Changing Nature of Estate Planning:
Part II - Influencing the Legacy

“Try not to become a man of success, but rather become a man of value.”
-Albert Einstein

“The parent who leaves his son enormous wealth generally deadens the talents
and energies of the son and tempts him to lead a less useful and less worthy
life than he otherwise would.”
-Andrew Carnegie

Powerful new words have been entering the estate planning lexicon the last few years. The words reflect changing perspectives about the fundamental purposes of estate planning. The focus on tax-avoidance methodologies is eroding. It is being replaced by new goals, which resonate more forcefully with clients than the avoidance of a death tax. Among the new words:

• “Legacy” has become a critical phrase in estate planning. (1) It provides subtle connotations that draw out a client’s often unstated desire to leave something of importance behind.
• “Capital” is being used as a tool to analyze the spiritual, financial, family and/or societal approaches by which a client’s wealth and influence can be passed responsibly. (2)
• “Values” are being stressed in estate planning more then ever. (3) Clients often believe their values of hard work, saving and contribution to society are underappreciated. They want values to be perpetuated in future generations - with the hope of making heirs more responsible.
• “Incentives” have increasingly been discussed as part of the methodology of encouraging responsible behavior from potentially wayward family members who might otherwise be prone to squander the family inheritance on a lavish, unearned lifestyle. (4)
• “Affluenza” is a phrase coined to express the often dysfunctional relationship which people have with money and material things. (5)

Each of these words reflects a changing perspective of estate planning. Clients of even moderate wealth recognize that Newton’s Third Law of Motion (“For every action, there is an equal and opposite reaction”) may apply to estate planning. The estate planning corollary may be: “Every inheritance (or lack of inheritance) will create a reaction with the recipient.” Clients and their advisors are increasingly struggling over whether they should influence the reaction and, if so, how, when and where the influence should occur. (6)

Clients are also focusing on the legacy they are leaving to society. As a result there has been a significant increase in virtually all forms of charitable donations. As a result of the discussion about the elimination of the estate tax, there has been an increasing debate about whether the passage of significant unearned inheritances is bad for society. (7)

These new perspectives are by no means universal. Many advisors believe any attempt to influence the behavior of heirs is just a misplaced attempt to rule from the grave. (8) Others believe that ignoring the inevitable impact of an inheritance is an unacceptable abandonment of a parent’s responsibility to “Protect and Preserve his or her Family.” (9)

The Impact of Wealth

Clients (even those of moderate wealth) are increasingly expressing concern about the impact of their wealth on family members. Both the retail (10) and professional media (11) are reflecting (and perhaps helping to foster) this concern. There is increasing evidence that an unearned, significant inheritance carries the strong potential of negative effects, such as guilt over not being personally successful and concerns about the agenda of friends and advisors. (12) A number of studies have shown an increasing concern by parents over how their children will react to an inheritance. For example, a US Trust study, (13) shows that 61% of parents are concerned that their children will place too much emphasis on material things and 54% are concerned that children will live beyond their means. Trusts for children have been created by 81% of these parents.

It is not just the impact of an unearned inheritance. Articles are also focusing on the negative impact of being raised in a wealthy environment. Wealthy children are probably no more subject to personal or psychological problems then any other group of children. However, there is no question that wealth has an additional affect. (14) First, it opens up opportunities and threats that less wealthy children do not have. Second, wealth tends to exaggerate personal character flaws. Third, many wealthy clients have spent more time growing their wealth than growing their families. Carol Kauffman who teaches clinical psychiatry at Harvard Medical School has said: “We’ve all gone nuts in the past decade with the mirage of fabulous wealth. Children can know how important they are to their family, but if it isn’t backed up with consistency of presence, they can feel valued and dismissed, indulged yet deprived.” (15) Fourth, wealth and happiness are not synonymous. At least one study has reported that wealthier children reported lower happiness than their less well-to-do peers. (16) Last, the wealthy can more afford the cost of counseling and treating children with aberrant behavior. In fact, an entire industry has begun to develop for the costly treatment of these children. (17)

Does this mean that estate planners need to convert their practices to psychology? Certainly not. But is does require practitioners to begin to delve into areas that they may have preferred to avoid. (18) It is far easier to draft a standard will with normal bypass trust language than to encourage a client to discuss his or her personal values and the legacies left for heirs. The ignoring of potential problems does not make them go away. In many cases, it only makes the outcome worse.

Influencing The Legacy

If every inheritance will impact an heir, should the client attempt to influence how the heir is affected? In analyzing this issue, some preliminary questions must be addressed.

Why the Influence? The starting point must be to question why the client wants to influence heirs. Obviously, this is largely a philosophical and personal issue, but it is one that must be addressed in the early stages of any planning. For example, if the client wants to penalize an heir for marrying outside the family’s religion, ethnic group or race, the planner and the client should seriously re-evaluate what they are attempting to accomplish. In most cases, punishing heirs for “incorrect” behavior probably falls into the ruling from the grave mentality and is bound to create new sources of conflict. There are obviously fine lines between encouraging “correct” behavior and punishing “incorrect” behavior. For example, are you punishing the grandson who does not go to college by not providing him comparable benefits to those received by the granddaughter who does attend college?

