Despite earning more than $27 million in salary, and millions more in endorsements, basketball superstar and cultural phenom Dennis Rodman appeared in court three years ago because he was unable to pay $800,000 in past due child support. He claimed that he was broke.
Scottie Pippen, a teammate of Rodman’s on the Chicago Bulls championship teams, found himself near bankruptcy just a few years after his retirement despite career earnings in excess of $110 million.
A common theme amongst all of these tales is that those who earned and lost enormous sums had no prior experience with monetary success. Like a lotto winner, they suddenly found themselves bathing in millions. Unable to manage their newfound fortunes, and unable to create a high-quality vision of their post-athletic careers, these athletes lost what took them a lifetime of training, sacrifice and hard work to achieve.
There are lessons to be learned for those planning estates – even for those of more modest means.
Traditional estate planning works to divide financial assets among family members without considering the other things that lead to the success that generated the wealth in the first place. Speaking as one inside the industry, estate planning professionals have become very adept at economically dividing up the money amongst the heirs with little regard to transferring the intangible wisdom, values, experience and relationship assets to future generations.
What appears to be the philosophy underlying traditional estate planning? Beat the taxman and ultimately dump all you can on your heirs, regardless of their ability to handle sudden wealth. As we’ve seen with the athlete examples, an heir to an estate can, in a few years, wipe out what took a lifetime to create.
This is exacerbated when parents name their adult children, who often have no experience managing wealth, as direct beneficiaries without an intermediary. Why would Mom and Dad expect their children to act any differently with newfound wealth than do professional athletes? What leads them to believe that they won’t make unwise decisions when they have virtually no experience accumulating and managing wealth?
I propose an alternative solution. Name a corporate trustee such as a bank or trust company.
Many clients object to the thought of imposing a gatekeeper on their family’s inheritance. They’ve heard horror stories of inept financial institutions that charge high fees and dole out low performance. The trust instrument named a bank or trust company with no means to remove the institution, no matter their performance.
This can be easily remedied by allowing the family to remove and replace the corporate trustee with another one.
Yet another objection is the expense of a corporate trustee. I’ve written other columns explaining that corporate trustee fees are more reasonable than you might imagine. Many clients already pay brokerage fees or management expenses, inside of mutual funds for example. Often you are only exchanging one fee for another. Also consider how much the beneficiary may lose without proper guidance. How much is that worth?
And the corporate trustee does not have to be the sole trustee, nor does it have to be permanent. Naming a corporate trustee need not be an “all or nothing” proposition.
Consider an example where Mom and Dad name their daughter Amy to serve as the co-trustee with ABC Trust Company for a period of five years following the death of the surviving parent. Amy has the power during that five year period to remove and replace ABC Trust Company with another bank or trust company of her choosing.
What have Mom and Dad accomplished?
They’ve given Amy some direction with a professional institution how to begin to handle wealth, yet they have not shackled their daughter for the remainder of her life. She needs to work with a professional trustee for a period of five years following their death. She can learn how a professional invests, and makes distribution decisions.
During that five year period, Amy may remove the trustee selected by her parents with another trustee. At the end of the five year period, she can choose to retain the institution to continue to serve as a co-trustee, or she can take over the reins herself without a co-pilot. It’s up to her.
There are more ways to skin the cat than this. I’m just illustrating one alternative. In any event, when leaving your family wealth, remember the lesson of the professional athletes, and consider how to leave enough support behind to ensure a smooth transition of that wealth to the next generation.