisors. On the one hand, clients are often concerned about the best use of their wealth after death. Those concerns may relate to a lack of trust that their heirs can properly manage wealth, belief that funds can be better used elsewhere, a belief that heirs should earn their own wealth, etc. On the other hand, clients also seem to be somewhat unwilling to be transparent with their heirs about their goals, intentions, and planning. How, then, are heirs supposed to become more competent to handle their inheritances and manage family wealth in line with the family’s common values?

As planners, we often find ourselves myopically looking at a client’s plan. The estate planner may focus on maximizing the amount of wealth that can pass tax-free to descendants as well as how to protect those assets from third-parties. Investment managers may be focused on maximizing investment returns, especially when certain plans, such as those including significant charitable gifts, may reduce assets under management. A client’s business or transactional counsel may be focused on business structures or transactions in an effort to preserve and maximize wealth with minimal risk. Where, in any of this, is there a focus on the client’s bigger picture? As planners, we often tend to be technicians, experts in our given fields of tax, M&A, investment management, etc. Clients, however, clearly need more tailored discussions that will allow the work done on their behalf to fit within their broader personal values, family structure, charitable goals, and similar considerations.

In this writing, I intend to raise a few planning opportunities designed to assist clients with their bigger picture goals. Of course, this is not a comprehensive list of planning structures that may do so, nor is it a complete discussion of the opportunities I will discuss. However, it is intended to provide a basic discussion of strategies which may be employed for clients to help move the needle beyond mere technical concerns and more towards a plan that addresses some of the gaps identified in these surveys.

Family Value Planning

Recently, I attended the annual Joseph Trachtman Memorial Lecture at the ACTEC Annual Meeting in San Diego, California. The presentation was entitled “The Calling of the Counselor, Part 2” (continued from a prior presentation) and was given by Ronald D. Aucutt of Bessemer Trust.[4] In that lecture, Mr. Aucutt discussed the importance planners serve in their roles as counselors. As a counselor, planners are much more than technicians. Rather, counselors bring wisdom and judgment to assist clients and their families in fulfilling their missions, preserving their values, and passing along wealth responsibly.[5]

There are numerous planning strategies outlined in Mr. Aucutt’s materials as well as others. In addition, certain professional organizations have been active in this area. Some of the basic concepts may include development of a family governance structure that includes a mission statement and set of core values. The intentional process of developing those documents can help articulate what a client desires to pass on to his or her family beyond just financial assets. Once developed, regular family meetings can be held to make family decisions such as discussing charitable gifts, planning a common family trip, considering investment opportunities, etc. Those decisions all would be made in the context of the family’s mission statement and core values. Such meetings can fit within the client’s comfort level in terms of transparency. The point, largely, is to open the conversation, pass along important values, and establish a means to success in managing family wealth within those values.

By codifying those items and regularly meeting with family, senior generations can pass along values that may be much more important than any material wealth they have. At the same time, these processes can educate family members in how family wealth should be used to accomplish the family’s mission. As seen in the surveys cited above, senior generations prioritize passing along values beyond financial wealth and have concerns regarding family members’ ability to properly manage inherited wealth. An intentional process of codifying those values and educating family members about those values and how those values interact with managing the family’s wealth should start the process of meeting these priorities.[6]

Charitable Planning: Donor Advised Funds and Private Foundations

Based on these survey results, clients are looking to do good with their assets beyond just giving those assets to children. Some of the relevant concerns are whether family members are best suited to manage wealth, whether inheritors benefit from certain levels of inherited wealth, whether excess resources can do more good elsewhere, etc. Quite obviously, that often leads to a discussion of charitable giving. A study by U.S. Trust found that opening the philanthropic conversation with clients to be important.[7] Almost one-third of high-net-worth clients responded that they would be more likely to choose an advisor knowledgeable about charitable giving with 34% feeling it should be raised in the very first meeting and 90% feeling it should be raised within the first several meetings. However, only 47% felt that professional advisors were good at these conversations. Clearly, based on what clients are reporting, they want to give to charity, and they want their advisors to open that discussion.

Many planners view charitable planning almost exclusively through a tax lens. Sure, charitable giving can do good, but the tax benefits are often the motivation. Only 6% of respondents in the U.S. Trust survey would reduce charitable giving if the estate tax were eliminated and only 45% if the income tax charitable deduction were eliminated. As such, tax planning, while an important part of strategic charitable giving, is not the primary motivating factor for clients. At the same time, clients report that 71% of discussion with professionals about charitable giving are technical conversations rather than focusing on goals or passions. Only 9% of high-net-worth individuals reported that their advisors suggested involving children and grandchildren in charitable giving conversations, yet 45% felt it was important that they be involved. There is an obvious mismatch.