To what purpose is the client attempting to influence the legacy? Are they attempting to maintain a moldy, worm-eaten hand on an future inheritance? Or are they trying to protect and preserve their family by minimizing the threats of an unearned inherited wealth? The client and the advisors must delve not only into the stated reasons for influencing heirs, but also into the real and potential results of trying to influence heirs. There are no easy answers and even the best of intentions can create a devastatingly negative result. The reasons a client wants to influence heirs will also dictate whether the approaches are binding or non-binding.

Inherent in this new perspective is that values count. Any discussion of protecting family 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. Contrary to some critics of this perspective, personal values have always been a part of the estate planning process. For example:

• Placing assets in a QTIP marital trust by its nature will influence the behavior of both a surviving spouse and the remainder beneficiaries of the trust.
• Placing assets in a trust for children to delay their ownership of the funds beyond age 21 will influence the life decisions of children.
• Using a charitable remainder trust to provide an annuity to heirs rather than direct ownership of the assets inherently limits the choices of the heirs.

What is different is the new broad-based focus on the impact of inherited wealth by not just the very wealthy, but even those who would be considered moderately well-to-do. Curtis Carlson, a Minnesota multi-millionaire, in a 1986 Fortune article captured the concern of many parents: “There is nothing people like me worry more about - how the hell do we keep our money from destroying our kids?” (19) To avoid the adverse affects, many clients have decided to gift substantial portions of their asserts to charities (20) and private foundations rather than to families.

If there was not a concern about the negative influences of wealth, most clients would never consider values-based planning. The negative concerns include:

• “Un-productive” lives - There is a quote by Warren Buffet that summarizes the balance that clients are seeking in order to avoid providing wealth that acts as a disincentive to being productive: “[The perfect inheritance is] enough money so that they feel they could do anything, but not so much that they could do nothing.” (21)
• Laziness - If you knew you were going to inherit $10 million at age 23, how seriously would you take your college studies? If you were 15 and knew that your financial needs for the rest of your life were taken care of, would it impact your life choices? Certainly not every child is affected by wealth in the same manner, but for many it will take away ambition.
• Consumption and Waste - There is an old adage in estate planning: “The first generation makes the money, the second generation holds the money, the third generation spends the money and the fourth generation starts again.” Observe historically how many wealthy families have dissipated a vast wealth by consuming it on lifestyle choices, rather than preserving and growing it.
• Destructive Behavior - Some people seem to have a propensity for self-destructive behavior. Wealth can magnify the potential for self-imposed disaster and it’s impact on future generations.
• Misuse of Funds - Some people will never understand how to manage money or a business. A client who recognizes this misplaced talent may want to provide benefits to an heir, but have someone else manage the money or business.

Clients also want to have their wealth produce a commendable legacy in their heirs. Among the hopes are:

• Education - A study shows that over a lifetime a person with a college education will earn over $1.0 million more than a high school graduate. There is probably no greater benefit a client can provide to family than an education and most clients spend considerable attention on this issue.
• Productive Lives - Notice that we say “productive” as opposed to “successful.” Many concerned clients want their heirs to use their inheritance to be productive. The choice of where to be productive is left to the heirs, but few would conceive of dissipating an inheritance on a lavish lifestyle as productive. Dissipating it to teach handicapped children would certainly be productive. Between the extremes lies the debate.
• Charity - As discussed in the first article a majority of wealthy clients personally volunteer at charities. Those who have such involvement recognize that character development results from such association.

While the client’s values lie at the heart of this planning, the central goal of the client should not to preserve his or her values. Instead it should be to preserve the family - the two concepts are not identical. For example, a plan which punitively demands a parent’s values 100 years from now, will probably prove more destructive to the family than an unrestrained inheritance. Just as the U.S. Constitution was intended to be a “living document” to preserve the Union, so to, any planning of this new perspective must include enough flexibility to adapt and change over time. The client and planners, in designing the terms of an inheritance, must take into account changing morals and avoid the ruling from the grave syndrome - even if it was unintended. It is largely a matter of degree and the key may be avoiding both extremes: supporting a wealthy, unearned lifestyle or acting as a petrified, deceased control freak.

For example, a mother has children whom are responsible. The client likes the asset protection and tax benefits of a generation skipping trust, but she is concerned that the grandchildren may lose their ambition if they know they are going to inherit significant sums. The solution? Place the assets in a generation skipping trust which provides current, unrestricted benefits to the children (i.e., probably at the discretion of the trustees) and provide that when the children die, the benefits of the trust for the grandchildren are more restrictive. However, give the mother’s children the ability to reconfigure the trust for the grandchildren using limited powers of appointment which are exercisable any time prior to a child’s death. Thus, the children receive unrestricted current benefits and the ability to change how their own children will receive benefits from the trust. The mother sets the initial parameters, but provides enough flexibility to allow for future changes.

