By Harry S. Margolis
Bill Gates, Warren Buffet, George Lucas and even Sting won't be giving their millions and billions to their children. Instead, the bulk of their estates will be going to charity. According to an article on CNBC.com, this is not because they don't love their children or just because they think that there are others in the world more in need of their support, but also because they don't want to undermine their children's initiative. Apparently Bill and Melinda Gates, who are worth $79 billion, plan to leave each of their children $10 million, certainly enough to live on, but not enough to purchase several mansions and a Lear jet.
When I was growing up, my parents had a friend who had inherited a substantial amount of wealth which appeared to affect his ability to stick with professions and businesses in the face of inevitable difficulties. He had been an exhibit designer for museums and had founded a company to create travel videos -- perhaps a bit ahead of his time. When he started the company, he bought a huge RV bus, which we used once for extra rooms when our cousins were visiting. A great vehicle, but ultimately the business failed. Subsequently, he decided to become a writer and outfitted an old stable on his property as a state-of-the-art writer's studio. Again, a beautiful place to work, but the words didn't come.
Would this man have stuck with these businesses and professions until they succeeded were her forced to do so to put food on the table? Would he have made the necessary changes to make them successful? Would he have been more fulfilled and happier? Were there other issues going on that stood in his way, perhaps as the son of a very successful father? I don't know, and perhaps no one can know.
While most Americans don't have enough wealth to worry about financing a life of luxury for their children, for many this can be a concern. It can often depend on the number of children in a family. A couple with a total net worth of $1.8 million and six children, for instance, would leave them each $300,000, which would enhance their lives, but probably not permit them to retire immediately. On the other hand, if they had only one child and she inherited $1.8 million at a young age, she might have less incentive to persevere in the face of challenges when starting a career or business. Another way to look at this, however, is that having some wealth would give this daughter the freedom to follow her dreams, whether that be developing as an artist or working in lower paid but fulfilling work, whether as a social activist or teacher of young children. Why should everyone be forced to work hard and deal with the inherent stress of having to make ends meet?
Every individual and every child is different. Parents generally want to help their children, enhance their lives, and relieve them from financial risk. Parents of adult children may have a pretty good idea about the effect a windfall would have on them and whether it makes sense that they receive their inheritance outright or perhaps in trust with an independent trustee. Parents of younger children may have little idea of how their children would handle some level of wealth or what their needs and circumstances will be as adults. They almost always provide that an inheritance not be distributed to them until they reach a certain age -- often age 25 -- or even that they receive a portion as they reach various ages -- often a third each at 25, 30 and 35. In the meantime, the funds can be invested and distributed for their benefit as deemed appropriate by a trustee.
In essence, parents have three choices:
- Keep it simple and give everything directly to their children in equal shares. Let come what may. It's up to the next generation to run their lives, including their financial lives.
- Give some or all of the estate to charity. Others may need assistance more than the children of affluent parents who have, in all likelihood, already received a step up in life due to the advantages and opportunities their parents' station in life has afforded them.
- Leave some or all of their estate in trust for future generations. The idea here is to make sure funds are available to children and grandchildren if needed for education, health care and other support, with the intention being that the funds will not be used except in the case of emergency. Except in the case of unfortunate events -- illness, disability, divorce, death of a spouse, for instance -- the children are expected to stand on their own two feet.These trusts can also offer creditor, divorce and tax protection.
Parents may choose any of these approaches, or a combination, leaving some funds directly to children and the balance in trust. Some clients divide their estates in equal shares among their children with another share of the same size going to grandchildren. For instance, parents with three children would leave them each a quarter of their estate with another quarter going to their grandchildren, often in trust for their benefit until they reach a set age.
In short, there's no answer. Or, rather, there are many right answers. Every parent planning for children and grandchildren needs to consider what's best for them -- more money to enhance their lives, money in reserve for emergencies, or little or nothing to make certain that they can stand on their own two feet.