It is often said that wealthy people create trusts for their heirs mostly out of distrust. They do not trust the beneficiaries to use the money wisely and avoid exploitation by unscrupulous people. Likewise, when estate planning professionals set up trusts, they tend to focus too exclusively on tax and legal issues. The elaborate strategies they devise are effective in protecting the money and shielding the heirs, but often neglect the heirs' own needs to learn about life and develop into mature adults.
I know something about all this because I was an inheritor myself and because I have interviewed and worked with many inheritors and their parents. I have heard six common reasons for setting up a trust for one’s heirs. Let me examine each of the six and explain why I think each can turn into more of a burden than a blessing because of the psychological handcuffs they create.
1. Avoiding taxes. Hardly anyone outside of the IRS is going to question the goal of using trusts to avoid taxes. Almost everyone approves of doing all that is permissible to minimize what goes to the tax collectors. Yet some heirs who have been hurt by trust arrangements will tell you that the tax savings were not really worth it.
Not long ago I consulted with a family in which the father chose to pay an extra $100,000 in taxes in order to treat his children equitably in their inheritance. This man's father had set up trusts that had the effect of favoring one of his grandchildren over the others. Judging that the emotional impact on his children of any such unfairness was more important than the money itself, he chose to set up trusts for them that corrected the inequity but cost more in taxes.
2. Protecting children until they are mature. This is also a laudable motive, but subject to misuse. For example, a woman whose trust fund is still controlled by her father keeps asking him when she is going to be mature enough to handle her own financial affairs. This woman is 35 years old and has had years of psychoanalysis. She feels strongly that his refusal to relinquish control of the money means that he doesn't trust or respect her.
Seeing and treating young people as immature often becomes a self-fulfilling prophecy: They don't grow up. This kind of overprotectiveness applies particularly to daughters. A number of my female clients have complained bitterly about how their fathers have withheld from them information and responsibilities that were given to their brothers.
3. Preventing children from making costly mistakes. A well-intended idea that may have a psychic toll. Testing one's capabilities by taking risks is an essential element in growing up. We all learn from our mistakes, often painfully, but most of us don't seem able to do it any other way. Overprotectiveness is a major factor in the slow maturation of many inheritors. One symptom is indecisiveness and inability to reach closure on many decisions in their lives, such as whether to leave the parental home and establish their own home or whether to end an unsatisfactory love relationship.
4. Guarding inheritors from the world's dangers. Certainly the world is a dangerous place, moreso perhaps for the rich. Inheritors can and often do get involved with people and causes that are dubious in terms of good judgment, ethics, even legality. “When a man of wealth and a man of experience get together,” says the proverb, “the man of experience gains wealth while the man of wealth gains experience.”
But parents need to balance the risk that their children will be cheated or make foolish use of their inheritance against their need to experiment and learn from experience in order to become responsible adults. Wealthy parents usually provide their children with the best possible academic educations, but too often seem to be unaware of the need for education in the school of life. Children have to learn about living, about themselves, and about how to function in the world. This education comes mainly from life experience and often from making mistakes, rarely from the advice of parents or teachers.
5. Maintaining control over the children's lives. The motives for this reason to set up a trust are often shadowy. Most parents who seek such control know, or learn painfully, that this doesn’t sit well with the children. Yet trusts are often used in this way long after the children have become adults and such parental control is appropriate. I have heard many potential heirs describe, with sadness and anger, how their parents have held out the promise of inheritance, and the threat of disinheritance, in an effort to coerce them into behaving in ways that are satisfactory to the parents or trustees.
One way that parents stay in control is by setting up trusts and legal systems that are so intricate that it is nearly impossible for inheritors to know where they stand. A surprising number of wealthy young adults are in the dark about the extent of the family fortune, how much will come to them, in what form, and when. This means that they will have difficulty planning their lives.
One form of this sort of control is forcing children to work in the family business, without taking into account their talents and inclinations. Sometimes an invitation to work in the family enterprise is an opportunity for a young heir that is consistent with the person’s career aspirations. But many heirs spend their working lives in occupations that don’t really suit them, at great emotional cost to themselves and often to others.
Of course, children do need to demonstrate a certain level of maturity and competence before they can be given responsible jobs or control over a great deal of money. But there is a clear and crucial difference between making the distribution of a fortune dependent upon demonstrated maturity and trying to fit children into a mold. The latter fails to honor the children and permit them to become the individuals they really are and want to be.