At its core, this approach to planning deals with a major psychological issue: how do we define ourselves as people? If we define ourselves in terms of what we own, rather than who we are, it creates an inherent insecurity because what we own can be taken away at any time. And this insecurity is even more pronounced when the assets were inherited. As Solomon said thousands of years ago: “Whoever loves money never has money enough; whoever loves wealth is never satisfied with his income. This too is meaningless. As goods increase, so do those who consume them. And what benefit are they to the owner, except to feast his eyes on them?” (22) Katherine Gibson of the Inheritance Project has said: "The guilt and shame of inheriting wealth increases with each generation. The farther a generation is from the initial creation of wealth, the greater the guilt and shame become.” (23)

Who is Being Influenced? Whose behavior is the client trying to influence? Is it a spendthrift child who might squander an inheritance? Is it grandchildren who the client wants to encourage to attend college? Is it a second spouse who might disinherit her step-children if she received an inheritance outside of a trust? Is it a general charitable desire to provide educational scholarships for disadvantaged youths?

Determining who the client wants to influence, their personal situation (e.g., married, divorced, parent), personality (e.g., spendthrift, drug addicted) and past behavior are all preliminary issues which must be addressed early in the process. There are some basic perspectives which the planner must understand:

• While children with debilitating mental or physical disabilities are often treated differently in the estate plan (e.g., assets held in a supplemental needs trust), healthy children are often treated as equals. Clients and planners have not delved into the personalities of heirs, their spending habits, the stability of their marriage, their relationships with other family members, or any drug or alcohol problems. Most attorneys believe that these largely psychological issues are not within the normal purview of the attorney’s drafting responsibility. Unpleasant experiences by clients or friends of clients are causing planners to include such evaluations in the planning process. However unpleasant for the advisor and the client, these issues must be addressed. In many cases, a psychologist may be a part of the planning.
• If special restrictions are placed on the inheritance of a mentally disabled heir, why not place restrictions on the inheritance of a spendthrift? Treating children as equals requires a pervasive ignorance of their personality, their marriage, their descendants (if any), their finances and other factors which will be affected by an inheritance. For example, assume a will provides that the estate is distributed in three equal parts to the three children. One of the children has a significant drug or alcohol problem. “Equality” will probably only add to their substance abuse problem. Locking all of the children’s inheritance in a trust may be unfair to the more stable members of the family.
• Often the heir is largely an unknown (e.g., a minor child or unborn grandchild). In such case, the focus is less on the specific personality of the heir and more on the potential general threats of the passage of wealth. In such cases, the client may be well advised to defer to the judgment of trusted friends and family. For example, a client wants to create a generation skipping trust. Grandchildren are still very young. The trust could include appropriate provisions for the known personalities of children, and provide that the parents of the grandchild have the right to exercise a limited power of appointment to reconfigure how grandchildren would benefit from the trust.
• By examining who the client wants to influence, the decision to use binding or nonbinding approaches becomes clearer. You cannot hope to influence an inheritor unless you know who you are attempting to influence.

What is the Client Trying to Achieve? The planner must specifically address what the client wants to accomplish. Over-broad statements, such as, “I want to have good grandchildren” do not begin to help the process. As a part of this evaluation, the client and the planner must delineate both the behavior which is being encouraged and any behavior which is being discouraged and review structures which accomplish these goals. For example, if a client wants to encourage descendants to stay at home with minor children, does he provide a trust stipend to all parents of minor children, or only those who are staying home? What about a child who has three children out of wedlock before the age of 20?

As the client examines what he or she wants to accomplish, the methods of getting there become clearer. For example, a father wants to match the earned income of his children, but does not want to provide income to those who work in “unacceptable” industries (e.g., pornographers, attorneys, politicians). The client may ultimately decide that rather then creating a list of the included and/or excluded activities, it would be less complex to defer to the judgment of an independent trustee who has the discretionary authority to “spray” income among beneficiaries. Or, the father might provide a unitrust payment to all the children, without any requirement of being in an “acceptable” business. Or, he may decide that any legal structures are too complex and that the simplest approach is to do an Ethical Will and Family Mission Statement, with the children receiving their inheritance by age 30.

When? Many of the influences are time-based. For example, we recently had a client who had funded a custodial account for a grandchild for over 15 years. When the grandchild reached age 21 (after bouncing in and out of college), he went to the custodian and demanded the $200,000 which was then in the account. When asked why, he told his grandfather he wanted the funds to go to Europe to “discover himself.” The grandfathers response was “...over my dead body, these dollars are to support you in college, not to go and have fun...” The grandson hired an attorney who sent the custodian a rather nasty letter telling him to give up the money or else. My advice to the client mirrored the attorney’s demand letter. Legally, the child owned the funds at age 21. The purpose of the fund was to encourage college attendance. Instead the custodial account created an incentive to leave, not attend college. The family could have used a trust funded by a Crummey withdrawal right, that would have removed the funds from the Grandfather’s estate but allowing the trustees to control the distribution of funds beyond age 21. The trustees could assure that the funds encourage reasonable behaviors (e.g., college attendance), and are not spent on cars, vacations or other activities that the immature beneficiary might see as more desirable.

