Gifting and Estate Planning: Determining the Right Time to Transfer Wealth

  • Niall J. Gannon


There are a number of books that address the various trusts and estate planning structures available to average and wealthy families. In this chapter, I will focus on experiences from families that might help in your own planning. I will also focus on developing a mindset and attitude about the meaning of wealth for your heirs in order to feed the ultimate work ahead in formulating your estate plan.

There are a number of books that address the various trusts and estate planning structures available to average and wealthy families. In this chapter, I will focus on experiences from families that might help in your own planning. I will also focus on developing a mindset and attitude about the meaning of wealth for your heirs in order to feed the ultimate work ahead in formulating your estate plan.

“I have built such a wonderful life and place for my children to grow up that none of them will ever be able to afford to live here.” This was the dilemma a successful Silicon Valley executive shared with me after a recent visit. According to Zillow, in November of 2017, the median home price in Palo Alto, California, was just shy of $3 million. Neighboring communities of Los Altos Hills, Cupertino, and San Francisco came in at $2.8 million, $1.9 million, and $1.5 million, respectively. Silicon Valley real estate was never cheap, but following Facebook’s initial public offering with a market capitalization of over $100 million in 2012, what had previously been “paper” internet wealth became real. Many other companies and startups followed in Facebook’s wake.

While there were no complaints about this new wealth causing a rising tide for both stock market and real estate prices, there was a dark side to the trend: the communities in which the executives of these companies had established their families had become too expensive for their children to do the same. Many of the newly wealthy executives themselves grew up in much more humble conditions and considered the journey from their childhood to Silicon Valley a mark of their success.

Now, here’s my question: if you believe that the bedrock of financial success lays in a middle-class upbringing and a journey from that place to an institution of higher education, a modest first home, and then a series of jobs that lead to “the big one,” is it fair to rob your children of the thrill of that same journey as they stake out their own course in life? Other families might take an opposite (and perfectly reasonable approach) that aims to use the family wealth to dull the sharp edges of life, to allow a younger family member to live in a nicer and safer neighborhood. There is no right or wrong answer to the above dilemma.

The US Marine Corps has a motto, “Every Marine is a rifleman,” by which they mean that even as top officers aim for high-ranking Pentagon jobs or as marine aviators, every single officer and enlisted marine will undergo the same tough training, becoming a rifleman, living in the woods with no showers or toilets for weeks at a time, and operating with a constant sleep deficit. Changing that recipe and removing the common bond shared by all marines would be a non-starter.

Similarly, it seems logical that once we identify the raw materials (such as growing up in a middle-class neighborhood, going to a public or neighborhood school, or starting a grass-cutting business at age 13) that led to our own success, we would like to share that knowledge with the next generation in the hope that they will recognize and take advantage of them if and when they are presented.

It also seems obvious that if you have $100 million and enjoy living in one of the most beautiful places on earth that you might want to give each of your children $5 million so they can purchase a home and live close to you. Now ask yourself, will their spouse look at that home with the same pride that you looked at your first home, which you bought after scraping together the 10% down payment? Will they experience the same pride you felt when, after making double mortgage payments, you hit 20% equity for the first time? Will they ever experience the excitement you felt the day you took your final mortgage slip and burned it in the fire pit to celebrate paying it off?

These are important milestones in a person’s life and each of us must gauge whether we believe they are necessary for our children’s own success or whether our wealth means things should be different for them. A respected colleague, Phil McCauley, CFA, of the Madison Group in Louisville, Kentucky, who falls into the former camp, put his philosophy this way, “I want to leave my children some mountains to climb on their own,” in response to my description of the book 100 Places to Take Your Kids Before They Grow Up.

As I read the book, it struck me that my parents never planned to take me to see the Sphinx in Egypt, the Aurora Borealis in Norway, or a breaching orca beneath a calving iceberg. The memories I have from childhood include quiet Saturday evenings in front of a roaring fire, watching “The Love Boat” and “Fantasy Island,” and eating homemade pizza that my mom prepared. We took one trip to see Niagara Falls and by 2 a.m., after a string of “no vacancy” motel signs, we slept in the car. Six people (including my grandmother) spent that night in our mint green Galaxy 500 two-door. We remember the falls, the trinket stores, and the vivid memory of what it was like to sleep in the car. My children have never spent the night in the car.

Similarly, the issue isn’t whether we take our adult children on terrific vacations; it is whether we should (if we are wealthy) simply give them the finest things and experiences, even if they are out of their own reach.

Later in our conversation, Phil went on to say, “the pitch of the nose of the plane is more important than the altitude,” by which he meant that it is a wonderful thing if each year of our lives could be better than the one that came before it, that each decade could be better than the preceding one, that as we approach each milestone in our lives, we are still growing in terms of our experience, wisdom, generosity, and, also, in our appreciation of the finer things in life.

