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The Inheritance Plan – The Right And The Wrong Way

Series: Blessings & Curses of Inherited Wealth – The Guide for Inheritors - Part 3 - Introducing Jeffrey Condon the Author of Beyond the Grave: The Right Way and the Wrong Way of Leaving Money to Your Children (and Others).

March 1, 2017 | Bogumil Baranowski
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Part 3 – Introducing Jeffrey Condon the Author of Beyond the Grave: The Right Way and the Wrong Way of Leaving Money to Your Children (and Others).

There are many books about the challenges and dilemmas of inheritance planning, but very few are written in a simple, easy-to-understand, relatable way. Beyond the Grave is full of examples, candid advice, and straightforward answers to some very difficult questions.

We learn about the importance of having an inheritance plan, and the author explains that there is the right, and the wrong way. We are reminded how crucial it is to treat beneficiaries equally. Among many other lessons, we also find an interesting discussion of one of the most frequent questions when it comes to inheritance – how much is too much?

With his late father, Gerald M. Condon, Jeffrey is the co-author of Beyond The Grave: The Right Way and the Wrong Way of Leaving Money to Your Children (and Others). Published in 1996 and revised in 2001, it was updated in 2014. The Wall Street Journal has called Jeffrey’s first book “the best estate planning book in America.” In 2008, Jeffrey authored The Living Trust Advisor: Everything You Need to Know About Your Living Trust (John Wiley & Sons).

In this third part of our series on inherited wealth, we feature selected highlights from the book. We had the pleasure of getting Mr. Condon’s feedback and discussing some very interesting aspects of estate planning with him in the process.

Beyond the Grave takes away the mystery and confusion, and shines a bright light on some of the dilemmas, explaining it all in a simple way. The book is full of “aha” moments, where Mr. Condon tell us what he used to believe as a young attorney, what people’s intuition might suggest, and what has really worked for his clients over the years.

What is an inheritance plan?

Mr. Condon provides a straightforward definition. He writes: “Whatever the form, an inheritance plan boils down to one purpose: It is your instructions for who inherits your money and property, when they inherit, and on what conditions they inherit.”

If you have ever been intimidated by the idea of establishing your own inheritance plan, now you know that it’s an answer to three questions: who, when and how? Let’s begin.

The right way and the wrong way

Before we too quickly conclude that creating an appropriate inheritance plan is simple, Mr. Condon shares with us: “I have learned the hard way that there is a right way and a wrong way of leaving money and property to spouses, children, grandchildren, and other heirs. “He adds: “This book will open your eyes to the panorama of potential family conflicts and problems that often occur in the inheritance area, most of which you never before considered.”

Our perfect children

We read in the book: “In every literate society, there is this saying about inheriting wealth: If you really want to know a person’s true character, share an inheritance with that person. This is sage advice. Having observed what happens between children following their parents’ death, I have arrived at one indelible conclusion: Your children may be perfect – but you really don’t know them until they divide your money.”

As we later learn in the book, planning for a variety of scenarios (and some unexpected sources of trouble) may help children divide parents’ money in a more orderly fashion without unnecessary conflicts.

Equal or not

This is a question that seems to be on many people’s minds: how should I divide the inheritance? Do I  give more to the financially struggling kids and less to the more successful? How do I measure their success anyway? Is there a way to be fair? Mr. Condon simply says – give to them equally. Always. Do as much as you can to balance their inheritances, and do it before you die.

He writes: “If you care about maintaining family harmony after your death, leave your money and property to your children equally, regardless of their economic circumstances or their beau geste declarations.” He adds further: “Even the most seemingly harmless inequality can cause problems.”

When should the kids get the inheritance

Mr. Condon tells us that interval allocation doesn’t work. This is the idea of giving beneficiaries access to their inheritance in installments at pre-determined ages. Condon states, “Although Interval Allocation remains popular and is frequently used, I believe it is fatally flawed. Why? Because it simply does not work! It may do little, if anything, to lead the financially immature child to maturity.”