How? Is the influence binding or non-binding? What happens when a grandson disregards the attempt to influence them? The client and the advisor need to examine whether binding restrictions should be placed on any methodology or technique used to influence behavior. For example, if the desire is to encourage children to go to college by giving them extra spending money, does the grandparent just provide income from a trust when the child is or college age, or does the plan mandate that the children must be in school on a full-time basis and maintain a minimum grade point average? Any restrictions must use precise language. One of my law school professors talked about a will which provided that the trust would pay all of the trust income to a child until the child was out of college. Once the child was out of college, all of the funds went to a charity. Obviously, the desire was to encourage the child to attend college. When the child was working on his 7th PhD, the charity sued. It was clear the drafter had not contemplated appropriate limitations.

As John Gallo pointed out in his book Silver Spoon Kids: How Successful Parents Raise Responsible Children, (24) influencing behavior should never begin at the death of the client. It begins by the earlier influences that parents have on their children. But because parenting is not a licensed profession, parents may lack the skills, time or desire to train children and planning must address the possibility of how to influence future generations.

Fundamentally, the client ends up choosing among alternatives, none of which will be perfect:

• Disinheriting family (in whole or part) to avoid the negative impacts of inherited wealth.
• Giving it all to family with the hope it will not harm them.
• Encouraging family to develop "productive" values using non-binding approaches.
• Designing a legal structure that provides family "enough money to do anything, but not so much to do nothing."

Will any alternative assure that the heirs are productive and happy? No. Those looking for perfect solutions should understand that each estate planning decision carries its own risks and rewards. Each heir, as an individual, will react differently to the influences of an inheritance. The central question is whether the client should attempt to influence the reactions, or ignore it and hope for the best.

If the client intends to influence heirs, the choices include a broad range of possibilities, including:

• Providing fundamental information about the client, his or her values, experiences, hopes, assets and liabilities. The approach is not intended to legally bind heirs. This influence on the legacy is generally more subtle, but perhaps more profound, than a legally constructed structure designed to more directly influence recipients.
• Providing legal restraints on a heir's inheritance. Heirs are required to act within the confines of the legally adopted structure.
• Providing charitable structures in which the goals of the client are not subsumed in the larger goals of a charity. For example, the creation of a family foundation to maintain family control over future charitable grants.

The remainder of this article will focus on the issues surrounding how clients can influence the legacy they leave behind.

Providing Non-Binding Information

If the true starting point of estate planning is “To Protect and Preserve Family,” then clients and their advisors need to do more than just draft standard form documents. As estate planners, we constantly advise our clients to make sure they have properly planned for incapacity and death. Unfortunately, our focus often begins and ends with the execution of proper documents and the titling of assets. We may fail to make sure the client’s family and decision makers have adequate information about the client’s values, hopes, assets, liabilities and intents. The incapacity or death of a family member is always a traumatic event. But the emotional turmoil and family pain is often magnified by the resulting confusion over the plans, assets and desires of an incapacitated or deceased family member. The mental fogginess that accompanies the family’s trauma is exasperated by the inability or reluctance to make basic decisions - because of the lack of basic information.

There are a number of documents that clients should consider to provide comfort and support to their families upon death or incapacity. These documents can provide “Information in a Time of Confusion” and help minimize the types of inadvertent mistakes which often occur in these times of turmoil.

Ethical Wills - In deciding how to influence heirs, one solution is an Ethical Will. (25) It’s roots lie in the Old Testament oral tradition of passing on wisdom to the next generation, called a “tzava’ah.” An Ethical Will is a document designed to do one of more of the following:

• Impart the wisdom and values of one generation to the next.
• Describe life changing events. For example, a grandfather may provide a discussion of his experiences (e.g., surviving World War II) and how it impacted his life.
• Tell a family of life’s choices, mistakes and successes and the lessons learned.
• Provide family ancestral heritages and histories.
• Provide favorite scriptures, poetry and sayings.
• Provide insights to family and planners on why and how the client developed his or her estate plan.

An ethical will is not a form document. It has no set format or required content. Instead, it is designed to accommodate the unique personalities, family structure, values and thoughts of one generation for the next. Perhaps one of the best description is: “Ethical wills are windows into the souls of those who write them. It is this that makes them so cherished by family members from generation to generation.” (26)

One author has indicated three principal purposes of an Ethical Will: (27)

• Leaving an Intangible Legacy
• Personal Satisfaction
• Aiding the Estate Planning Process

Family Mission Statement - Similar to an Ethical Will is a Family Mission Statement. However, while the Ethical Will tends to focus on values and life’s experiences , the Family Mission Statement tends to be more practical - discussing how the family should conduct itself in the future. It may also serve as a benchmark for acceptable and unacceptable behavior in the family. For example:

• The statement may discuss how a family business will be maintained: "...unless disabled or retired at a normal retirement age, any family member receiving benefits from the business must be actively employed in the business and no family member is assured employment..."
• It may be a statement of a newly married couple of differing ethic or religious backgrounds discussing how their children will be raised.
• It may describe how a step-family will conduct itself.

