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Inherit the Windfall
t’s a common theme used in Hollywood movies: A wealthy relative passes on, leaving a massive fortune to a family member who hasn’t quite got his or her life together yet. But before the money can come rolling in, there’s a clause insisting that the beneficiary prove himself responsible in some way.
It can be an entertaining, Cinderella-like story to watch on the big screen.
But for aging Americans who have amassed some funds over their lifetime, what to do with the money after they pass on is a very realistic concern. Do they hand it over to their children? Or can inheriting a large fortune be detrimental to their family members, prompting a lifestyle of decadence, laziness and poor decision-making?
Adam Sherman, CEO of Firstrust Financial Resources, a wealth management firm in Philadelphia, sees many clients struggle with this issue. “I think despite the rhetoric, most parents want to see their kids get every opportunity with the fortune they’ve amassed,” he says. “The underlying theme is that parents want to make sure things are very comfortable for their kids after they’re gone, so the preference is still to give that money to the children.”
Sometimes his clients add stipulations, for example, that their children don’t get full access to those funds until they reach age 30 or 40. “The idea is that they continue to work hard, stay productive and educate themselves through the school of hard knocks before they can access the funds,” Sherman says.
Whether or not that works depends on how children have been raised, says professor Ted Kurlowicz, who specializes in estate planning at the American College in Bryn Mawr, Pa. “My experience with the majority of high-net worth people is that they’ve already partially ruined the kids by the time they’ve reached inheritance, by providing too much to them too early and creating an expectation that there’s more to come.”
Kurlowicz calls those kinds of kids “professional beneficiaries — kids who are just waiting for the next gift.”
Parents who recognize that mindset of entitlement in their children and are perturbed by it approach Kurlowicz and other professionals in the estate planning industry requesting the creation of a trust, to ensure their kids won’t waste the money. In the trust the parents are able to set parameters for the distribution of their funds and thereby maintain control long after they have gone.
In some instances they insist the child produce a W2 to prove he’s earning a living independently, before any distribution of funds occurs. “The trustee becomes the gatekeeper, preventing the child from frittering away the money,” he says.
One way to avoid having to make a trust in the first place is through good parenting, Kurlowicz says, by emphasizing strategies that award achievement and insisting that children earn things themselves. He started teaching his daughter about budgeting at the age of 6, he recalls. “When we’d go on vacation, for example, I’d give her some money and tell her it needed to last the whole week. She’s good with money today because she learned to make choices.”
The question of if, when and how much money to give your children when you die is one that mostly very high-net worth individuals wrestle with, he says. “My average client, who is worth between $2.5 and $10 million, doesn’t come to me asking if they should give their kids money. It’s when you get to $50 million or $100 million that you start wondering what kind of significance a person’s life will have if they inherit that much, and if it will stop them from having any goals of their own.
“Often, the parents have not been sufficiently involved in their kids’ lives to provide them with the right guidance — which is the root of the problem,” he reflects.
That line of questioning has led to a proliferation of Jewish family foundations being established in the past quarter century. Most of them are in the $4 to $5 million range, says Rabbi Lance Sussman, spiritual leader of Reform Congregation Keneseth Israel in Elkins Park.
What to do with the money is a matter people definitely struggle with, he says. As a prominent rabbi in the region, he has heard a lot on the topic and is sought out for advice. “There are serious questions families raise, such as, do wealthy children get the same percentage as their less wealthy siblings? Do you give to the grandchildren exclusively or to your children and your grandchildren? And how do you transfer your wealth to the generations beyond your children and grandchildren? Every once in a while you hear about a family that once had immense wealth but no longer has it, because it wasn’t well-planned out over the generations.”
A congregational rabbi for the past 30 years, Sussman has a definite theory on the matter: “The Jewish community has nowhere to go but to the Jewish community for help,” he explains. "It’s very rare that a friend from the outside lends a hand, so it’s up to us. Taking care of our institutions is a very serious matter.”
This article originally appeared in "Financial Health," a special supplement.