In this series of posts, we are looking at the components that are becoming hallmarks of best and next practices in 21st Century Estate Planning. First up: the teaching component.
Did you know that studies show most heirs spend their inheritance within thirteen months of having received it and most of them fire their parents’ financial advisors within six months. Many experts see a correlation between these two observations.
Part of the problem lies with the structure of traditional trust planning. In traditional trusts, someone in the senior generation puts assets into a trust to be managed by a trustee for a beneficiary who will receive income and, perhaps, eventually a series of principal distributions. This static model of trust administration makes the beneficiary a passive and therefore wholly dependent person in the wealth transfer process. Should it then come as any surprise that “trust fund kids” turn out to be financially passive and dependent? Is is possible that the structure of the trusts has “trained” them to be this way? Perhaps by the very structure of the trusts we have created, we have taught beneficiaries the wrong lessons about how to be successful in life. Many beneficiaries of such trusts are ultimately ill-equipped to receive the principal distributions when they finally arrive and so the funds are often squandered. This is particularly true in a culture where consumerism dominates the cultural landscape and where oftentimes the immediate knee-jerk reaction upon receiving money is to spend it.
An estate plan considering human, social, and cultural capital will take a very different approach. One of the principal goals of a trust informed by these concepts would be to provide an educational framework that will give the beneficiary the skills (i.e. human capital) to work with advisers and to manage money effectively. In a well designed trust, the beneficiary is typically required to work with a trustee or investment professional in co-managing assets. While the trustee or manager may have the final say in investment and distribution decisions, the beneficiary will either have the opportunity or be required to participate in and understand discussions about risk assessment, diversification, investment horizons, markets, and so on. One important goal of this sort of trust is to involve the beneficiary in age-appropriate ways throughout the term of the trust.
By the time the beneficiary receives outright distributions, he or she will have received a good foundation for understanding how money works. There will also be a track record of having worked with advisers which will help the beneficiary wisely manage the distributions. This ability to work with professionals can be absolutely critical to maintaining wealth in the first few months after receiving a distribution. Rather than leaving money to younger children or grandchildren in an old-fashioned trust, transition planning in the 21st Century requires that the beneficiaries and the investment manager work together in a way that teaches beneficiaries sound financial skills and habits.
Questions
- Do you agree or disagree that the structure of trusts in itself can create degrees of capacity that undermines the human potential of the beneficiaries?
- Have you seen trusts that have done more than create passive beneficiaries?
— November 2, 2010