Unlike the Ethical Will which a client creates on their own and then imparts to family, the Family Mission Statement must be developed with the input of all family members who will be impacted by its terms. If they are not a part of the process of developing the statement, it is less likely the family will observe it's requirements and perspectives.

Family Love Letter - Many guardians and personal representatives have the benefit of a client’s well-drafted estate planning documents, but have been befuddled when they could not readily access basic information about the client’s assets, liabilities, insurance coverages, burial plans, and advisors. The Family Love Letter (28) is designed to provide basic information to family about assets, liabilities, and personal desires upon death or incapacity.

Family Meetings - Once a client has completed an estate plan, should heirs be told of its contents? (29) Obviously, the disclosure or non-disclosure of information will influence the subsequent actions of beneficiaries. There are sound arguments supporting such disclosure, including:

• It allows children to know how the parent's estate plan will impact their own estate plans. For example, if a parent creates a generation skipping trust with a spray power for the benefit of both children and grandchildren, the children and their advisors should to take the trust into account in their own planning, especially if the trust grants a power of appointment to a child. As a further example, suppose an irrevocable life insurance trust grants a child/trustee the right to appoint a successor trustee. If the child has no knowledge of the terms of the trust, the child may fail to make the necessary appointment.
• The disclosure allows children to react to the plan. For example, a daughter might have a substantial estate of her own or be facing a divorce and ask her parents to pass her inheritance through a generation skipping trust. However, the heir's reaction may not be what the client may have hoped, particularly if an inheritance is restricted. As a consequence, the decision to disclose should be predicated upon the personality of the child, the manner that the inheritawith potential conflicts with heirs.
• Disclosure may lessen the chance and success of an attack by an heir after the client's demise. If the child knew of the disposition pattern and did not object, the courts may be less willing to entertain a later challenge. Moreover, if children knew how the estate was structured before the death of the parent, they may have had time to accept the unpleasant outcome and not raise a challenge.
• The passage of particular assets are prone to create conflicts and a discussion of the client¹s desires may reduce the potential for conflict. For example, passing a family business to both those inside and those outside the business will inevitably create conflicts between the two groups. The client should address the ownership and management of the family business with family before death, to reduce the possibility of later family fights.
  
  There are also significant reasons not to disclose the estate plan:
  
  
• The ownership of assets and decisions about their transfer are exclusively the right of the parents. Allowing children to think they have a right to challenge a parent's dispositions may create unnecessary conflicts. For example, suppose a husband is in his second marriage. He has adult children from the prior marriage and a minor child from the current marriage. Because of the prior benefits (or possible estrangement) provided to the adult children, he intends to pass a larger percentage of the estate to the minor child. Disclosing this decision may create conflicts between the adult children and their father, step-mother and half-sibling.
• Clients are often concerned that providing children information about how much they will inherit will take away the ambition of children to create their own wealth. If a son expects to inherit several million dollars, will it hinder his drive and ambition for himself?
• Some clients will provide partial disclosure. For example, telling the children the general disposition of their estate, but providing minimal information about the value of assets.
• Sometimes disclosure is an indirect attempt to control an heir. By telling a child what they will inherit and then threatening to take it away if the child's behavior does not meet the parent's expectations (e.g., visiting the parent enough, spending the child's money as the parent directs) is exercising a pre-mortem ruling from the grave. It is also destructive to relationships.
• Estate planning is a process, not a conclusion. It changes over the course of the client's life as assets, laws and family situations change. Decisions which were made early in the process will not necessarily remain a part of a later estate plan. If early disclosure is made, the client may feel obligated to continue the disclosure for later changes, including those which may be unpleasant for heirs (e.g., locking a spendthrift child's assets in a generation skipping spendthrift trust). Moreover, given the increasing life expectancies of Americans and the potential reduction in government social benefits, (30) clients may use substantial assets to support their retirement instead of passing them to heirs.

Non-Binding Nature - The principal disadvantage (some would say advantage) of these approaches is that they are not binding on family members. They tend to be broad statements of hopes, desires and intents or provide specific factual information, but do not generally provide a legal mechanism to create incentives for proper behavior, or place restrictions on heirs who violate the precepts of the documents. As a consequence, many clients have examined more formal restrictions to influence the legacy they leave behind.

Legal Structures to Influence A Transfer to An Heir

The Goals - When the client wants to create legal structures to protect and preserve family, the goals are often one or more of the following:

• Clients want to protect their families from ever becoming DESTITUTE. Many clients have been destitute and recognize how hard it is to drag yourself out of that hole. As discussed in the first article of this series, clients realize that the ability of their heirs to participate in governmental social programs will probably diminish over the next several decades. As a consequence, they may want to provide a safety net that assures a minimum level of support to their descendants. This topic will be developed in more detail in the next article of this series.
• Clients want to provide OPPORTUNITIES and INCENTIVES to their family. They hope their descendants will take those opportunities and mature because of their own sweat and blood. Clients do not want to provide a non-working, unearned LIFESTYLE to their heirs. As Andrew Carnegie said (as he gave his wealth to public libraries and charity): "The parent who leaves his son enormous wealth generally deadens the talents and energies of the son and tempts him to lead a less useful and less worthy life than he otherwise would".
• They want to minimize INTRA-FAMILY CONFLICTS. Family relationships are more important then family wealth and clients want structures which take into account real or potential family conflicts. (31)
• Finally, they want a plan that minimizes both estate and income taxes imposed on the family.

