There is an old Chinese proverb that states, "Wealth does not pass three generations." This proverb shows that the first generation works hard to create wealth; the second generation lives off the wealth often without maintaining the work ethic that created it; and the third generation squanders what is left. We all know of situations where a family left a large estate that was completely wasted by their children and grandchildren. In light of these risks, a good estate planning goal is to plan to prevent your children and grandchildren from squandering the wealth that you worked hard to accumulate.
A starting point for solving this problem is to educate your children and grandchildren about the value of money and how they should preserve their inheritance. This includes teaching your children about investments, learning about family values and work ethic, and how to live off the income of the inheritance, without spending down the principal. One easy way to educate your children and grandchildren about investments as they get older is to open them an investment account as a birthday gift or a Christmas present. This will allow them to make investment decisions, with your advice and counsel. You can then review the investments with them periodically to see how they are performing. Some families get creative and have a contest as to whose investments grow the most year to year.
Another good solution to protect your estate from being squandered is the use of a continuing trust or lifetime trust share. This type of trust minimizes the ability of the adult child or grandchild to get their hands on the big money and spend it all. Instead, the child or grandchild is given an allowance, but the principal is professionally managed. The trustee of this trust share would have the discretion in how much the beneficiary needs for their health, education, maintenance and support. These continuing trust shares are often referred to as "dynasty trusts" and help instill a value of asset preservation. They may also have provisions whereby the trust can match earned income the child has so as to promote a strong work ethic in your family.
In summary, it is tragic to see a financially successful family lose all their investments, within just a few decades after the passing of the grandparents. Proper estate planning can minimize these risks.
Wesley Harris is an associate attorney at Farrar & Williams, PLLC and can be contacted at 501-525-4401 or by email at [email protected]. Wesley can answer any questions you have about this subject.