Preparing and Protecting Heirs

Life Insurance in Trusts
by Steve Goodman

CPA, MBA – President & Chief Executive Officer

Contact Steve today for more info.

Many people who have amassed considerable wealth recognize that it can be both a blessing and a curse. Raising children in an environment of wealth, high expectations, and considerable resources present unique challenges. The prospects of transferring considerable wealth to children and grandchildren generate concern in many people of means. Examples of misspent wealth as a result of an inheritance abound. Socialite Paris Hilton, the heir to Conrad Hilton’s fortune, is just one notable example of the potential liability associated with wealth.

This article introduces techniques that wealthier families employ to prepare their heirs to deal with their inherited wealth in a more responsible, productive, and socially conscious manner. People of great wealth have faced this concern for many decades. Increased opportunities have created even more people with assets to generate concern. Estate planners, in cooperation with other professions, have developed strategies to prepare families for a transfer of wealth. This article presents an overview of these strategies.

The content of this article sources from Steve Goodman’s 2014 book Business Succession Planning.Mr. Goodman, CPA is a Long Island, NY based estate planning professional with 25 years of family wealth and business succession planning experience.

Business Succession Planning

Over the past few years, I have noticed a trend among affluent families that involves the goals these families have for their wealth. There is, without a doubt, increased awareness of the effect their wealth may have on future generations. They are becoming more concerned with the possible negative effects that substantial sums of immediate wealth may have on their children and grandchildren.


In a survey conducted by US Trust (US Trust Bi-Annual Client Survey, Number XIX), parents expressed that their top “fears” for transferring wealth to their children were that they would (in order of priority).


  1. have too much emphasis on material things;
  2. be naïve about the value of money;
  3. spend beyond their means;
  4. have their initiative ruined by affluence;
  5. not do as well financially; and
  6. have a hard time taking financial responsibility.

While I refer to this as a trend, these are not new concerns. In 1889, Andrew Carnegie expressed the same concern over the effect substantial wealth may have on future generations when he wrote in his Gospel of Wealth,

There are instances of millionaires’ sons unspoiled by wealth, who, being rich, still perform great services to the community. Such are the very salt of the earth, as valuable as, unfortunately, they are rare. It is not the exception, however, but the rule, that men must regard; and, looking at the usual result of enormous sums conferred upon legatees, the thoughtful man must shortly say, I would as soon leave to my son a curse as the almighty dollar.

The concept may not be new, but the possible negative effect that wealth may have on future generations is a growing concern for today’s affluent. These families are looking for ways to use their wealth to create opportunities for their heirs, not hand them a silver spoon. Warren Buffet famously stated that one should

leave one’s children “enough money so that they would feel they could do anything, but not so much that they would do nothing.”This sentiment seems to be taking hold with many affluent families.


Conrad Hilton, the founder of Hilton Hotels, bequeathed 97 percent of his fortune to his charitable foundation. Barron Hilton, his son, successfully contested the will and gained a substantial share of the estate. Ironically enough, Barron, the grandfather of famous (or infamous) socialite Paris Hilton, announced in 2007 that he was following in his father’s footsteps by donating 97 percent of his estate (estimated at approximately $2.3 billion) to the Conrad N. Hilton Foundation. Having the opportunity to see exactly what effect great wealth had on his granddaughter might have played a role in his decision.


This idea that substantial and sudden wealth may not be the best thing to pass on to future generations is more than just an emotional intuition. While we are all familiar with the phrase “Money can’t buy happiness,” in recent years, psychologists have actually studied the connection between wealth and happiness. They have not only confirmed the validity of this age-old saying, but they have found that, in large, part it is the way we utilize our wealth that limits the “happiness” we receive from it.


Elizabeth W. Dunn, Ph.D., assistant professor at the University of British Columbia, has conducted significant research into the psychology of happiness. In 2008, Dunn, along with several her colleagues, published the findings of their research (“Spending Money on Others Promotes Happiness,” Elizabeth W. Dunn, et al., Science 319, 1687 (2008)). Dunn concluded,

Although much research has examined the effect of income on happiness, we suggest that how people spend their money may be at least as important as how much money they earn. Specifically, we hypothesized that spending money on other people may have a more positive impact on happiness than spending money on oneself. Providing converging evidence for this hypothesis, we found that spending more of one’s income on others predicted greater happiness both cross-sectionally (in a nationally representative survey study) and longitudinally (in a field study of windfall spending).