Note that this perspective involves "one or more" of the above approaches. This approach to planning is not a single planning approach or tool. Instead, it attempts to focus the client's attention on a plan designed to “Protect and Preserve the Family” as the first priority of the plan. Estate planners will have to increasingly address each of these issues in the coming years. One of the more uncomfortable aspects of this approach is that standard forms will no longer be as helpful. Many documents will have to be client-specific. This will result in both higher fees and a cost-based counter balance to this growing revolution.

Each of the above goals involves some restrictions on an heir’s inheritance. One of the most frequent criticisms on restricted inheritances or drafting documents to influence behavior is that it is a blatant attempt of to rule from the grave, by mandating that current value systems govern the behavior of future generations. The critique is fundamentally philosophical and takes many expressed and implied forms. Remember the quote from Warren Buffett: “[The perfect inheritance is] enough money so that they feel they could do anything, but not so much that they could do nothing.” (32) Mr. Buffett’s goal is not to rule his children’s life from a musty grave. Rather it is to aid them to do whatever they want to do in their lives. The key is that they do something, not nothing with their lives.

All planning which attempts to influence the behavior of heirs is not “ruling from the grave.” Giving substantial assets to children does not necessarily destroy them. But, every inheritance will impact the recipient. The struggle is trying to figure out how to make that impact as positive as possible. The answers generally lie between the extremes.

The Restraint Continuum - Parents may feel trapped between the extremes of providing too much to children (and harming them) or giving assets to charities and effectively disinheriting family. A third alternative involves placing reasonable restraints on a family inheritance.

By its fundamental nature, any attempt to legally influence the behavior of heirs starts with the contemplation of some sort of restraint on the inheritance. These restraints may be conceived of as a “Restraint Continuum”. On one extreme lies the outright fee simple, unfettered bequest to family members. At the other extreme lies the disinheritance of family by transferring assets to a charity. It is between the extremes where most planning occurs, using not one, but a blended set of techniques to satisfy the client’s goals.

In evaluating how to influence behavior, the planner needs to address exactly which elements of an asset the client wants to use to influence future behavior. Virtually every asset can be broken into four parts. The division of these parts lies at the core of virtually every estate planning technique. The parts are:

• Control - The ability to control the asset, its use and disposition (e.g., a general partner may own 5% of the equity of the family limited partnership and still control most major decisions.
• Income - The ability to receive the income (e.g., salary from the family business) or current benefits (e.g., use of a family vacation home) from the asset.
• Current Equity - The current value of the asset if it were sold (e.g., while a general partner may control a family limited partnership, the vast majority of the partnership’s current equity value is normally owned by the limited partners).
• Future Appreciations - The future increase in value that the asset will grow to over time (e.g., a residential GRIT may transfer all future appreciation to heirs, while the donor retains a limited present right of enjoyment).

Once the elements are broken down, the next factor is deciding the manner in which each of these elements will be restrained in the inheritance. Basically, there are five separate ways of passing any of these four elements to any heir. The combination of the elements and their related restrictions lie at the core of any attempt to influence behavior. In some cases, restrictions may be combined (e.g., a daughter receives no benefit from a trust until she is in college, with an independent trustee deciding how much to distribute during college). The restrictive approaches include the following:

• Denied - The heirs may have no benefits from the right. For example, a child may own a limited partnership interest while someone else holds the general partnership interest and, therefore, controls virtually all partnership decisions.
• Limited - The heir may have some rights, but not total access to the particular right. For example, a child may be a beneficiary of a total return trust which distributes a 5% annual unitrust benefit. The right to income is limited to 5%.
• Discretionary - Some other party may have the subjective ability to decide the manner in which the heir receives benefits from the asset. For example, in a discretionary “spray” trust, the trustee may be entitled to “spray” the income and/or corpus across a class of beneficiaries, with the decision on which beneficiaries will receive the benefits from the trust being at the largely unfettered discretion of the trustee.
• Delayed - The restraint may be delayed, generally based upon reaching designated ages or certain defined events (e.g., attending college). For example, gifting an asset to a section 2503(c) minor’s trust can delay the heir’s total ownership and control over the asset until they reach the age of twenty-one.
• Granted - The individual may have the current use of the element. While the heir may have the benefit of that particular element of asset rights, the heir will not necessarily have the benefit of all four elements of asset rights. For example, a trust may be created which provides that all of the current income must be distributed to a named beneficiary, but deny that beneficiary the right to receive benefits from current equity (e.g., corpus distributions) or the rights of future appreciation (e.g., a generation skipping trust).

The following chart demonstrates the various ways that these elements may be restrained using standard planning techniques. Obviously, the chart is a bit simplified, but it’s purpose is not exact delineation of each technique. Instead, it attempts to demonstrate the various methods by which elements of an inheritance might be restrained.