The U.S. Trust survey found the most common reasons clients hesitate to give to charity include concerns that the gift will not be used wisely, lack of knowledge or connection to the charity, and fear of increased donation requests. When coupled with the data cited above, there are certain charitable giving structures that may bridge the gap. Both donor advised funds and private foundations are charitable vehicles that may be used to involve clients and their families in charitable giving in a way that is strategic, provides for active involvement of the next generations, and mitigates the concerns as to why clients hesitate to make charitable gifts.

The details about donor advised funds and private foundations is beyond the scope of this writing, but they can be used alternatively or in conjunction to assist in achieving clients’ goals, both personal and technical.[8] However, each allows the client and others to be involved in managing assets given to charity and determining the ultimate use of charitable funds. In most cases, the client’s existing financial advisor can continue managing assets transferred to charity. This ongoing involvement of the client and advisory team can facilitate bringing children and grandchildren into those planning conversations, either formally as part of the governance of the charitable organization or otherwise such as through family meetings as described in the discussion above. By doing so, the client is better suited to pass along values to successive generations as well as to help those generations manage wealth they receive within the context of those values, also involving them in family philanthropic discussions.

Trust Structures and Private Family Trust Companies

Many clients, and their advisors, jump to giving wealth to family members as a simple division of assets among children (and/or grandchildren) at death. Depending on other planning goals, including tax and asset protection, those assets may be held in trust or distributed outright. Likewise, for assets held in trust, the beneficiary may be appointed as trustee or this position may be filled with a third-party, including a corporate fiduciary. Naming the beneficiary as trustee often is done to mimic outright distribution while structuring a trust to maximize tax and asset protection planning. Naming a corporate fiduciary often is done to avoid putting the beneficiary in charge of his or her own inheritance, such as when there may be concerns about their ability to manage the wealth they inherit.[9] While these structures and planning discussions tend to be the bread-and-butter of estate planning conversations, other structures exist which may better address some of the concerns raised by the surveys cited in this writing.

One such structure includes the use of a private family trust company.[10] A private family trust company essentially serves a similar function as an outside, corporate fiduciary. However, the trust company (i.e. corporate fiduciary) is owned and controlled by the family and governed under a governance structure developed by the family. By maintaining ownership of the trustee within the family, yet building a formal governance structure through a private trust company, the trustee can act within the family’s culture, values, mission statement, and needs. Decisions are made by leadership selected by the family. However, while a single family member may serve as the day-to-day manager of the private family trust company, a single family member does not “control” the structure. This avoids appointing, for example, one child as trustee over another child’s inheritance, appointing uncle or aunt as trustee, etc., each of which can strain relationships. Rather, a board of family members and, possibly, third parties, controls the trust(s) for descendants within the context of the trust company’s governance structures and values.

A private family trust company, depending on the goals of the family and the assets being managed, may work in conjunction with a professional trust company (i.e. not the private family trust company). In this way, the family can control decisions while engaging professional third parties to handle administration. This may be through delegation of duties, use of a directed trust, or appointment of an administrative trustee to serve alongside the private trust company. This allows family to work together in maintaining values in asset management, including participation in charitable giving, while freeing them from the burdens of administrative responsibilities such as bookkeeping, accounting, tax compliance, and the like.

In addition to creating a structure to assist with trust management within the family’s values and culture, the trust structure itself may need to be considered. As stated above, the knee-jerk assumption many people, including advisors, have is that assets will be divided equally among children at death. There may be specific gifts to grandchildren or charities. However, once those specific gifts are made, per stirpital division is the norm. However, when seeking to control for many of the concerns raised in these surveys, holding assets in a “pot trust” may be more in line with the client’s goals. A pot trust essentially is merely a trust that holds assets for multiple beneficiaries in a single “pot” rather than dividing into shares. A pot trust, especially when combined with a private family trust company, can allow trust assets to be managed and distributed more equitably than merely divided into equal shares for children. There are a number of pros and cons to pot trusts. However, for clients concerned about the family legacy, ongoing management of inherited assets by successive generations, preservation of family values, best use of inherited assets among successive generations on an equitable (as opposed to purely equal) basis, and the like, a pot trust can be a useful tool either as the exclusive recipient of inherited wealth or as a component to the client’s estate plan.

