Estate planning in new-money and old-money families. Part One

By Barbara Blouin,  founder of The Inheritance Project

Not long ago I decided to revise my will, and I realized that although I had engaged in that exercise several times I still didn’t know exactly what “estate planning” meant. Google was my next step. I read several not-very-satisfactory descriptions (there does not appear to be a definition as such) of estate planning. I found Wikipedia’s entry the most useful of the listings I read. “Estate planning is the process of anticipating and arranging for the disposal of an estate during a person’s life. Estate planning typically attempts to eliminate uncertainties over the administration of a probate and maximize the value of the estate by reducing taxes and other expenses. However, the ultimate goal of [word missing] estate plan is determined by the specific goals of the client and may be as simple or as complex as the client’s needs dictate. Estate planning involves [creating] wills, trusts, beneficiary designations, powers of appointment, property ownership, . . . gifts, and powers of attorney, specifically the durable financial power of attorney, the durable medical power of attorney, and living wills.”

Simply put, estate planning is the basis for the transfer of wealth from one generation to successive generations.

There are basically two types of wealth in America, which are commonly called “old money” and “new money.” New money refers to wealth accumulated in a person’s lifetime. In spite of the commonly heard expression “rags to riches,” few creators of new money start life truly poor, with the exception of some professional athletes and entertainers (Oprah Winfrey, for example). Many more new-money individuals rose to wealth from the middle class.

The term “old money” is used in two different ways: one in the limited sense of American “dynasties,” like the Rockefellers, the Duponts, and the Astors. They are commonly seen as the “upper class” in America.

More generally, “old money” refers to the first-generation descendants of the founder, and any successive generations, much less prominent than the Rockefellers, that go back several generations.

The cultures of new money and old money are very different. However, this is too big a subject for this not-very-long post. The ways in which new-money- and old-money families engage in estate planning are also very different. I want to give just one example here, from a young woman I interviewed for The Legacy of Inherited Wealth: Interviews with Heirs. When she was fifteen, following her father’s sudden and premature death, Rachel [a pseudonym] inherited $6 million, a big house, and a Mercedes Benz. Rachel was an only child. She lived in a middle-income household with her mother, who worked full time but didn’t make much money.

Rachel’s father was a real-estate developer. He worked so hard that he died prematurely following heart surgery. Because of his preoccupation with making as much money as possible and his sudden death, he hadn’t spent much time thinking through how he wanted to give his wealth to his only child. “It took the lawyers five years to work out my dad’s estate,” Rachel explains. That was a heavy burden for a fifteen-year-old. This is a fairly extreme example, but by no means unique. I interviewed a few other young heirs from other new-money families with similar histories.

A thoughtful process of estate planning should begin with the founder, the wealth-maker—new money—if he (or she) is willing or able to recognize the necessity of careful estate planning, or the head of a family in a successive generation. With new money, since estate planning is a brand new experience to him, if he knows what he is doing, he looks for professional advisors to guide him—estate attorneys in particular, but there is also a whole array of other types of professional advisors. Whether a fortune is new or old, professional advisors are necessary and can be enormously helpful. There is a variety of professional advisors involved in creating an estate plan In addition to attorneys, such as certified financial planners and perhaps “wealth counselors” or “wealth advisers.” I feel slightly queasy recommending these last two—not because there are no capable and honorable wealth counselors or advisors but because there is no professional training for either of these designations. Therefore, the quality of the service you pay for—and rely on—may be questionable, or worse. Or good to excellent, but it is hard to know in advance.

The primary goal of estate planning for the very wealthy is to create legal and extra-legal instruments that can reduce taxes as much as possible, avoid giving too much leeway for the next generation to squander their inheritances, and in general shepherd the wealth into the next generation, and on and on into an indefinite future. (Some old-wealth fortunes have been in place for generations.) What is to be avoided is summed up in the widely known expression: Shirtsleeves to shirtsleeves in three generations.

There are several ways to achieve these goals, and normally a variety of instruments are used: wills, trusts, charitable trusts, foundations, and so on. In the best-case scenarios, founders, as well as heads of family in successive generations, work to create shared values within their own generation and in their children’s and grandchildren’s generations; foster understanding of everyone’s values, needs, and concerns; and find ways to facilitate communication within and between generations, such as annual “family meetings” led by trained professional facilitators.

In the worst-case scenario, the founder seeks to keep tight control of how his fortune is used. If he is clever and has clever advisers (though “clever” does not necessarily mean “good”) he can, at the same time, give the impression that he is giving away his fortune to his descendants while actually maintaining tight control over the assets he gives by creating trusts with so many conditions attached that he can, in effect, usually through the services of a fiduciary company, control the lives of his beneficiaries from beyond the grave.

The outcome of this approach is almost inevitably conflict—even litigation—between the founder and his descendants, as well as conflict among the descendants. At the very least, this tight-fisted, mean-spirited approach creates long-lasting ill will among his children and grandchildren. It disempowers all the so-called “beneficiaries.”

In my next blog post I intend to tell the story of my father’s life, his rise from the lower-middle class to substantial wealth, and his largely successful efforts to create trusts that disempower his children.

Although this situation is far from universal, in “new money” families, the founder has limited experience with thinking about and planning what will happen to his spouse, his children, and his grandchildren. It is the norm to want to give most, or all, of the founder’s fortune to his family, although many founders also give generously to charity and other kinds of nonprofits.

I would like to recommend four professional authors and facilitators who are particularly helpful in guiding wealthy families in the estate-planning process. I don’t mean to exclude others, but I don’t know enough about their work to be able to recommend them with confidence.

Financial planner Judy Martel  has written a very useful book The Dilemmas of Family Wealth: Insights on Succession, Cohesion, and Legacy. The intended readership for this book is primarily old-money (at least one generation) families, but it is also useful for new-money families.

The introduction to Martel’s book is by James E. Hughes, Jr., an estate attorney and advisor to wealthy families. Though now in retirement, his useful books remain available: Family wealth—keeping it in the family: How family members and their advisers preserve human, intellectual, and financial assets for generations, and Family: The Compact Among Generations.

Last, and most recent, but certainly not least, psychologist Jim Grubman’s book is the most recent of these books. Strangers in Paradise: How Families Adapt to Wealth Across Generations  is relevant to both new-money and old-money families. I heartily recommend it.

To be continued …