Lawyers say communication is key to long-term preservation of large estates

September 10, 2014

A fortunate few wealthy families are able to preserve their estates for more than a couple of generations, but attorneys say communication can improve the odds that a grantor’s grandchildren will have something left to pass on.

Rules against perpetuities in Indiana and other states work against multi-generational inheritances, but estate-planning attorneys say those laws often are unnecessary because laws of human nature tend to work against long-term wealth preservation.

In a recent widely published article, “Will your beneficiaries beat the odds?” California wealth management professionals John Hartog, Jim Kohles and Haitham “Hutch” Ashoo wrote that baby boomers will inherit $7.6 trillion in their lifetimes – a sum greater than the annual gross domestic product of China.

The bad news for boomers – nine of 10 family fortunes will be gone by the end of their children’s lives, based on research from the Boston College Center for Retirement.

“The third-generation rule is so true, it’s enshrined in Chinese proverb: ‘Wealth never survives three generations,’” said Hartog. “The American version of that is ‘shirtsleeves to shirtsleeves in three generations.’”

Hartog and his co-authors recommend that heirs be given some money early so matriarchs and patriarchs see how they handle it; that donors should let go of some control of the estate; and that families should hold wealth meetings.

Amy Comer Elliott, president of the Indiana State Bar Association’s Probate, Trust and Real Property Section, knows from experience the importance of those kinds of considerations. She and her brother, Ben, are third-generation owners of the Abstract & Title Guaranty Co. Inc. in Danville. Elliott also is a partner in the Comer Law Office in Danville.

Elliott said she and her brother benefited from their father’s decision to relinquish some control of the family business when he retired about five years ago. But she said it’s partially the natural order that wealth dissipates over time.

“Even if the children are astute with the money, it naturally gets divided unless each generation has only one child,” Elliott said.

Family dynamics also can play a role in dissipation of assets. Gina Giacone, a partner in Ice Miller LLP’s trusts and estates practice, said those factors can have a greater impact on estate value than taxes or poor planning. “It’s a difficult thing to address,” she said.

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But open communication about family wealth is important, and so is realizing that different psychologies may be at work in people with a longer history of wealth in the family compared with those who are just learning to deal with substantial estates.

“A lot of times people are nervous about giving large sums of money” during their lifetime, Giacone said. “Exposing the next generation to some wealth and teaching them about financial advisers is a good thing.”

Nevertheless, she said, “It’s not a one-size-fits-all for every family” when determining when, how much or under what circumstances to give heirs a portion of their inheritance.

Giacone said some clients have taken a novel approach, for instance allowing distributions to children with incentives to use the money to bring business plans to the trustee, thereby potentially growing the estate. Foundations and charitable components of estates also can help foster good stewardship.

“In the last 10 years or so, I think I’ve seen more of those more specialized plans and trusts that try to create incentives for children to behave in a certain way,” she said.

Polly Dobbs, an attorney at Starr Austen & Miller LLP in Logansport, said she has had estate clients who realized their family fortunes might be in peril.

“I always ask my clients whether their children are emotionally and financially prepared to manage their inheritance,” said Dobbs, whose practice areas include wealth transfer and farm and business succession planning. “Often, I see ‘looks’ between spouses, eye rolls and hear chuckles. Then we talk about ways to help prepare the next generations for the responsibilities that will accompany that influx of assets.”

While communication is key, talking about family wealth often is antithetical to some. Many older people are of generations who believe talking about money is bad manners.

“The concept of a family meeting seems too formal and foreign to many,” Dobbs said. “If an adviser pulls together one family meeting, the likelihood of consistent future family meetings is low; it isn’t realistic.

“However, simply telling stories about family history and how businesses were grown and assets were accumulated is a great first step toward educating the younger family members about financial matters,” she said. “Once the dam is broken, frank discussions about family money and expectations of heirs’ behavior are more likely to happen spontaneously.”

polly dobbs Dobbs

Dobbs said disputes between heirs are a sure way to quickly deplete estates, but those can be avoided with some early recognition and conflict resolution.

“Working through emotionally sensitive issues surrounding family relationships should be the first step of a solid estate plan,” she said. “I’m a fan of throwing all the dirty laundry on the table and sorting out issues directly. This avoids surprises later and helps me draft a comprehensive estate plan.”

Giacone said it’s not uncommon for older generations to provide modestly for their heirs but ensure the majority of money is entrusted to a foundation for a greater community benefit. “They’ve given them some money, they’ve given them a good start, but they want their kids and the next generation to work hard and accumulate wealth as they did,” she said.

Dynasty trusts, attorneys explain, are another tool for long-term wealth preservation. These allow people to place money in trusts for their grandchildren. “If they put that money in for their grandkids when they’re very young,” Giacone said, “that can be a powerful tool to accumulate wealth for those generations.”

Indiana limits the direction of inheritances beyond a couple of generations, but Giacone said clients with very high-value estates may avoid those restrictions by establishing trusts in Delaware, where there are no restrictions on perpetuities.

After 19 years dealing with estates, Giacone realizes how imperative it is that the grantor’s wishes for the trust be spelled out clearly. She has administered trusts she didn’t create, some that go back to the 1950s. As time passes, intents and desires may fade as fewer are left to remember the terms under which a trust was established.

“It’s very important to provide a lot of information about the family, sort of a mission statement for the family – what are the goals, and what do you want the trust to accomplish?” Giacone said.•


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