A balance between giving our children too much and too little can be struck and, in this chapter, I will share some case studies of families that have gotten close to striking it.

The Mathematics of Giving

Gifting to children makes complete mathematical sense, especially if your net worth resides in the shares of a private company that has not reached its potential valuation. It makes perfect mathematical sense to take a married couple’s lifetime estate tax exemption ($22.4 million in 2018) and place those funds in a vehicle that will grow OUTSIDE of the donor’s estate. Many families wisely gifted their lifetime exemption amount into family trusts in the 1990s and early 2000s. For those that experienced a two- to threefold growth on those assets, that meant the $11 million grew to $22 or $33 million, all of which would be exempt from the estate tax at the death of the senior generation. Once a married couple can reasonably fund the rest of their lives and do anything they wish without tapping into their estate tax exemption, putting it in a trust is worth considering.

Giving Now versus Giving Later

The challenge becomes HOW and WHEN to give your heirs access to the money? Most people agree that handing a $5 million check to a 21-year-old is a bad idea. Many would agree that forcing a trust to distribute income of $100,000 per year at age 21 (as many trusts do) can create a disincentive for the beneficiary to gain meaningful employment. I gained valuable insight into this debate at a meeting of IPI in New York. The interactive session was led by an estate tax attorney and a trust officer. The moderators, requesting a show of hands, asked at what age a child could be given a large financial inheritance or trust distribution WITHOUT it disrupting their lives, career plans, choice of spouse, or character. Age 30? A couple of hands went up. Age 35? About five more hands. Age 40? Eighty percent of the hands in the room went up. This was a fascinating exercise as it was a poll taken among a group that had witnessed wealth transfers occur at a much earlier age and had seen firsthand the benefits and pitfalls that resulted. While it is not a legal term, I have come to describe trusts terms that distribute everything at a certain age or year as a bullet trust.

Pros and Cons of Different Trusts

Most trusts established for young beneficiaries contain language that keeps the assets held in trust up until specified ages, with the trustee having the discretion of making distributions for the health, welfare, and education of the beneficiary. More liberally written documents include the word “lifestyle,” which I consider a dangerous addition. The common trust also dictates that at age 21, income from the trust is to be distributed to the beneficiary. In these cases, it is common to see two distributions of principal, such as 50% at age 30 and the remainder at age 35 or 40. The income mandate creates a situation where a $10 million trust could create $200,000 in dividend income, even more if the vehicle contained higher-yielding bonds.

The bullet trust contains neither an income mandate nor staggered distributions. On a specified day, such as the 40th birthday of the beneficiary, the trust either makes a full distribution or makes the beneficiary a co-trustee in order to “learn the ropes”—in other words, how the trust is managed. Proponents of the standard trust claim that since the child is going to live an upper-class lifestyle anyway, staggering the ages to 21, 30, and 35 gives them the opportunity to learn along the way so that when the trust terminates they will be experienced in managing a large financial asset. There is merit to this claim.

Proponents of the bullet trust value something else: they believe that their children have the right to select their own career path, spouse, city of residence, and place of employment without the financial overlay of a trust, which most certainly will influence their decisions. For this group of clients, I ask, at the time the trust is established, to write a letter to the beneficiary that can be delivered either verbally or in writing if the grantor has passed away. The letter would read something like this:

Dear son/daughter. Happy 40th Birthday! When you were young, your father and I made a decision to forego a portion of our wealth for your benefit as you grew older. We viewed it as planting a tree that was watered, fertilized, pruned, and protected so that it could grow into something wonderful for you at this stage of your life. You have just turned 40 years old. Your own children may be thinking about college. Precious time on vacation with them will become rarer. You may be considering what your own retirement will look like. The tree has now come into bloom and we hope it will lighten that burden. It may help you send them to a better school. It may help you take a nice vacation. It may allow you to retire a few years earlier. It is now your choice, your tree, and your task to protect. We did this because we love you and at the time we felt it was the wisest decision we could make.

Love, Mom and Dad

This letter may sound completely ridiculous to some and wise in its simplicity to others. The benefit of the bullet trust (and the accompanying letter) is that at all times in the beneficiary’s life, the trustee maintains the ability to use trust assets for the health and education of the beneficiary. If the child gets into Harvard and the family is $50,000 short, the trustee can make up the gap. Similarly, if a life-threatening illness strikes the child, the trust can be used for the very best care available. What the trust will NOT fund are swimming pools, BMWs, hot tubs, or drug habits. The right age for the “bloom” of the tree differs among families. They generally select an age at which, they believe, the child will have self-actualized, when the financial benefit of the trust is more likely to help, rather than hurt, him.

