Sharing the Billionaire’s Dilemma – How Much Should We Leave to Heirs?

Sharing the Billionaire’s Dilemma – How Much Should We Leave to Heirs?

Rumor has it that wealthy Americans are responding to President Biden’s inheritance tax proposals by deciding to simply leave less to heirs.

Yet taxes aren’t the only cause for their reticence.

The issue is ancient. Consider the case of Arseny Abramovich Morozov, born in Moscow in 1874 to an ancient, read impossibly rich, titled family. Arseny Abramovich earned a good education in technical subjects, no-nonsense preparation for a productive future. The Morozov elders could see the times changing and didn’t want to be stranded at the station.

His wise parents, alas, made a baffling mistake: they allowed their young son a Grand Tour of Europe. There, he learned un-Orthodox notions.

On Arseny’s 25th birthday, his mother gifted him a plumb bit of land in central Moscow, and there he built a house. You can still see it today; in the somber, pastel-shaded capital, its gaudy monstrosity blares out.

Mama took one look at the new domicile and wailed: “Only I used to know you were a fool, but now all Moscow will know it!” Heart-wrung mothers can land a punch.

It’s a weird kind of joint, a perfect match for its master. He drank; he took drugs; he shot himself in the foot to see if he could take the pain. It’s always confused me: fluent in Russian and English, Arseny would know the word ‘gangrene’, identical in both tongues.

Down plunged poor Arseny into the hell set for dunces, eternally hopping on one sound, smoking foot across coals straight from Newcastle. I wonder if he notices any difference between life and death.

I also wonder if Warren Buffet heard the tale. If not, he’s familiar with the moral. We all know Buffet’s bright pearl on inheritance planning: ‘Leave your children enough money to do anything, but not enough to do nothing’ – or something like that.

His billionaire neighbors have taken his point: Bill Gates, Daniel Craig and Keven O’Leary, and gilded others alike, say their kids won’t be inheriting everything – and some might not be getting anything at all.

Making his point with a dagger, O’Leary recently said his children can expect to inherit not-one-coppery-cent. His money is going into a generation-skipping trust: the kids will be well-provided until they graduate college; then, they must rely on their own devices. Dads can land a punch, too.

GS trusts skip over the benefactor’s children. The endower’s wealth passes to grandchildren (or anyone else at least 37 ½ years younger than the grantor). Right now, this allows a tax-free transfer to that later generation – just so long as their parents, the grantor’s children, have already passed away.

Generational skipping trusts are highly complex. Experts I queried tell me if you want one, it’s best to start early – as soon as you launch retirement planning. The tax rules are opaque and exemption limits prone to change. Congress is getting ready to vote on Budget 2022, which will be loaded with tax increases for wealthy citizens – it’s a tough time for planners. This is why we should start planning early: like problem children, with time, the swings level out, just so long as we don’t shoot our foot off.

Wealth disappears in three generations: more boilerplate. A good way to deal with this fateful condition is a conditional trust.

In an earlier blog, I mentioned that an old girlfriend from Udine, Italy called on my birthday this year, prompted by her nonagenarian mother. The daughter hadn’t remembered, and I barely noticed myself; birthdays north of 60 ain’t worth the cake.

After a time, we talked about Mattio, a worrisome son and brother. Years ago, he inherited a small pot of money from his grandparents – just enough to do nothing. He’s in line to inherit a heap more when he drives poor mother to her grave. What can she do, a respectable old lady, who somehow ended up wealthy?

I was the right guy to ask, for a change. A conditional trust, I said.

How dear old ex-GF did snort. She works for human rights; in her mind, I’m Moneybags Mcgillicuddy, suspect and tainted in a Monopoly™ top hat. If only it were true.

My career path to ‘sporco lucro’ has long raised her ire. Yet recall, those grandparents left her a share, too; her cut of the family villa and orchards will match her brother’s. It’s ever the same.

Conditional trusts can be structured in many ways, from sensible to mad colorful. Educational achievement can be rewarded with a rising stipend. I recall a clause of particular good sense: the first wedding and honeymoon were richly funded; just the one, mind you. The birth of children; reaching career goals; steady employment; kicking dark habits. There’s no limit to the variations, beyond the law’s prohibitions.

Married couples can insist on a powerful clause: when one of them dies, the other must never be sent to a nursing home, and the children are held to account. If the kids do right, the trustees pay out. Foot dragging or worse means no inheritance – ever.

In Mattio’s case, I made no suggestions. We’re still good mates, so I’m disqualified, and these matters are best left to the family; sister and mother know best. Poor Mattio may soon be back on the job market.

When deciding how much to bequeath to children, charity or friends, the top issue isn’t taxes: it’s put yourself first. Enjoy your own money while you’re alive – even if you want to leave them a taste, it doesn’t have to be a full meal. That’s what the richest families are learning.

Here’s an eye-opener: Motley Fool ran a poll of the big-time rich. They found that respondents who’d inherited large fortunes were suspicious of endowing their kids with the same, and those who’d been parties to conditional trusts liked the idea a lot. Experience is the best teacher, like it or not.

Want to really bless your kids? Spend time with them, while you’re still healthy. I’ve mentioned Karin, a roommate from Moscow, who astonished me by saying that she, her sister, and parents vacation together, every single year.

They’ve seen the US (Karin fell off a boulder, broke her shoulder, in Yosemite), Bali, Kyoto, Chennai if you please, had Grand Tours of Europe, east and west. Karin’s clan gets around.

The philosopher Montaigne wrote: “The weeping of an heir is laughter in disguise.” What a cynical brute, yet Karin will correct him. Here’s what she says: “My parents keep yapping about how much is ‘in the will’. I tell them, stop; go spend it. What you’re sharing with us now is my dream come true.” Go and do likewise, my friends.

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