He is in favor of “the wait and see program” where an inheritance plan provides that a Trustee controls the inheritance and measures the beneficiary’s progress in terms of responsibility, stability, independent earning power.  The Trustee then adjusts the age when the legatee receives control. This leaves more flexibility to the Trustee, and helps minimize unwelcome consequences of giving too much too early — or too little too late.

Motivating the inheritors

In Beyond the Grave, we hear that “there is no better incentive than money to motivate your child toward gainful employment.” The author writes: “the dollar-for-dollar incentive is the best thing I’ve found to ‘coerce’ a child into getting a job.”

I found the dollar-for-dollar concept refreshing. In this situation, the Trustee matches what the beneficiary earns on his or her own. Again, Mr. Condon’s advice is very blunt, and straightforward, and worth serious consideration.

How much inheritance is too much

Inheritance itself should be more a blessing than a curse, as the title of our series discusses.

Mr. Condon shares with us: “Since Beyond the Grave was first published, this concern has become the ‘hot’ topic in family inheritance planning. Never before have I encountered more people who fear that a large inheritance will lead their responsible children to become classic ne’er-do-wells who hang out at the country club or who will acquire bad habits.”

He adds: “With the ‘New Economy’ having created more millionaires than ever before in American history, this issue will undoubtedly be considered and addressed more than ever before. But one does not have to be a Captain (of Industry) or a millionaire to share the concern that a significant inheritance can lead a ‘good kid’ down the path of irresponsibility. It is simply a natural feeling to want our children to make the most of their lives.”

Mr. Condon recommends his version of incentive-based planning, while informing us that the typical “carrot-and-stick” methods do not work: “I prefer an incentive-based plan not built on reward but on cold, hard reality of ‘that’s all you get.’ This is a no-strings-attached plan that states, in essence, as follows: ‘Child, when we die, your inheritance will be held by a Money Manager who, for the rest of your life, will pay you an amount equal to the monthly support we have given you during our lifetime.’”

He adds: “This is more than an incentive-based plan – this is a reality check!”

Controlling child’s life from the grave

Mr. Condon quotes examples of parents who want their kids to follow certain rules or change their behavior and try to use inheritance to steer their kids that way. He shares: “For them, the inheritance plan is not just a way to transfer their wealth when they die. It is a tool to control their child’s life from the grave.”

On one hand, he writes: “I am a firm believer in inheritance conditions when they are designed to prevent the inheritance from being squandered due to the problems in your children’s lives – addiction, financial immaturity, disability, marriage, and divorce problems, and the like.”

On the other hand, he adds: “You know that I am somewhat opposed to rewards-based inheritance planning for children whose only addiction is avoiding a conventional lifestyle or whose only disability is not being desirous of attaining education or employment. Not only do I instinctively react against parents attempting to control their children too much from the grave, I believe these plans do not ensure that the goals to be sought will be achieved.”

Child’s trustee

Mr. Condon talks about the importance of ensuring the execution of your wishes when it comes inheritance. The Trustee plays a key role here. He shares in his book the three alternatives: a private individual, a banking or other financial institution, or the child himself or herself.

There is no one-size-fits-all answer here, but one lesson resonated with me the most. Mr. Condon counsels against naming one sibling as Trustee of the other. He writes: “There are sensible reasons that make it seem right to appoint a child’s sibling a Trustee. Early in my practice, I invariably agreed with this choice. But since then clients have died, and I have seen what happens when one child holds money for another, inevitably, there will be stress on – or the destruction of – the sibling relationship.  Why? Because when one sibling holds money for another, the tie that binds is no longer only blood – it is blood and money.”

Succession of the family business

With the majority of new wealth coming from new businesses, business succession becomes a frequent challenge for successful wealth creators and their beneficiaries. Mr. Condon reminds us: “Statistically, two out of three family businesses do not survive the death of the founding parents. The federal estate tax, the death of key men, a lack of management skills, no child with desire to take over and carry on – all these problems work against the family business surviving into the next generation.”

