The pivotal goal of estate planning should be to protect and preserve the family, not to protect and preserve the assets. This is not because the preservation of family funds is unimportant. It just pales in comparison to protecting and preserving the family.
This distinction is important because when assets serve as the focal point, maximizing wealth transfer is the key planning goal. When the family is the focal point, however, the planner is forced to concentrate first on other issues, such as:
- Taking account of the personality and character of each inheritor
- Deciding on trustees and guardians who view the preservation of the family, not the assets, as their primary responsibility
- Placing reasonable restraints on wealth
- Minimizing potential family conflicts
Only after these issues have been properly addressed should the tax issues be considered. Thus, the client's desires, hopes and fears drive the planning process, rather than the avoidance of tax. This often results in deeper discussions with clients and a greater need for the counselor to focus the client's attention on psychological and more fluid issues than the preciseness of the computation of an estate tax liability.
Accounting for the personalities
Inherent in the concept of protecting and preserving the family is understanding the needs, strengths and weakness of each heir. Many parents want to treat all of their children in the same manner, even though they are aware of often-profound differences in their personalities and life situations. Treating all of them in the same way is either courting disaster for those with personal problems or unfairly restricting the more stable children.
Moreover, the tax and financial needs of each child may differ. The wealthy child may want her inheritance in a generation-skipping trust, while the spendthrift may need a trustee to serve as a gatekeeper to her inheritance.
In every estate plan, parties are appointed to make decisions when the client is no longer able to make those decisions (because of death or incapacity). If the focus is on the assets, the best person may be a qualified money manager. If it's on the heirs, the emphasis may be on those with the skills and judgment to help develop the heirs. In many cases, co-trustees should be used so that both needs are satisfied.
Restraints on wealth
A study by Boston College researcher Paul Schervish estimates that by 2050, between $41 and $136 trillion will have changed hands as the baby boomers and their parents pass on their massive wealth. According to a study by U.S. Trust, only 10 percent of today's millionaires inherited their wealth.
These clients are largely self-made and realize that much of their sense of self-worth comes from having made it on their own. They want their children to also feel this way and are unwilling to provide an unearned lifestyle.
The first goal of a trust designed to protect families is to provide a minimum safety net for family members to ensure that those who are in need receive a minimum level of support.
Such planning also needs to place reasonable constraints on the use and passage of wealth. Evidence shows that providing someone with an unearned lifestyle will often result in decadence and will have an ongoing harmful impact on the heirs. Constraints should be structured to provide opportunity and incentives while minimizing any damage. The planning needs to provide opportunities without funding irresponsible behavior.
Planners have paid little attention to minimizing family conflicts as part of the planning process. I warn my business clients that conflicts are inevitable between operators of the family business and family members who are outsiders. The business owner's plan should deal with this inevitability. Ignoring it will only magnify the conflict.
The July 2000 installment of this column discussed ways to avoid family conflict over personal property. In choosing executors and trustees, one needs to take into account the conflicts that may result from the appointment.
Inherent in this new perspective is the idea that values count. Any discussion of family protection leads naturally to the issue of values. Phrases such as "drafting to influence behavior" or even "values-based planning" recognize that values are at the core of this new perspective. Unfortunately, they provide an easy target for critics.
While values are central to this planning, the objective is not to preserve a parent's values; rather, it is to preserve the family. These two goals are not identical. Moreover, the goal should not be to have the bony hand of the deceased reaching out from the grave; it's to ensure that heirs can do anything, while keeping them from doing nothing.
Just as the U.S. Constitution was intended to be a living document to preserve the Union, so it should be with any planning focusing on this new perspective. It must include enough flexibility to adapt and change over time. We will discuss more implications of these changes and flexible planning in the next few columns.
John J. Scroggin, J.D., LL.M, is a graduate of the University of Florida and a nationally recognized speaker and author. Scroggin has written over 120 published articles, outlines and books, including The Family Incentive TrustTM, published by National Underwriter. He is known for his ability to convert complex, technical rules into practical, usable planning ideas. His website is www.scrogginlaw.com.