None of these planning techniques are new. What is new is the adaptation and reconfiguration of these techniques to satisfy non-tax, disposition purposes. Even though the focus is on how the technique will influence behavior, the plan must also examine the transfer tax and income implications. While tax issues are secondary, they may still modify the initial proposed plan.

Some General Perspectives on Legal Structures Designed to Influence Behavior - When drafting to influence future behavior, then there are certain general perspectives which should be addressed as a part of the decision process:

• In general, any attempt to influence behavior should not be punitive. It should be designed to encourage responsible behavior rather than punishing unacceptable behavior.
• The approach necessitates careful and precise drafting. For example,if the desire is to encourage heirs to attend college, drafting a trust which says "$20,000 a year to a son as long as he is in college" may not be sufficient. The $20,000 could be used to pay for a wild lifestyle. Moreover, unless there are restrictions on how many years the payments are made or the number of degrees, the son might become a perpetual student who never leaves college. If the trust provides support for a “college education", will the language cover a vocational school?
• The influence on behavior should encourage. It should not be so much money that a descendant feels obligated to do what the ancestor dictated. If the client wants to pay for someone to do something they would not otherwise want to do, it will tend to be counter-productive. Such an approach is also a clear attempt to run the lives of heirs from the grave. For example, a client wants to encourage his grandchildren to obtain a college degree. Paying the costs of college and providing some spending money may encourage college attendance. Paying each grandchildren $50,000 per year to go to college is essentially buying the grandchildren¹s education. The grandchildren may not go to college because they wanted an education. Instead, they may go to get the money. The line between influencing behavior and controlling behavior is a fine one that requires through discussion and careful drafting. When is the line crossed? It is simply a matter of degree.
• Drafting to influence behavior must account for the fact that acceptable behaviors may change over time. Therefore, the approach must be flexible enough to accommodate future technological, personal and societal changes. For example, some day it may be that a computer chip is inserted into our brains as a part of our educational process. If a trust only provides for college education and does not allow for changes, this technological change might never be funded - assuming of course that computer chips are something you want in the brains of your descendants.
• Because every contingency cannot be anticipated, the approach must allow some degree of discretion in the judgment of trustees or other parties. (33) It is simply impossible to contemplate and draft for every possibility. Third party discretion (e.g., a trustee or general partner of a FLP) can allow for an unexpected events.
• The approach may require that heirs satisfy certain requirements as a condition of receiving benefits. For example, assume a trust will fund a granddaughter¹s college education as long as she is in school on a full time basis and maintain a 2.8 grade point. The trust may require that the child provide sufficient written information to prove they have meet the requirements of the trust terms.
• The approach should not be too restrictive. The more restrictive the approach, the greater the likelihood that either a need will exist outside of the permitted approaches (e.g., a medical emergency for a descendant when the trust can only support a college education), or that the approach will be seen as ruling from the grave.
• The approach must involve both a recognition of the heirs as they are and as they may become in the future. They are individuals not equals. People change over time and the plan must be flexible enough to accommodate such changes.
• The client should consider providing at least some minimum level of family support (e.g., if the family is destitute). If there is a need for basic medical, educational, long term care or other basic needs, the plan should provide some mechanism to help the family satisfy these needs.
• The approach should be one part of the larger estate plan. For example, placing all assets in a highly restrictive trust normally does not make sense. Providing enough assets to heirs to provide them life opportunities, coupled with assets placed in more restrictive vehicles (e.g., family partnerships) is often the best approach. Except in unusual situations, placing all assets in restrictive trusts may just create more family conflict.
• In most cases it makes sense to discuss with the heirs the manner in which their inheritance will be handled. Death of a loved one is traumatic enough without the shock of finding out you are not inheriting what you expected.
• The client and the advisor should let the ideas sit for awhile and then be reexamined. Look for potential new conflicts or possible unintended implications which might be created by the plan. For example, if the client wants to encourage a child to stay home with a minor descendant, is the amount being paid more than the person might earn? If so, it may encourage a person who wanted to work to stay home - to the potential detriment of both the parent and child. Does the parent have the ability to operate a business out of the home without losing benefits? All of the potential implications should be addressed.
• Counter-balancing influences and flexibility should be built into the plan. The US Constitution has survived because of the checks and balances built into the document. Any planning which restricts an inheritance must have checks and balances built in to avoid abuse by an heir or a trustee and to avoid having heirs being at the mercy of an inflexible approach.

