A good homework assignment for your clients before your next wealth transfer planning session is to have them watch the Netflix miniseries, Bloodline. If that doesn’t spur your clients to think about a better plan, nothing will. Gone are the days when disgruntled children and grandchildren passively accepted the gifts from their parents and grandparents.
Imagine how your clients would feel to learn their children would never speak to each other again because of what they inherited. Not only are heirs regularly suing each other, but they’re also suing surviving parents, the advisors who did the work and the institutions where the money is held. Everything is challenged, including intent and competency. As advisors, it is our strong resolve that helps clients create financial plans, succession plans, retirement plans and wealth transfer plans. Often, if not for us, these plans are never completed or updated.
The Collateral Damage
If your client’s wealth transfer plan isn’t done carefully, your client’s wealth will be transferred, that’s for sure — just not where they intended. It will end up being transferred to their litigation-minded children, law firms and other professional firms.
“I have seen successful family businesses fail and real estate empires implode. Even modest estates of less than a couple million dollars can be wiped out in litigation expenses, tearing families apart,” said Larry Adkins, CEO of Atlantic Coast Brokerage Services.
And this carnage is not always contained to the family, evidenced by cases that threaten attorneys, guardians, trustees, judges, Realtors and wealth management advisors all over the nation. When one or more disgruntled heirs are in the mix, emotions can run high. When you combine death, money, children and skilled lawyers, wealth destruction is inevitable.
Not My Clients!
“Not my family” is what we hear most from clients. But these stories are increasingly becoming the rule, not the exception, and everyone has a story to tell. We should help our clients consider better alternatives to help their heirs enjoy their gifts and preserve family relationships. Make sure to include both husband and wife in the initial wealth transference discussions about goals and objectives. When both partners participate, a more realistic assessment about family dynamics will emerge.
“The wealth transfer planning strategies from 10 or 20 years ago are simply not enough today,” said Alan Rose of Mrachek Rose, a litigation specialist in Palm Beach, Fla. “Don’t kid yourself as trustee or executor — families fight. Parents are well-served to consider a harsh penalty for any kind of contest.”
Planning for Successful Wealth Transfer
To minimize destruction of wealth and family, clients should consider each child (and their families) separately and work backward from there. Many people did not treat their children equally throughout their lives, so it may be beneficial to consider unequal treatment after the parents’ deaths as well.
The traditional starting point for estate planning discussions is usually the same: “The more money we can leave our heirs, the better.” But better for whom? Is it better for each child and their families? Does each child handle money differently? Do some children have marital issues, mental health issues or any issues that would prevent your client from handing money over to them today?
What typically starts from a place of good intentions often ends with family feuds, scorched-earth tactics and worse in some cases. Inheritances are gifts, not entitlements. Too much given at the wrong time to the wrong children can lead to a lifetime of problems. In some cases, even telling certain heirs about their inheritance can be damaging. To be clear, I am not suggesting people disinherit their heirs. I am suggesting that we are responsible to recommend solutions that deliver everything our clients want from their planning.
Permanent Life Insurance – The Great Equalizer
A client’s team of advisors is well-served to include a life insurance professional who relates to the problems of wealthy people. Adding income-tax-free liquidity at death is always sensible planning, but it should be elevated to essential planning in order to increase the chances for successful outcomes. Many noninsurance professionals have an insufficient appreciation for the value of instant liquidity at death.
Estate planning advisors tend to implement complex strategies such as discounted asset sales, limited liability entities, sheltering vehicles and many others. Many are great ideas that work, no doubt. Consequently, too many clients adopt a view that life insurance is not necessary. We need to help them adopt a view that instant, income-tax-free liquidity will increase the likelihood of preserving their family relationships after they are gone. That is not the job of attorneys, financial planners or accountants. It is the sole job of the life insurance professional.
These complex planning strategies depend on all the variables coming together as predicted. Market conditions, IRS trends, economic conditions, the real estate market and several other factors all intersect, raising the chances for failure and misunderstanding. An infusion of guaranteed, income-tax-free and estate-tax-free liquidity goes a long way in reducing the fears of anxious heirs, and it gives the plans time to be executed properly.
The Insured Giving Pledge Lessons
Warren Buffett and Bill Gates called on their friends who are worth at least $2 billion each to give at least half their wealth to charity during their lifetimes. From a utilitarian perspective, this request — also known as The Giving Pledge — is brilliant. Buffett is spot-on by questioning how much good his next million dollars does for him as opposed to how much good that million dollars would do for a charity.
As good as The Giving Pledge is, the use of leverage would improve it. Although neither Mr. Buffett nor Mr. Gates asked for my opinion, I suggest that charitably inclined people consider a large, charity-owned life insurance policy as a condition for making the pledge.
For example, assume my wife and I agree to give $25 million to the American Heart Association during our lifetimes. Simultaneous to making the gift, a $25 million survivorship life insurance policy will be purchased with one payment of $5 million. As a result, the total value of our $25 million gift increases by 100 percent, to $50 million.
Here’s how The Giving Pledge with life insurance works in this situation.
1. Pledge and transfer $25 million to charity.
2. Upon receipt of the gift, the charity purchases a $25 million life insurance policy.
3. A single premium of $5 million buys a $25 million policy on the donors, with an immediate $5 million cash surrender value.
4. After the insureds die, $25 million is paid to the charity.
There is no “cost” because this is simple leverage using the donors’ insurability. Those who already made The Giving Pledge might consider scaling this strategy to the maximum amount of insurance on their lives. A $1 billion gift could be increased to $1.5 billion by including life insurance.
Change the Starting Point
Your clients can reduce the chances of wealth destruction by answering a series of important questions at the outset.
* Which children cannot handle money now, or ever?
* Which heirs do you support now?
* Which heirs will need support forever?
* Which children don’t need or want an inheritance?
* Should you include a penalty for contesting your will?
Finally, this may be your client’s last act of “tough love” for their heirs. Part of our role going forward will be to help the client understand that children who are problematic during their lifetime are likely to become grownup children causing problems after the client’s death. Screaming “fraud” repeatedly in court is like yelling “fire” in a crowded theater. I view it more clearly now than ever before.