United States: Managing Abundance: Inheritance Strategies Of The Upper Class

Last Updated: May 18 2015

Broadly speaking, I have observed Upper Class families use three types of inheritance strategies: deferral, ad hoc gifts, and income streams.

Deferral is a traditional strategy: pay to raise and educate your child, and then give them not very much (if anything) until they inherit as your survivor.

Ad hoc gifts are transfers for a particular purpose, such as paying off credit cards, covering club assessments, grandchildren's tuition, buying a vacation home, or capitalizing a business.

Income streams are arrangements (often using trusts, or partial ownership of businesses or rental real estate) that provide ongoing income to the child.

As an aside, please bear in mind that by "Upper Class", I'm referring to families in which children could inherit more (sometimes, much more) than $5 million each. Especially if parents can transfer that much wealth to each of two or more children, the parents themselves are likely in a substantially secure financial position, even after making lifetime transfers to their children.

For discussion purposes, this creates freedom to focus on how wealth transfers affect children, rather than parents.

Each type of inheritance strategy presents pros and cons.

Deferral can be tempting in certain conditions.

  • Parents might have lingering concerns about their own financial security (particularly if their lifestyle spending is high in relation to their asset base).
  • Parents might view their children as irresponsible, and be concerned about gifts reducing a child's work ethic.
  • Parents might be undecided about ultimate allocation of their wealth between their descendants and philanthropy.
  • Parents might simply be strong personalities who prioritize control over other objectives.

Deferral's downsides are expressed over time, in ways that can be hard to observe in the near term.

  • Adult children finally inherit when they are in their 60s and their parents are in their late 80s or early 90s. The children receive large wealth when it's too late for that wealth to allow them to pursue careers of choice rather than necessity, and after grandchildren are educated.
  • Adult children may experience "sudden wealth syndrome" and make (perhaps) large unwise purchases, in an effort to enjoy the wealth they've waited for while there's still time.
  • Adult children who didn't want to wait for a large inheritance may have taken very speculative business risks in early and mid-career; if these risks didn't pan out, their debt burdens can present problems.

Ad hoc gifts may make sense on a case-by-case basis.

  • A child may need a down payment on a first home.
  • A grandchild may need to go to college or graduate school.
  • A parent may want to congratulate a child on reaching a milestone, or on a particular achievement.

On the other hand, ad hoc gifts can create very perverse incentives.

  • A child learns that bailouts from credit card debt are possible.
  • A child learns that parents will backstop "social image" spending on clubs.
  • To receive parental funding, a child has to pursue entrepreneurship, even if their heart isn't really in it.

Ad hoc gifts also present fairness issues in families with multiple children, because ad hoc opportunities vary in size and timing. How will gifts be equalized in a way that is fair – and beyond that, is seen as fair by all siblings?

An unspoken competition can develop among siblings to see who can get the most from mom and dad. As you might expect, that turns siblings into "frenemies" at best and outright enemies at worst.

Income streams created for a child (for instance, by a unitrust, or by gifts of partial interests in a business, investment partnership, or rental real estate) can be an attractive wealth transfer approach for several reasons.

  • Once the income stream is arranged, the cash flows to the child are relatively predictable.
  • The child can use income flows to service debt. This allows the child to borrow to fund major purchases or investments, without needing to turn to parents for case-by-case lump-sum funding.

In certain instances, income streams can present downsides.

  • A child who is co-owner in a business might object to the parent's business decisions or cash distribution policy, and family discord or even litigation might ensue.
  • The value of unitrust assets or the business might soar unexpectedly, and the child might become "too rich, too soon."
  • Children with the cash they need might become ungrateful and/or inattentive to parents.

For Upper Class families, I am partial to the income streams inheritance strategy, compared to deferral and ad hoc transfers.

A child can make much better financial decisions knowing what his or her income will be, and that relative predictability is what the income streams strategy provides.

Without having to ask parents for ad hoc transfers for particular purposes, I think adult children maintain more independence and dignity.

When wealth transfer isn't completely deferred until children survive parents, a family's financial capital can be used more fully to develop the human capital of grandchildren and more remote descendants.

In turn, higher human capital makes it much easier for families to protect and grow multigenerational financial capital.

In my experience, potential problems with the income streams inheritance strategy can best be avoided by not using it in the wrong situations.

Parents should not transfer future cash flows to children unless they are objectively and subjectively extremely financially secure themselves.

Parents and children who will be co-owners in a business or real estate delivering income streams to children should have positive relationships of trust and confidence.

That's because closely held business ownership by co-owners who don't like and trust each other can be fraught with problems – whether or not the co-owners are related.

When parents hold enough wealth that inheritance will dramatically change their children's lives, they will obtain better outcomes through careful review and implementation of the particular mix of deferral, ad hoc transfers, and income streams that best fits their family.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions