September 20, 2011
If you’re in the fortunate position of deciding where to leave your millions or billions, take some advice from billionaire Warren Buffett’s son, Peter: Don’t spoil them.
Warren’s philosophy is that you should give children “enough to do anything, but not enough to do nothing.” Instead of perpetuating the cliche of lazy trust-fund babies, Warren pledged most of his fortune to philanthropy, and Peter Buffett received $90,000 in stock for personal use. He and his siblings each received $1 billion to do nonprofit work. And Peter is all right with it, using the money to build a career as a composer.
These kinds of champagne problems are no longer restricted to the uber wealthy. Now more people than ever are faced with the challenge of making crucial financial decisions for their heirs. The nation’s estimated 78 million baby boomers are the greatest entrepreneurial generation and have accumulated staggering amounts of money from a variety of sources such as high-tech stocks. It’s not just a matter of turning over a pension fund or selling Grandma’s house anymore.
“There’s a tremendous amount of wealth,” says Richard Gotterer, managing director of Wescott Financial Advisory Group in Florida.
But history shows how difficult it can be to have such wealth within your reach. Paris Hilton’s billionaire grandfather Conrad Hilton reportedly slashed her inheritance after her wild behavior, choosing to give away 97 percent of his $2.3 billion fortune to his family’s foundation.
“In many cases, a gift or inheritance can do more harm than good,” says Anne Marie Levin, attorney and vice president and trust specialist at PNC Wealth Management in Wilmington, Del.
Financial experts say that employing creative approaches to trust funds, such as implementing incentives for your children, can offer your children financial protection and personal empowerment.
Here are five things to consider if you are going to create a trust fund:
1) Passing the buck before taxes go up. One of the hottest topics concerning funding trusts is making gifts to irrevocable trusts to take advantage of the current $5 million (or $10 million per couple) gift-tax exemption, Levin says. (The $5 million gift-tax exemption was raised from $1 million to $5 million in 2010 and will stay in effect through 2012.) A popular estate planning option that isn’t scheduled to change is an individual annual tax-free gift of $13,000 (or $26,000 per couple).
2) Timing is everything. The key is to build flexibility, says David R. Okrent, an estate planning attorney in New York. When it comes to trust funds, one of the biggest questions is when to give wealth, while you’re alive or after you die? One option is to stagger when a child receives the inheritance — say every five years — at 25 years old, 30, etc. This allows children to mature. Many young people would find it hard not to blow all the money on cars and fun, Gotterer says. “You really want to look at your children and their strengths,” he says.
3) Offer a carrot for good behavior. Some trusts include incentives to encourage certain kinds of behavior and/or productive lifestyle; e.g., the child receives a certain amount when he/she graduates from college or to assist in starting or growing a business, Levin explains. Some trusts discourage certain behaviors, such as drug and alcohol abuse. They forbid distributions from the trust if the child has a positive drug or alcohol test.
4) Recession perks. People may own something now that’s artificially low — real estate — for example. “Today would be a good day to gift that,” Okrent says. People may decide to give this year instead of next, especially with the possibility of tax law changes in 2012.
5) Money isn’t everything. Letters or videotapes to children are “sometimes more powerful than the money itself,” Gotterer says. A lot of baby boomers have rags-to-riches stories. Every generation wants the next to have a better life. “They say, ‘I don’t want my kids to work as hard as I did.’[But] what’s wrong with that?” Gotterer says.