Essentially, what Dunn and other psychologists have found is that prosocial spending, which includes spending money on others as well as charitable giving, increases happiness substantially more than spending to acquire additional consumer goods. They have even gone as far as to study this phenomenon from a more scientific angle. In one study, participants in an MRI were given the opportunity to donate money to a local food bank. Choosing to give money away, or even being forced to do so, led to activation in brain areas typically associated with receiving rewards (Harbaugh, W. T., Mayr, U., and Burghart, D. R. (2007).“Neural Responses to Taxation and Voluntary Giving Reveal Motives for Charitable Donations,” Science, 316, 1622–1625).


While the majority of affluent families haven’t studied the psychology of happiness, they seem to understand more today than ever that if they want to make their children and grandchildren happy in the long run, they need to take great care in how that wealth is passed on. When that wealth is made up of a closely held family business, an element of the transfer that must take place is preparing the recipients for what they are about to receive.

In addition to the concern over the emotional state of your family, it is also important to understand that when heirs are poorly prepared to receive wealth, oftentimes that wealth leaves the family in a very short amount of time. Studies have shown that 70 percent of families fail to successfully pass their wealth on to the next generation and 90 percent do not successfully pass on their wealth to a third generation. The number one reason for these failures is a lack of communication and trust within the family (60 percent of the time), and 25 percent of the time, it is due to poorly prepared heirs.


Preparing heirs does not require complex legal and tax strategies, although they may be involved somewhere along the line. And there is no magic pill or perfect system. In my experience, if you focus on two key elements, you will dramatically improve your chances. First, create a family mission statement. Second, communicate with everyone in your family as to what that mission statement is and discuss how best to accomplish that going forward from one generation to the next. You can make this a very formal process or an informal one. You can hire advisors to help coordinate, or you can introduce the idea on your own at a family picnic. But from what I have seen, if you skip either step, it won’t matter how intelligently crafted your estate planning documents are; the odds will be against you.

The main point of this chapter is that if your children are to be the recipients of your business interests, they need to be prepared before the transfer occurs. In addition to preparing the heirs, you may want to consider ways in which you can protect heirs who are to receive a business interest. A great example would be what is often referred to as a “beneficiary-controlled trust.”


In a beneficiary-controlled trust, the grantor, typically a parent, transfers property (say a business interest) to the trust via gift, sale, or loan. The beneficiary (the grantor’s child) is also named as trustee with authority over investments and management of trust principal. A third party is named trustee with authority over distributions (discretionary, not mandatory). The trust contains a spendthrift provision that protects the beneficiary’s interest in the trust from creditors. The beneficiary retains the right to change the third-party trustee. The beneficiary is also given a special power of appointment to designate the individual(s) who is (are) to receive their interest in the trust upon their death. The result is a trust in which the adult child may control the business, receive income from company profits, retain employment with the business, and freely pass on the business interest to the next generation free of estate taxes, all while keeping the business safe from attack from creditors (e.g., a divorced spouse). The trust may last for several generations, possibly into perpetuity, depending on the state the trust is established in. This creates several opportunities for high-net-worth families who wish to protect family assets and keep them in the family.

Another way to protect future generations from family strife that often follows transfers of financial wealth, specifically business interests, is to avoid passing on a business interest to a child that is not involved in the business. As mentioned in the article “Transferring a Closely Held Business to Family Members” in the Succession Planning section of this website, when there are multiple children involved, yet one or more are not involved in the business, parents (typically Mom) insist that the children are treated equally. And in their mind, the only way to do that is to pass on an equal share of the business to each child.


I can’t say this clearly or strongly enough: horrible idea!

The term most experienced advisors will use in these situations is “equal but not equivalent.”That means it is fine to pass on the same dollar amount to each child, but it does not have to be the same assets. If you do not have sufficient other assets in your estate, then use some personal income to acquire life insurance and name the children who are not involved in the business as beneficiaries (or use a trust). I have never heard a person express displeasure over receiving cash as part of their inheritance. It is easily divisible, is paid out exactly how you instruct (if using a trust), at exactly the time you select, and will be received income tax-free (and estate tax-free if owned by an irrevocable trust or the children themselves).


The challenge of preparing families to transfer wealth to heirs is one that families of means have faced for at least 100 years. Technology, growing population, and increasing opportunities have combined to increase the number of families that will face this situation. It is an area that is likely to face a greater study in years to come. Every bad example of an heir (or heiress) who flaunted their wealth to the embarrassment of their family provides greater impetus for responsible families to prepare their heirs.



CPA, MBA – President & Chief Executive Officer

About Steve Goodman

For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.

He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.

Email Steve today for the business succession planning you deserve.