Sting and Philip Seymour Hoffman are only the latest mega-millionaire parents writing wills that disinherit their children. While the stars may be pleased with their charitable impulse, advisors need to soothe multigenerational tensions now.
When news breaks that multiple celebrities within a three-week period are cutting their kids out of their estate plans, it’s not hard to see which way the wind is blowing.
Default assumptions about inheritance have broken down. And the richer your clients are, the more likely they’ll refuse to pass on more than a pittance to their traditional next of kin.
Take Gloria Vanderbilt, for example. She might still be worth up to $200 million, but she apparently hasn’t put a dime of that money into a trust for her son, sensitive news guy Anderson Cooper.
With her other surviving child famously estranged, the Vanderbilt advisors don’t really need to get close to the heirs to keep their jobs when 90-year-old Gloria goes.
Instead, they need to align themselves with her more peripheral heirs or philanthropic causes, whoever or whatever they happen to be.
Look at all the stars – from Ted Turner and Warren Buffett to Andrew Lloyd Webber and Gene Simmons of KISS -- promising “no trust funds.” Look at the billionaire “giving pledge” that denies hereditary money.
A lot of potential dynasties just aren't going to be around for generations.
Are the kids still all right?
That said, leaving flesh and blood completely out in the cold becomes trickier business once more than a few million dollars are on the table.
Anderson Cooper seems content to live on whatever they’re paying him at CNN, so he’s unlikely to protest if the Vanderbilt line does in fact end with his mother.
But he’s really the only child of famous parents who has spoken up about the new anti-inheritance rhetoric. The other kids have been quiet.
Less high-minded offspring have such a strong financial incentive to challenge a will that expressly leaves them nothing that it’s probably cheaper in the long run to carve out a little something for them instead.
While a few million dollars may only represent 1% to 5% of a massive estate, it’s more than enough to shield the kids from most of the usual financial disasters that might figure heavily in the parents’ nightmares.
Rock star Sting, who recently jumped on the “no trust fund” bandwagon, demonstrates the complications of this psychology nicely.
He’s worth about $300 million and doesn’t want to fund a lazy lifestyle in perpetuity for his six kids. On the other hand, he says he’s eager to help if they run into trouble.
How do you build an estate plan that supports that kind of safety net without simply handing over enough assets to ensure that the heirs never do anything with their lives?
Warren Buffett’s people seem to have figured it out. By giving at least 95% of his roughly $62 billion to charity, he aims to endow his descendants with financial freedom but not extreme world-changing wealth.
At best, the family may end up with $3 to $4 billion to split – enough to “do anything,” in Buffett’s terms, while not quite adding up to enough to “do nothing” with their lives.
That’s a vast amount of money by middle-class standards, but given his penny-pinching mentality it’s likely the final number per heir will be much smaller.
Maybe his close relatives will end up with a few million apiece to smooth over the rough patches for a generation or two. The estate would probably have to spend more defending itself if he cuts them entirely out of the will.
Real money takes time to spend down
Sting is hoping he can deal with the problem by spending his money before he dies.
That might be a realistic goal if he had a little less money to work with – his advisors could simply treat him like any retiree who wants to live as well as the numbers permit and not leave any legacy behind.
But Sting is going to have to blow about $60 million a year to have a short at dying broke unless his investments tank. Much like Buffett, it’s almost inevitable that he’ll leave a lot of money on the table.
His advisors need to assign that money when he dies. If not the kids, they need to identify non-profit groups or individual “little people” to list as beneficiaries in his will.
With Sting, they’re lucky. He’s a known patron of Amnesty International and other groups, so the advisors can help run the endowment if he decides to set up a private foundation to keep funding the future he wants.
Gloria Vanderbilt is a different story. As far as we know, she’s not really passionate about any particular cause.
Unless she’s a secret humanitarian or gives her money to someone else, Anderson Cooper might end up helping to run a family foundation in her name after all.
That kind of work would fit nicely with his career, and in any event his life won’t revolve exclusively around waiting for the next check to arrive.
The kids may not be so sanguine about the idea of hard work and struggle. If your clients are flirting with some kind of “giving pledge,” make sure the kids are in the loop and that their feelings are respected.
Is there room for a foundation or donor-advised program that might keep the kids involved in the fortune even after it leaves the family forever? There might be an opportunity here to provide work if they need it.
Kicking the ball down the road
And in the meantime, of course, the first person to protect is probably a surviving spouse.
Realistically speaking, the fortune will go to the widow or widower before there’s any question of pushing the bulk of the money out to the kids. That’s not a solution but it can defer the ultimate question for years or even decades.
Maybe the surviving parent is a softer touch with the kids and they inherit after all. Or maybe at that point the kids will be grown and won’t need or want more than token support.
This seems to be the approach Philip Seymour Hoffman took with his relatively “modest” $35 million estate plan. His long-term girlfriend got everything. None of the millions went straight to his young kids.
While this is being reported as part of his “just plain folks” philosophy, it actually makes perfect sense from a cold pragmatic point of view.
She’s their guardian and they’re very young. Putting the money in their names – even in trust – only complicates the situation and raises the odds that something will go wrong along the way.
When she’s gone, maybe they inherit. Maybe the money goes to a fund for wayward actors. For her sake, let’s hope the decision is a long time away.
And maybe the kids grow up to be little Anderson Cooper types, eager to make a difference in the world and not just spend down the trust fund. That’s apparently the goal here.
Do your clients feel strongly one way or another? Find out!