The client sitting across from me was very concerned about passing massive amounts of wealth on to his children. He was worried about entitlement and sapping their motivation. He was worried about what a large inheritance would do to their marriages and his grandchildren. He was concerned that he would do more damage than good. He had also heard a great deal about Warren Buffet.
The Buffet Meme
As many know, Mr. Buffet has said that he wants to leave his children ”enough money so that they would feel they could do anything, but not so much that they could do nothing.” The rest is going to charity. This is terrific in theory, but actually quite difficult to work out in practice. The Buffet aphorism sounds like an answer to the old chestnut “How much should I leave to my children?” Unfortunately, when you scratch the surface, this bit of apparent wisdom offers no real guidance — it simply refines the question and forces you to think of the same problem from two directions. At best it allows you to bracket a number and create a range.
The underlying question – “How much is enough?”- is intrinsically impossible to answer. There is no “right” calculation; whatever answer is given is set against a backdrop of deep human and economic risk. Even with guidance from Mr. Buffet’s insight, one is still picking an almost certainly arbitrary number based on guesswork and bias in the face of an uncertain future
There has to be a better way and I believe there is.
The Share for the Family’s Common Good
I have spoken before of creating a share of the estate dedicated to the family’s common good. The basic idea is that one creates one more share than he or she has children. For example, if there were three children, you would create four shares of your estate (or five if you wanted to give a large portion to charity). These shares may not be of equal size. The extra share is not given to the children, but is held in appropriate structures and invested in the long term well-being of the family as a whole. It will be intentionally held and consciously used to invest in the family’s human, cultural and social capital over an extended period of time. This share is thus specifically dedicated to sustaining the common good of the family.
In thinking about this share, it is useful to consider the following kinds of purposes or pools for these assets:
- The Contingency Trust: This pool of funds is designed to cover the costs of unanticipated emergencies and hardships. This trust might cover periods of disability or fund future special needs trusts. It could also address such problems as chronic mental illness, substance abuse, emergency medical care or the loss of a job. Some of these problems are chronic and some are acute. The trust can be designed to treat these differently. For example, in cases of substance abuse, the trust might make certain distributions contingent on treatment and continued sobriety or for those who have lost jobs put a limit on the duration of such distributions and insist on job retraining. Conditional distributions might be made for short term situational problems while treatment for chronic mental illness or disability would be ongoing.
- The Development Trust: This fund covers such things as education, paying for unique learning opportunities and experiences, helping families adopt, short term therapy, and personal growth experiences. Distributions are most often be structured as loans on the premise that the family is investing in the individual and therefore that individual must ensure that the funds are available in the next generation. Because of repayment obligations and structured accountabilities, requests to this fund are likely to be serious and thoughtful applications that result in mutual agreements entered into by the administrators and the applicant. As family branch fortunes wax and wane, this fund helps to ensure that funds are available for those who want to succeed. This trust also sends the message that the family values and supports personal development and accomplishment.
- The Family Togetherness Fund: This fund covers the expenses of family gatherings (including reunions, meetings and retreats), commonly held family assets (such as family compounds), and other assets or activities that promote the healthy relationship of the family.
- The Philanthropic Fund: Families that give together tend to do better than families that don’t. By engaging in collective philanthropy families learn to collaborate. Philanthropy is a wonderful way to bring spouses into the family from day one. Philanthropy, when done well, also becomes a powerful tool in preparing the next generation to work together and to understand the dynamics of money, organizations and the role of advisors. Finally, philanthropy can also be used to enhance the family’s social capital.
- The Family Venture Fund: This becomes a way for family members to support the entrepreneurial spirit of the family by fostering credible business ventures by family members. The fund vets business plans, monitors progress, establishes advisory networks and supports the family members in business. In turn the fund typically takes equity stakes in the enterprises it funds (again on the theory that the family is benefiting the individual and the individual should be working to benefit, in part, the future of the family as a whole). To the extent that these funds are not invested in family enterprises, they can be managed by the family as a means to learn about investing in outside business ventures and share in the profitability of those ventures.
- The Grant Fund. Occasionally family members do something wonderful and should be recognized and rewarded for it. Grants allow a family member the luxury of focusing on something larger than themselves. These reward excellence, achievement and contribution or recognize extraordinary potential. Such grants may be premised on the recipient taking time off to work on something of value or may be simply given for the recipient to do with as he or she will.
If you let your imagination run, you will be able to think of other funds or different uses to which the funds above might apply. The point is that these funds are all designed to invest in the family as a whole.
Why This Approach is Helpful.
How does this approach begin to help answer the question of “How much is enough?”
First, it creates a robust safety net by reapportioning what are usually thought to be individual risks to the family as a whole. This means that shares given to individual children can be smaller with the knowledge that if disaster strikes, a child will not likely be financially ruined because of the family safety net. The second thing these funds do is encourage accountability and provide rewards for solid behavior. This helps contain, to some degree, problems of entitlement. Finally, and perhaps most importantly, this approach requires that the family work collaboratively from the beginning. This is not a plan that can be designed behind closed doors and dumped on the family at death. The only way for a system like this to work is for families to begin collaborating to create workable agreements based on their recognition of their common good. Helping the family come to understand the importance of supporting one another is perhaps the best hedge against not only entitlement, but against the downside risk of getting the wrong answer to the question “How much is enough?”
There is much more to be said about these approaches. These are inherently complex structures that must be carefully drafted and even more carefully administered with both family and outside governance structures. There should be linkages between these funds and contingencies within them. They require solid decision making by the family working closely with professional advisors. They should contain mechanisms for making these decisions and resolving conflict. There should be clear paths to dissolution of these entities if they are not serving a useful purpose. Some of these problems are truly difficult and some merely technical.
This is not a perfect framework – it still requires that money be allocated at the end of the day – but it does take a great deal of anxiety out of the problem of individual inheritances. It also allows one to think about the problems of inheritance from multiple perspectives and in much more nuanced and flexible ways. Most importantly, in my experience, this sort of framework transforms the estate planning process from one that merely hedges against risks such as entitlement or profligacy to one that energizes clients and their families as they work together creatively to secure the common good of the family.
— April 22, 2013