6. Establishing and continuing a dynasty. Some rich people try for immortality by establishing monuments of various kinds. Others establish trusts. This last reason is the one with the greatest potential for damaging inheritors. Wealthy parents, I have learned, can become quite captivated by the prospect of having their descendants continue their legacy—the American equivalent of the European aristocracy. They set up trusts that provide not just for their children but for future generations.
While their stated purpose is usually to provide for the security of grandchildren and great-grandchildren, too often the real purpose is a form of self-aggrandizement. One clue is that most of the trust instruments in these cases are named after the donors and not the beneficiaries.
To me, healthy, well-functioning adult children are a much more satisfactory form of immortality. A young couple I know embraced exactly this philosophy in their estate planning. Their parents and grandparents had set up a dynastic system of trusts of extraordinary complexity and stringency. The young couple decided, instead, to leave their own money directly to their children, with no provision for future generations. Their principal reasons: They felt that it was important that their children know that it was up to them to provide for their own children, and that their parents trusted them to assume this responsibility in their own ways.
In a family meeting that I facilitated, it became clear that two of the children wanted the money to come directly to them, while the third felt that some of her inheritance should be left to her children-to-be, so they would have the satisfaction of knowing that their grandfather cared deeply about them. The family worked out separate arrangements for the third.
Now consider the case of a wealthy father who tried to force his four children to hold onto their fortunes for the sake of future generations, to make sure that they put more into the pool of funds managed by the family office than they took out. The father's dynastic ambitions clearly backfired. The offspring rebelled against his attempt to get them to operate as a family unit and found ways to get around it that, in the long run, were destructive of their own happiness. Three of the four have not had any children of their own—and probably never will. All four have also steadfastly refused to have much to do with one another or to cooperate in sharing and maintaining family properties.
I am not opposed to trusts. They obviously have their uses in reducing taxes and in protecting immature young inheritors until they are ready to be responsible guardians of their own money. My only concern is that in creating trusts—and wills and other documents—parents make sure that the process enlarges the opportunities for children to become well-functioning adults rather than retard their development and maturation.
Let me offer, then, several suggestions to parents considering the creation of trusts for their offspring.
First, make clear to the professionals with whom you work that you do not want your estate plans to appear to dictate behavior or impose other restrictions that may frustrate the beneficiaries in pursuing their own life goals.
Second, consider the process of drawing up trusts (or wills) as an opportunity, not just a duty. It is an ideal time to clarify your own values and ideals—to make a personal statement to your children about what really matters to you. Few of us ever do a very good job of communicating what we care about most deeply to those we love. These messages can be very meaningful and moving for the beneficiaries long afterward.
Third, be sure to keep your children informed and involve them in decisions regarding their inheritance. Set up meetings at which you and your financial advisers make presentations that clarify the inheritance arrangements for them and clear up any points at issue. It is often useful, too, for the family to meet without attorneys or other professionals to discuss the estate planning process. Involving children in the process doesn't mean democracy—the kids don't get an equal vote. But their views should be heard and respected as the parents make their decisions.
Fourth, avoid the flaw, so common in trusts and wills, of delaying too long in giving responsibility to inheritors. Withholding responsibility and power too long from children, or imposing rigid restrictions on them, is usually interpreted as a lack of trust. If their parents don't trust them, they may come to feel that they cannot trust or respect themselves.
Obviously, there is no simple way to safeguard an inheritance completely against foolish behavior while allowing beneficiaries use of the funds for their needs and development. Families have found a few formulas that seem reasonable. One way, for example, is to divide the inheritance into three allotments (not necessarily equal), with the first going to them at age 21 and the next two at intervals of 5 to 10 years—often contingent upon demonstration of some ability to handle the money responsibly.
Fifth, consider including a charitable element in your estate. The tax savings from setting up a charitable remainder trust, for instance, can be considerable. Just as important, however, is the example that parents set by putting all or part of their estate into such a trust. Especially when the parents work out trust arrangements jointly with their children—which I believe they should—they make it clear that philanthropy is a major value for them. I have found that inheritors who lead productive and satisfying lives are, surprisingly often, the ones for whom philanthropy is, likewise, a major activity.
John L. Levy, a consultant in Mill Valley, CA, counsels parents, children, professional advisers, and therapists on the emotional consequences and problems of inheriting wealth.