When it comes time to make an Estate Plan, most people have at least some idea who they want to give their wealth to. In many cases, they first want to give it to their partner, and then after their partner dies, they want to share it equally among their children. This is what we call the ‘standard’ or default choice.
For families with considerable wealth, there is one more ‘layer’ of planning you must consider. This is the scenario if one of your children dies, either before or after inheriting.
Once again, there tends to be a default in this scenario, that is, the children of your child (i.e. your grandchildren) will take their parent’s share. In this manner, the wealth passes down your ‘family’s bloodline‘.
This sounds simple and appropriate, but it does raise several critically important issues – that justify more thought.
Let’s say that your grandchildren are young and will continue to live with your child’s partner (let’s call them your ‘child-in-law‘) for years or even decades. If the entire gift passes to your grandchildren (and nothing to your child-in-law), then your grandchildren are likely to be much richer than their surviving parent. Let’s call this the ‘rich-child syndrome‘.
The rich-child syndrome can have a massive impact on the child-parent dynamic in your grandchildrens’ lives. In most instances, the rich-child syndrome has a negative impact, particularly when your grandchildren inherit from a young age. The rich-child syndrome is also greatly exacerbated when the trustee of your grandchildren’s money is someone other than their surviving parent, for example, their uncle or aunt. This is because the uncle or aunt usually gives very little to your child-in-law and directs considerable wealth and opportunity to your grandchildren. In one instance we know of, a child-in-law was working as an office cleaner to make ends meet, while their daughter privately hired out the entire Grand Hyatt disco room for her 16th birthday. Not an ideal mother-daughter dynamic!
The alternative would be to give your child’s share of your estate to their partner, i.e. your child-in-law, and assume that your child-in-law will continue to look after your grandchildren. The danger here is that your child-in-law is very likely to re-partner. This is both natural and probably what your child would have wished. However, your child-in-law’s new partner may have kids of their own, or your child-in-law may have further kids with their new partner. The chances of your grandchildren ultimately ending up with anything diminishes greatly over time. Let’s call this the ‘wasteful parent scenario‘.
One possible compromise is to give your child-in-law some level of benefit and control over the inheritance, and impose a condition that they look after your grandchildren, and do not waste the wealth. You could achieve this with a well-drafted ‘testamentary trust’. This avoids the rich-child syndrome in the short term, and the wasteful parent scenario in the longer term. But even this strategy has its own difficulties. It makes sense for your child-in-law to have control over the inheritance when your grandchildren are young, but at some stage, your grandchildren will be ready to take control of your family’s wealth. Imagine that this wealth takes the form of equity in a significant family company or large agricultural landholdings. Your child-in-law may live to a ripe old age, and your grandchildren may be well into their 50s and 60s before your child-in-law dies and the wealth finally passes back into your bloodline. Let’s call this outcome the ‘Prince Charles effect‘.
One way to deal with the Prince Charles effect is to set a fixed time for when your grandchildren take over the wealth, say when they reach 30, which may be well before your child-in-law dies. The danger here is that this can result in an abrupt cessation of lifestyle for your child-in-law, who may have spent a considerable part of their life as the custodian of your wealth for your grandchildren. Let’s call this ‘falling off the money cliff‘.
All of these considerations start to point us in the direction of a comprise involving the following elements:
- Your wealth is left to benefit both your child-in-law and your grandchildren, i.e. you do not put in place a strict ‘bloodline’ trust;
- Your child-in-law is given considerable control over this wealth while your grandchildren are young, to avoid the rich-child syndrome and maintain an appropriate child-parent dynamic;
- You involve an independent person to protect the longer-term interest of your grandchildren in the family’s wealth, and thereby avoid the wasteful parent scenario. This person could be an uncle or aunt, or ideally a trusted professional who is unlikely to have a ‘personality clash’ with your child-in-law;
- You provide for a relevant portion of your wealth to remain for the support of your child-in-law until their death, and thereby avoid them falling off the money cliff. Yes, a portion of your wealth will remain outside your ‘bloodline’ and may potentially be ‘lost’ to a re-partner, but it also may still end up with your grandchildren at the end of the day; and
- You provide for the balance of your considerable wealth to pass to your grandchildren in a controlled way over their lifetime and at appropriate times so as not to ‘blow them up’, i.e. some in their 20s, some in their 30s and perhaps the balance in their 40s, just like would have happened if their parent had survived into old age.
Many people obsess about keeping family wealth strictly within their ‘bloodline’. We certainly understand this motivation, as we see many scenarios when external parties destroy family wealth and their associated enterprises and landholdings.
However, if you are truly concerned about the welfare of your children and their children, then it is incumbent on you to ensure that you do not destroy your grandchildren’s upbringing through the inappropriate conferral of wealth that undermines the child-parent dynamic. It may be that some ‘leakage’ of family wealth outside of your bloodline is the very thing you need to consider to set your descendants up for longer-term success.