The combination of a pot trust with a private family trust company can be very powerful, especially when combined with purposeful family governance structures. By using these planning alternatives, clients can address many of the concerns raised in the surveys cited in this writing. Family values can be prioritized while also educating successive generations about management of family wealth and the use of that wealth to engage in meaningful philanthropy. At the same time, the private family trust company is provided the opportunity to use the trust’s resources to equitably benefit family members consistent with the vision, mission, and core values that are established by the family.

Conclusion

I often see planners who do not see a client’s big picture goals. Rather, as stated above, many planners tend to enter a project myopically. For estate planning attorneys, that usually is maximinning wealth that can pass free of tax, and in a protected way, to descendants. For transactional attorneys, such as in M&A transactions, the goal is often to complete a transaction returning the most monetary value to the client at the least risk. For investment advisors, that usually is maximizing investment returns. While each of these are important in planning, they all need to carefully consider the bigger picture. Often, when projects are approached with tunnel vision, decisions may be made in how to advise a client which would conflict with the client’s broader planning goals. For example, clients may not always want to maximize the amount of wealth that can pass to family members, or clients may be willing to lose some monetary value in an M&A deal if doing so reduces the risk of losing the values of the family business, etc.

Also, for clients who have previously engaged in technical tax, business, and investment planning, they may have planning fatigue. Certainly, saving tax, minimizing risk, and maximizing investment returns are important. Those goals are, to a certain degree, “built in” to the work attorneys and other advisors perform. At least anecdotally, clients can quickly tire of detailed and technical discussions about how these goals are accomplished. However, when clients are given the opportunity to talk about their values, their families, their charitable giving, and similar topics which have personal importance, they get excited about the conversation. It can be a breath of fresh air to come to a meeting where these issues are discussed rather than tax rules or investment performance.

All planners have to earn a living, there are only 24 hours in a day, and clients will not always be willing to pay for more broad-based planning. However, for the advisors who are willing to learn more about a client’s big-picture goals and concerns, and for clients who are willing to take the leap (for example, in planning costs and transparency with family members), there are any number of planning opportunities to address their concerns. Hopefully the surveys cited in this writing show that clients often perceive certain goals such as passing along family values, strategic philanthropy, and intentional asset management within those considerations, as more important than the technical work planners tend to focus on providing. Taking the time to help clients work through these concerns can also benefit planners by solidifying long term relationships with their clients and their families and provide fulfilling (and billable) work that adds more value to the client than technical based projects. The planning opportunities discussed in this writing are just the tip of the iceberg, but may help in opening the door to a more complete discussion.

[1] Caporal, Jack, “Kevin O’Leary is Concerned About Leaving Too Large an Inheritance – So are Two-Thirds of High-Net-Worth Individuals,” The Motley Fool, October 12, 2021, https://www.fool.com/research/high-net-worth-inheritance/. For this study, high net worth was determined to be those with a net worth over $1 million.

[2] Money & Family Study, Ameriprise Financial, Inc., https://www.ameriprise.com/binaries/content/assets/ampcom/pdf/money-and-family_research-report.pdf. This was a survey of adults with investment assets of at least $100,000.

[3] 67% say they often discuss how their values shape financial decisions, 77% help children understand reasons behind financial decisions, and 52% talk with children about the charities they donate to.

[4] https://www.youtube.com/watch?v=HyLvjSNvOIc&t=1s

[5] A list of resources provided by Mr. Aucutt in this regard can be found here: https://www.actec.org/assets/1/6/A22_Trachtman.pdf?hssc=1

[6] For additional discussion along with a proposed step-by-step suggestion for addressing family governance, see the two-part series, Rogerson, Thomas C., “Back to the Future: The Central Role of Family Governance in Today’s Estate Planning,” 48 Est. Plan. 24 (April 2021) and 48 Est. Plan. 18 (May 2021).

[7] U.S. Trust, “The U.S. Trust Study of The Philanthropic Conversation, Understanding Advisor Approaches and Client Expectations,” https://www.bankofamerica.com/content/documents/philanthropic/Philanthropic_Conversation_Executive%20_Summary.pdf.

[8] For a summary discussion of private foundations and donor advised funds, see Tillery, Susan, M., “Private Foundations and Donor-Advised Funds: A New CPA Best Practice,” The Tax Advisor, March 1, 2020, https://www.thetaxadviser.com/issues/2020/mar/private-foundations-donor-advised-funds.html.

[9] Of course, there are numerous other planning reasons involved in determining proper appointment of a trustee beyond these considerations.

[10] For a more complete discussion of planning considerations, and benefits, of private family trust companies, see Duncan, John P.C., “The Private Family Trust Company,” Tr. & Est. (Mar. 2017), http://www.wealthmanagement.com/estate-planning/private-family-trust-company.