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A New Calculus

The after-effects of Warren Buffett's $31 billion gift to the Gates Foundation -- like any other seismic shift -- continue to circle outward.

The after-effects of Warren Buffett's $31 billion gift to the Gates Foundation -- like any other seismic shift -- continue to circle outward.

Buffett's gift brought front and center one of the chestnuts of wisdom the great investor often offered regarding the amount of money the wealthy should leave to their kids. "Enough money so that they could do anything," he said, "but not so much so that they could do nothing."

It's too soon to tell whether Buffett's surprise move, giving the bulk of his estate to charity during his lifetime, will inspire others. But his other, still-radical notion -- that the wealthy shouldn't leave too much to their children -- has gained some momentum in recent years. Throughout history, most wealthy people left something to public charities or a private foundation. But it was rare that they first defined how much they thought their children should inherit and then gave all the rest (no matter how big that "rest" was) to philanthropic causes. That rarity is now a small minority.

Advisors attribute this shift to horror stories about spoiled kids and family lawsuits over inheritances, the influence of high profile advocates who warn about the dangers of inheriting too much, and the powerful examples that Buffett and Bill Gates provide. "You are starting to see this type of estate planning working its way down the economic hierarchy," says Laura Peebles of Deloitte & Touche LLP in Washington, where she specializes in charitable organizations.

Of course, that begs the question: How much should the fabulously wealthy leave to their children? "That's the $64,000 question," says Peebles. "What is '$X'?"

Venerable Concept

The notion that a child can inherit too much money is not new, dating back at least to the Gilded Age. Andrew Carnegie, one of the nation's earliest philanthropists, believed that those who built huge fortunes were responsible for circulating those fortunes back into society. (Buffett has cited Carnegie's philosophy as an influence.) In an essay, "The Advantages of Poverty," Carnegie wrote: "[T] he parent who leaves his son enormous wealth deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would."

Wealth created in during the 1980s and 1990s substantially increased the number of multi-millionaires who might wrestle with the problem Carnegie defined. And 21st century multi-millionaires have shown interest in what some call "soft issues" around wealth. Advisors say two books published in 2001 have been particularly influential in shaping the opinions of the mega-rich: Silver Spoon Kids: How Successful Parents Raise Responsible Children, by Eileen, Jon and Kevin Gallo and Wealth in Families, by Charles Collier, the senior philanthropic advisor to Harvard University.

Collier says, "The decision of wealthy parents on how much to give their children and how to define and quantify the financial inheritance is a very tough thing." Many factors complicate this dilemma, such as different values spouses bring to the marriage and the fact that children are constantly changing, as they settle on a career and get married. But the fundamental problem, says Collier, is that "[s]ome people deny or postpone or procrastinate." He says, "Talking about money is difficult in any case and when you have a lot of it, it just raises the level of anxiety." Jamie Johnson, heir to the Johnson & Johnson pharmaceutical fortune, makes the same observation. Johnson, at age 23, produced the 2004 documentary Born Rich, in which his father, who never had a job and spent his life painting, says on camera: "Money is a thing you don't talk about because it's in poor taste."

Collier's book guides families on how to ask questions about the family's definition of success, core philanthropic interests and the appropriate financial inheritance for children. Collier wouldn't say what he thought "$X" should be. But in an interview with Trusts & Estates, Collier he did say: "I am going to take a stand." After many years of working with wealthy families on the issue, Collier says he's concluded that for families of enormous wealth -- those with over $40 million -- there is such a thing as giving too much to the children.

"It's possible that you could give too much to the children, which is not good for them and not good for society," Collier says. (He excludes from that the transfer of a family business.) Make a decision on how much is too much, he now advises the rich, because the tendency to avoid a thoughtful decision on what to give the children will impact the "scope and scale" of philanthropic giving.

How Much Is Enough?

Collier is not alone in being loathe to say exactly how much is enough for kids to inherit. But the question only really starts to rear its difficult head when estates are valued at $20 million, advisors say. The numbers that get bandied about, according to Peebles, are that $5 million to $ 10 million be given to each child -- and no more -- no matter how big the total estate might be. Of course, she adds, "I've seen one that's a $100 million per child...obviously that's not typical!" On the coasts, where living expenses tend to be higher, the numbers trend upward. But, she adds, "It's very personal: There's no rule of thumb."

The wealthy want to ensure their children and grandchildren have enough to pursue a good education. Their next concern is establishing a safety net so that children will be provided for in the event of a medical emergency or disability. And many wealthy parents want to ensure each child can purchase a first home or pay for a wedding. Sometimes, trust documents provide adjustments for inflation. And sometimes, the dollar figure the parents want to set is too low. "I have occasionally pushed back, when I thought people were cutting the number too much," says Peebles, citing one occasion when a parent wanted to limit a child's inheritance to just $1 million.

Most families determine the amount to leave their children on their own -- and are simply looking for reassurance that their decision jives with others. Daniel Daniels, a trusts-and-estates lawyer in the Stamford, Conn., office of Cummings and Lockwood, had one client with a $100 million estate who decided that a total of $25 million was enough to leave to his three children; the rest went to his alma mater. "How that client came up with that number, God knows," Daniels says. Another couple with an estate of $60 million and two children initially decided that $2 million per child would be enough. They reconsidered after going home and looking through some documents. Ultimately, they settled on leaving each child $10 million.

A client has never asked Daniels to answer the question of how much is enough, and, he says, he'd be hard pressed to decide for a client whether to leave $20 million or $40 million to a child. "That's not my job as a lawyer...and to my mind, it's an impossible question to answer."

In many cases, families are content to, shall we say, "split the baby": Leave half to the children outright and half in a protective trust that gives an independent trustee discretion to distribute income and principal. "Because they are so much at sea themselves, they say to themselves that it sounds like something King Solomon would do," says Daniels.

Whatever the number, deciding the "$X" that the children will get, makes it simpler for families to take the next step and decide to leave the rest to charity, Daniels says. This plan is a good way to fix the estate tax that'll be owed as it gives the family the opportunity to buy life insurance in the amount of the tax to be paid. If the family's wealth is tied up in a closely held business whose worth may fluctuate, fixing the child's inheritance at "$X" -- with the rest of the shares in the business left to the family foundation -- decreases the IRS' incentive to conduct an audit either to reduce or deny entirely the valuation discount taken to reflect the business' lack of marketability and thereby collect more taxes.

Daniels has yet to see a client cut children out meaning "out" entirely or whittling down the kids in favor of charity. But in recent years, in a "totally unscientific" sampling, he's seen a rise in the charitable giving from wealthy estates, so that it now ranges between 30 percent to 50 percent of the family fortune. Many of these families know their children will be taken care of because they've seen it, through gifting to the children during their lifetime. But a "perfect storm" of three concerns makes a charitable bequest appealing: not wanting to hurt the children with the money, combined with a desire not to pay too much estate tax, and a strong interest in charity -- especially if it carries on the family legacy. This is the new math that some of the fabulously wealthy are doing these days.

Karen Donovan is a freelance journalist living in New York.

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