Family Incentive Trusts - One solution is the Family Incentive Trust (34) (a “FIT”). It is designed to create incentives, opportunities and safety nets to family, without providing future generations an unearned lifestyle. The FIT is typically an irrevocable, generation-skipping trust, which provides restricted benefits across future generations. The terms of a FIT vary widely, but generally involve the following approach: (35)

• Trust income is designed to first provide a safety-net to heirs, second to provide incentives for desired activities, third to match a portion of earned income and last, any remaining income is paid to one or more charities or accumultruly destitute, no family member can live off the trust income.
• Trust principal is designed to first provide a safety-net to heirs, second to provide incentives and last to serve as a private family bank/venture capital source for family members.
• The safety net provides help for medical, educational, long term care needs and to help destitute heirs. The aid is generally “needs based”.
• Family incentives are driven by the behavior which the client wants to encourage. For example: (36)
  • Match 50% of the earned income of any beneficiary under age 30,but not more than $20,000 per year shall be distributed to any beneficiary
  • Pay 5% of the trust principal, as a "Family Nobel Price" every five years to the person designated by [third party] to have made the most significant contribution in the field of [charity, education, science, law, humanities, medicine, etc.]
  • Pay $20,000 to each of my descendants who obtain a graduate degree.
  • Pay $2,000 to each of my descendants who graduate from high school with a 3.0 or better average.
  • Pay $20,000 annually to any parent who stays at home with a minor descendant of mine.

The corpus is primarily held as a capital pool from which any family member can request loans or capital investments in their business. A third party provides an analysis of the proposed funding and a recommendation to the trustees.

If adopted, the Family Incentive Trust is just one part of an overall estate plan. For example, a married couple may provide that assets equal to their unified credit exemption amounts go to their children, but that the insurance trust is created as a FIT. This assures the family a source of inheritance, while still leaving a legacy in a Family Incentive Trust.

In the next article (Part III - Divorce and Other Conflicts), we will discuss some of the other types trusts which can influence the behavior of beneficiaries and the flexibility that can be drafted into trusts.

Charitable Legacies

Many clients see the support of charitable activities as a part of their legacy to society and to family. As pointed out in the first article of this series, the manner in which clients are focusing on charitable planned giving has undergone significant change in the last decade. Perhaps as a convergence of the recent scandals in charities, (37) the significant dollars being passed to charities and the increasing “hands-on” management style of donors, clients increasingly want to retain in themselves and/or family the future direction of charitable grants. (38)

Clients want to provide for charitable transfer which will not only leave a legacy for society, but also one which will impact their heirs. Joel Breitstein noted the common bond between today’s donor and the 20th century philanthropists “...is the desire to transmit family values and social responsibility to successive generations...” . (39) This dual goal has resulted in not only a dramatic growth in charitable donations, but the development of “retained control” charitable giving approaches. For example:

• Charitable remainder trusts have been a part of estate planning for years, but have dramatically grown in the last few years. Many donors want to retain in themselves (40) or others (41) the ability to replace the named charitable remaindermen of the trust to assure that the charitable goals of the family are not necessarily bound to existing named charities.
• Private foundations have shown a huge growth the last several years. (42) Essentially, a private foundation is a private charity formed to make grants to other charitable organizations. Because of perceived abuses in private foundations, federal laws place significant restrictions on the operation of private foundations. However, within the constraints of the law, they can provide the family significant control and benefit when compared to other charitable choices. For example, unlike a Donor Advised Fund, family members who manage the foundation can be paid for their services. Because of the cost of creating and maintaining private foundations, many advisors advise clients not to create a Private Foundation unless they intend to place several hundred thousand dollars in the foundation.
• Donor Advised Funds (43) have grown in use. Donor advised funds are generally created by a community foundation. The donor and/or the donor's family have the right to advise, but cannot legally obligate the charity to make requested charitable grants. Except in unusual situations, the charity will generally follow the "advice" of the donor and the donor's family. Because of their relative simplicity, donor advised funds can be created with minimal contributions.
• Supporting organizations (44) are similar to donor advised funds, with one major difference: family can be paid for the services they render to the organization. Like a donor advised fund they are under the umbrella of an existing charity, which has ultimate legal responsibility for the supporting organization. The supporting organization is generally formed as a legally separate subsidiary to the parent charity. Many practitioners believe that supporting organizations are superior to private foundations inprivate foundation gives the family direct legal control of the assets.
• Many clients do not want the burden of managing or making decisions in a charitable organization. However, their desire to contribute is normally motivated by some charitable purpose which resonates. Clients who have a charitable goal, but are unsure of which charity to make the contributions to should consider going to www.justgive.org and www.guidestar.com to locate charities that meet the clients’ goals. The client may either gift to a charity’s endowment to fund a particular program (e.g., fund scholarships for disadvantaged students to attend the University of Florida), or provide restricted funds (e.g., provide for overseas missionary efforts) to a charity’s general fund.

What type of charitable approach should clients adopt? It depends upon their particular facts and goals. (45) For a growing number of clients, the answers lies in the most cost effective method of retaining control while satisfying the charitable purpose which caused the client to consider funding a charitable transfer.

Conclusion

Legacy. Values. Incentives. Protect and Preserve. The escalated use of these words reflect some of the fundamental changes occurring in estate planning. The use also demonstrates that estate planning is far more than the passage of assets to heirs and the avoidance of taxes. It will also help define the legacy of the deceased upon the living.

Author: John J. Scroggin, J.D., LL.M. is a graduate of the University of Florida and is a nationally recognized speaker and author. Mr. Scroggin has written over 300 published articles, outlines and books, including The Family Incentive TrustTM.