New Estate Tax Law: Lottery or Legacy?

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Many estate planners and their clients want to work quickly to take advantage before this law expires, because no one knows if this tax exemption will last past 2012. But wealthy individuals and their trusted advisors would be wise to also consider the human implications.

The government could not have designed a better way to stoke the economy than enabling parents to give millions to their children, without teaching them how to invest and spend it wisely!

Parents, grandparents and estate planners need to focus less on how the new tax law—which allows us to pass up to $5,000,000 ($10 million for married couples) in assets to heirs without any gift tax or generation-skipping tax (GST). Instead, they should focus more on the effect a windfall inheritance might have on the next generation, say Richard A. Morris and Jayne A. Pearl, authors of Kids, Wealth, and Consequences: Ensuring a Responsible Financial Future for the Next Generation (Bloomberg, a Wiley imprint).

“It’s understandable that many estate planners and their clients want to work quickly to take advantage before this law expires,” say Morris and Pearl, “because no one knows if this tax exemption will last past 2012. But wealthy individuals and their trusted advisors would be wise to also consider the human implications. Giving your offspring $10 million at any age can have the same negative effects as a winning lottery ticket.” For instance, the majority of lottery winners declare bankruptcy within five years, according to a study by researchers from the University of Pittsburgh, University of Kentuck and Vanderbilt University Law School.

Morris and Pearl point out that many affluent parents assume that because their children grew up in a high net worth environment, they will handle a sudden windfall responsibly. “In researching our book, we found that an inheritance can dampen an inheritor’s sense of purpose, motivation to be productive, and ultimately, cause them to be less happy, just like lottery winners.”

The authors explain, “Some advisors and their clients believe they can construct trusts that will protect children from the dysfunction that money can produce. Unfortunately, legal language cannot effectively instill the grantors’ value system. As important as it is to draft trusts with careful language and clearly direct trustees, it is just as import to start imparting financial literacy and values to the next generation.”

The authors suggest, “Before planning how to take advantage of the new tax legislation, you should revisit why you are passing down the wealth and how to do so in a way that will not hinder the next generation’s lives by creating entitled, unhappy trust-fund babies who may not share your values.”

Pearl and Morris' book (and their workshops) shows grantors and their advisors how to structure their estate plan so that their assets will create a long-term legacy. Warren Buffet and Bill Gates decided to give most of their billions to charitable causes, leaving their children “enough so they can do anything, but not enough so they can do nothing.” They also set aside significant money in private foundations, one for each child to manage and direct toward causes they care most about.

“It is easy for tax and legal advisors to demonstrate the value of an estate plan by showing how much taxes can be saved, but if the kids end up feeling entitled, unproductive, or spend through the money, then all that tax savings will undermine the parents’ wishes to have happy children,” say Morris and Pearl.

“We can almost picture Stephen Colbert suggesting that the government planned this as a stealth stimulus package! After all, the government could not have designed a better way to stoke the economy than enabling parents to give millions to their children without teaching them how to invest and spend it wisely.”

Kids, Wealth, and Consequences helps affluent parents and their advisors understand how affluence affects children’s future success, happiness and motivation. The book explores everything from how and when parents should talk to their children about the often-uncomfortable topic of money to what affluent families can learn from the economic meltdown about spending, saving and investing to help them better prepare themselves and their children to survive in any economic environment.

Jayne Pearl is a journalist and entertaining speaker, focusing on family business and financial parenting. She is author of Kids and Money: Giving Them the Savvy to Succeed Financially (Bloomberg Press) and has co-authored or ghost-written ten other books. Jayne began her career at Forbes and was former senior editor of Family Business magazine, to which she has contributed for 20 years.

Richard Morris is an adjunct professor at the Lake Forest Graduate School of Management and is principal of ROI Consulting, helping family owners expand and pass down their business to subsequent generations. Previously, he worked at his family's 80-year-old privately held company, Fel-Pro Incorporated, managing Marketing and then Acquisitions, and serving on the Board of Directors until its sale in 1998.

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