There is a downside or criticism to this structure, which is that there are no training wheels since the distribution or co-trusteeship is a single event. Families who choose this structure may have set up smaller Uniform Gifts to Minors Act accounts where their children take control, usually between the ages of 18 and 21, which allows them to learn how to manage their investments, cash flow, and long-term goals. It is critical that I point out that if you have failed to teach your children the lessons of saving, having a work ethic, and delaying gratification (discussed in Part I), the bullet trust could still be damaging to them.

Nota bene: If you choose not to pursue a bullet trust structure, you and your advisor should model a list of scenarios as to what the trust might be worth when income is distributed or at the point(s) where a distribution of principal is authorized. A $10 million trust in 2018 with a 2% yield could produce $200–300,000 in interest and dividends. Only you, as the grantor, can make a determination as to whether this will help or harm your beneficiary.

Pros and Cons of a Simple Wealth Transfer

What about a “traditional” inheritance that happens at the death of the senior generation? It’s been around for thousands of years of human history. It still is one of the most popular wealth transfer vehicles even though many millions of dollars are squandered in estate taxes and lost opportunities. Those who prefer to transfer assets at death likely share some thinking in common with the group who prefer bullet trusts. They both want to refrain from financially meddling in the lives of their children. Admittedly, many who choose a simple transfer at death do so because it was too difficult for them to deal with the complexities of lifetime wealth transfer, literally ignoring the job. One obvious drawback to the transfer at death model in our age of longer life expectancy is that one’s children might not inherit anything until they were in their late 60s or even 70s if one or both of the spouses see their 90s.

Choosing an Estate Plan That Fits Your Values

There are many complex vehicles; among the most popular are family limited partnerships, grantor retained annuity trusts, charitable remainder trusts, charitable lead annuity trusts, and family insurance trusts. It is critical for a couple not to become bogged down with the legal terms or the buffet of estate and gifting vehicles that are available to them. Rather, they should spend their time discerning the issues of HOW, WHO, and WHEN on a long walk on the beach. These determinations can and should take place over many discussions and be free of the complexities that bog down effective decision-making. Once the couple has figured out what method fits their values, it is time to assemble their financial advisor, accountant, and estate planning attorney to discuss the roadmap. A word of caution: If you jump into a plan too early and fund a vehicle before your values have been refined, it is difficult to put the genie back into the bottle.

Of course, the issue of philanthropy comes into play in estate planning. For some, the existence of a defined philanthropic plan is the glue that brings the family together for a common purpose; to do something worthwhile with a portion of the funds from the estate. Billionaires who have signed the Giving Pledge are precise in how they practice this. It is not uncommon for a billionaire to give $100 million each to his three children, and then bequest the remaining $700 million to a charitable foundation. As such a donor sees it, nobody will miss any meals with a $100 million net worth and the act of stewarding the remaining $700 million for the greater good will give purpose to their lives and, for those who need it, will create a counterbalance to the guilt that some feel from being so lucky.

Maintaining Your Estate Plan

An estate plan should be reviewed by your financial advisor and attorney every three to five years. For younger families, reviewing the named guardian for minor children is an important consideration, especially as the children’s needs vary. As they become older, an older named guardian’s ability to care for them may diminish, so it is important to ensure that you have selected the right person.

The second most important aspect of your estate plan is the naming of a successor trustee. It is important that this individual possesses the skills, temperament, and age that will allow them to faithfully discharge their fiduciary duty on behalf of the beneficiaries. While it may seem obvious, don’t neglect ensuring that your named trustee is willing to act in that capacity. You may be surprised to learn how many grantors name a successor trustee without ever asking if they are willing to serve.

Another task that should be performed along with the three- to five-year review is to simply ensure that assets that are supposed to be titled in the name of the trust are correctly titled at the financial institutions that serve as your custodian. It is not at all uncommon for families to go to the trouble of creating a well-thought-out estate plan and then failing to go through the steps of properly titling securities accounts, properties, and bank accounts.

Before You Start, Make Sure You’re Clear

The most important thing for a couple to consider is the cause and effect relationship their work and their financial success have had in their own lives and to make a financial plan that does not diminish or hinder the raw materials that drove that success and the pride of self-accomplishment. Only once they have determined what feels right in their gut (including the ability for both spouses to explain in plain English what the purpose of the transfer is intended to accomplish) should they meet with their advisors to discuss strategy and ultimately determine a course of action. This is yet another one of the complex decisions that must be made by families of means in which a slide rule or calculator has limited value.

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© The Author(s) 2019

Authors and Affiliations

  • Niall J. Gannon
    • 1
  1. 1.The Gannon GroupSt. LouisUSA

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