Here, Mr. Conon emphasizes again the importance of treating all siblings equally. If only one of them is interested in the family concern, he suggests that child should inherit the business, while the other(s) should receive assets of equal value or an insurance policy on the parent’s life (if insufficient assets are available).

The author warns us about dividing a business, as when one sibling holds a majority interest. Conflicts may arise with the minority-share sibling(s) receiving lesser distributions. These situations can lead to litigation, putting the business at risk.

Thinking of grandchildren

In Beyond the Grave, we learn how all grandchildren should be treated equally as well. If grandparents have fears about the use of money, Condon suggests urging grandchildren to account for the gifts they have been given, and explain what they are doing with the gifts.

Mr. Condon draws our attention to an important challenge, though: “If your child is like most children, his attitude about your lifetime gifts to your grandson is: ‘Dad and Mom, your gifts are great but don’t give him too much. Leave your money to me and I will take care of my child.’ If you don’t follow this thinking, your child may resent that you gave away some of his inheritance. The result is that you may have created enmity between your child and your grandson. Before you make an appreciable gift to your grandson, I urge you to be sensitive to this possibility.”

Leaving your money to charity

It’s a frequent question – how do we prepare for leaving some or all of our fortune to charity? Mr. Condon tells us that there is no better way than both doing your research on a specific charity, and getting personally involved before committing your fortune to the cause.

Cautionary tales

Towards the end of the book, Mr. Condon shares some really interesting cautionary tales. Not to give too much away, we’ll mention two.

In the first tale: “Probate is the ‘Lawyers’ Retirement Fund,’” Mr. Condon introduces us to a couple who own a house. It’s a second marriage for both, and both have children from their first marriage. Although the husband left a will, the author points out that “this Will was self-executing. In order to carry out Mr. Schultz’ wishes, the Will had to be submitted to court for ‘probate,’ which, in a nutshell, is the court-supervised process of transferring assets from the dead to the living. The probate process took about thirteen months and about $12,000 in court costs and attorney’s fees… but she ultimately ended up with the entire house.”

He adds: “I advised Mrs. Schultz that now that she owned the entire house, she should have a Living Trust. With a Living Trust, she retains ownership and control of the house during her life. On her death, the Living Trust then transfers the ownership of the house to her children without that probate court nonsense.”

That’s not the end of the story, though. Mrs. Schultz didn’t act on the advice, and a year later, when she passed away, her children had to face the probate process again, with all the time and money that it consumes.

In the second tale, Mr. Condon shares a lesson: “You have to predict the future about the nature of the relationship between Trustee and Beneficiary.” He writes: “Getting the right trustee to manage the family money and property for the surviving spouse’s benefit is a very important choice. If the surviving spouse and the trustee can’t get along, problems and unhappiness will arise.” We learn further: “My personal preference is the professional trustee, which is contrary to most clients’ decisions. If a personality or management-driven conflict arises between the beneficiary and the individual assigned by the bank or other institutional trustee to interact with the beneficiary, a different person can be assigned.”

Final thought: should you tell your children about your inheritance plan?

Mr. Condon closes the book with one of the biggest questions – should you tell your children about your inheritance plan? He writes: “I never cease to be amazed how often clients ask this question when common sense dictates it is the right thing to do. Nevertheless, clients seem loath to discuss inheritance issues with their children, leaving their children in a mystery as to the contents of their parents’ inheritance plan. “

He advises: “Even if discussing inheritance issues with your children goes against your grain, I strongly encourage you to do it anyway. If you care enough, this is the true solution to potential conflicts and the simplest way to their resolution.”

There is much more in the book than we have been able to cover in this article. The book discusses further how a proper inheritance plan can help avoid probate, and allows you to take advantage of estate tax exemption, and more. We hope you will enjoy it as much as we did.

 

Bogumil Baranowski – February 24th, 2017

Available as a video podcast or audio podcast (iTunes and Podbean).

Disclosure:

 

This report is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.