From time to time in the news we read about wealthy celebrities and business magnates who have publicly stated that their offspring should not expect to receive any sizeable inheritance upon the parent’s death. In recent years, these pronouncements have come from a variety of people including Sting, Warren Buffett, Bill Gates, Gloria Vanderbilt and the late Dame Anita Roddick (founder of The Body Shop).
The frequently cited reasoning for this decision is that parents do not wish a sudden windfall inheritance to be a disincentive to their children in leading ambitious, productive, healthy and self-reliant lives. Moreover, some see significant–and non-monetary–intrinsic value in the fact that their money was self-made, and believe that their children should have a similar opportunity in forging their own paths and achievements, while cultivating their own personal wealth and self-worth.
These can certainly be valid and serious concerns. Instead of going to the extreme of complete or near disinheritance, however, it is possible to pass wealth on to the next generation and beyond in structured and well-thought-out ways that address and alleviate many of these issues.
One method of planning for the transfer of wealth to the next generation and beyond is through the use of a trust (either testamentary or inter vivos). A trust can have the benefit of delaying wealth transfer to children and grandchildren over a sustained period of time, with distributions being made at specified intervals such as upon reaching certain ages or dates well into adulthood. The trust can be tailored to meet a beneficiary’s specific needs (and anticipated future needs) as well as the aspirations of the person establishing the trust. A trust can also ensure that the funds are managed by financially astute trustees who can see to the investment and distribution of the income and capital for the child’s / grandchild’s benefit within the trust’s parameters, while helping to preserve capital for the long-term.
Other creative but perhaps controversial wealth transfer techniques can be incorporated into a trust structure to further ensure that children or grandchildren have incentives and motivation to pursue their own success and self-sufficiency. So-called incentive trusts can stipulate, for example, that beneficiaries receive distributions or other incentives (such as having student loans paid off) upon the successful completion of a variety of education-related events (e.g., obtaining a bachelor’s degree, a master’s degree, etc.). Another idea is to use a “matching fund”: once a child has graduated school and is employed, the trust is structured to match his or her income on an annual basis for a specific period of time. The more income a child makes at his or her profession, the greater the annual distribution from the trust.
Gifting funds to your children or grandchildren while you are living (provided that, of course, you have plenty of assets to look after your own needs and lifestyle first) may also be an option. These gifts could be tied to certain milestones in growing up–for example, funding post-secondary education, the down payment on a first home purchase or a business start-up. Smaller, structured gifts for defined purposes while you are living may provide you with the ability to be part of the decision-making process and allow you to guide and educate your children in the development of their financial literacy and business acumen–while also permitting you to observe how they handle money.
Leaving wealth well to the next generation and beyond may also involve holding candid family meetings and / or preparing ethical wills (see our November 25, 2014 post) in which you outline your reasoning for making certain decisions in formulating your estate plan, as well as your aspirations and expectations for the next generation.
As with all estate planning matters, proper advice and coordination among your professional advisors is critical in formulating an efficient and effective plan tailored to your particular situation.
Please watch for our next post on total return investing and will drafting.
The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.