By Joe Calabrese
President, Harris myCFO
www.harrismycfo.com

Wealth created by one generation can provide for and deeply enrich the lives of generations to follow. However, multi-generational wealth may also pose challenges.

Men and women who have built considerable fortunes often fear that the comforts and trappings of wealth will distort the values of their children and grandchildren. Yet, too often, the many distractions of business, society and family prevent wealthy parents from passing down the knowledge and tools needed to responsibly and capably wear the mantles of their inheritances. Unhappily, the consequences can be weakened family ties as well as weakened family fortunes.

Here are the four basic issues of inheritance: entitlement, differing needs, the grandchild conundrum, and distribution.

Sense of Entitlement.

Should a child be entitled to an inheritance? Although parents are usually delighted to pass their wealth on to their children, some demand that their children adopt their values. Children, in turn, may chafe at such parental control and regard their inheritances as their entitlement, to which no strings should be attached.

Some parents require that inheritances be earned by establishing trusts that reward children at certain milestones - such as receiving a college degree, starting a business or attaining a designated level of income. This is not in itself a negative practice, but if parents establish such milestones, they should be reasonable and consistent with the child's best interest.

When parents begin sharing early on their values and expectations about family wealth, their children are more likely to be prepared - and less likely to be surprised, overwhelmed, disappointed or even bitter - when the time comes for the disposition of that wealth. Parents who conscientiously groom their children for the privileges and responsibilities of wealth are the most likely to have fulfilled their dreams for the thoughtful continuation of their legacies in the generations ahead. Thus an argument is made for early, open and ongoing discussions between parents and their children about family wealth.

Heirs' Differing Needs
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What parents haven't been amused (or baffled) that their children can be so very different from each other and grow up to lead such different lives? This awareness is important as parents do their best to address their children's differing needs and circumstances while also endeavoring to treat their children fairly. It is critical for parents to discuss with their advisors how their estate plans should provide for their children. Should assets be divided absolutely equal? At first blush, that seems most equitable. But aren't there circumstances that might prompt parents to treat their children differently?

For example, what if a child or grandchild is disabled or has a chronic illness requiring considerable and ongoing medical care and services? A so-called "special needs trust" for the exclusive benefit of that descendant may be in order. And what about a family in which one adult child is a professional or entrepreneur with high compensation, while another adult child is a dedicated artist, social worker or teacher whose salary is modest?

Is it appropriate for parents to provide more for the lower salaried child - or will the child who inherits less feel "less loved" or resentful, while the child who inherits more feels embarrassed or guilty? These are not easy issues to resolve. However the best formula for success is thoughtful discussion with advisors and open communication with children.

Grandchild Conundrum: "Per Stirpes" or "Per Capita"

Usually, grandchildren are sources of undiluted and unadulterated joy for their grandparents. Yet, when grandparents make hasty decisions about dividing their estates among their descendants, tension and even heartache can follow.

Case in point: Child A has four children, and Child B has two children. Should the parents provide two equal pots - one for the four children of Child A, the other for the two children of Child B? The risk of this per stirpes ("by the roots") method of disposition is resentment on the part of Child A or Child A's children. The alternative is a per capita ("by the head") distribution - that is, the grandparents would provide for six equal pots - one for each grandchild. The disadvantage is that the descendants may wonder why the estate was not divided equally between the families of the two children.

Parents should determine the direction they wish to take after discussing the pros and cons of these scenarios with their estate-planning attorney and other trusted professional advisors. What may be right for one family may not be right for another.

Lump Sum or Extended Distribution

Parents may be uncomfortable with the idea that, upon their death, their children will receive large lump sum payments or other assets. They may sense that their children lack the maturity or sophistication to manage sudden wealth. Fortunately, there are time-honored alternatives, the most popular of which are trusts.

Parents can establish trusts from which funds can be distributed to their children and grandchildren over time. Until the trust is terminated, the trustee holds legal title to the trust property and is obligated to safeguard and invest it in accordance with fiduciary laws and principles.

In Conclusion

While each family is unique, the task of transferring wealth from generation to generation is universally difficult. The task can be eased, and the envisioned results achieved through thoughtful, collaborative planning using the advice of professionals and open channels of communication with children.

Harris TMis a trade name used by Harris N.A. and its affiliates. Trust services are provided by Harris N.A. and The Harris Bank N.A. ; consult state law to verify fiduciary capabilities. Not all products and services offered in every state and/or location.

The information and opinions expressed herein are obtained from sources believed to be reliable and up-to-date, however their accuracy and completeness cannot be guaranteed. Opinions expressed reflect judgment current as of this publication and are subject to change. Past performance is not indicative of future results.