The parable of the prodigal son is one of the most famous estate planning stories ever told. Interestingly enough, it is as relevant today as it was in biblical times, touching on some of the core issues that families of every faith wrestle with when planning their inheritance, including the problem of dealing with a less-than-reliable heir.
Whether their son’s or daughter’s issue is substance abuse, inability to manage money or just a risky lifestyle and troubling relationships, this classic tale resonates with many parents and raises the very questions that they need to think about when planning their estate. First, a refresher on the story:
It starts with a father who has a very successful business and two sons. The younger son asks his father to give him his share of his father’s estate today, well in advance of his passing. The father agrees and divides his estate between both sons.
Inheritance in hand, the younger son travels and frivolously wastes all his money, ultimately coming back to his father with hat in hand to apologize and ask for a job.
Before he can give this apology his father rushes to his side, hugs him and asks his servants to dress the son in a fine robe, a ring and sandals, and to slaughter a fattened calf to celebrate. The signet ring, by the way, probably allowed the younger son to use the family name to conduct business. (In modern parlance, it was like the father was giving the spendthrift younger son a durable financial power of attorney.)
His older son boils with resentment at this lavish treatment. Why, wonders the older son, would his father celebrate the return of this wayward son who had already demonstrated an inability to manage money? The father explains that it is because the younger son has returned, in a sense, from the dead, and celebration is necessary. Of course, this is a bitter pill for the older brother to take. Half of his father’s life’s work had been wasted, and the family dynamics were shattered.
Is this starting to sound familiar? Here are some lessons modern parents can take away from the tale:
Think twice about naming one child as trustee/executor. What if the father had passed away before his younger son had come home seeking help and forgiveness? Many estate plans name one child as trustee or executor over the estate. Placing one child in loco parentis over his or her siblings rarely leads to good results. Would it have worked out well for the prodigal son had the older brother been named as his trustee?
Make sure your child can handle it. Leaving an inheritance to an unprepared child can lead to disastrous results. If a parent focuses only on the aspects of the value of the estate and not on the impact that the estate can have on the child, then the parent’s plan is almost sure to fail. Have you passed on financial literacy and a sense of stewardship to your children?
Reconsider an outright inheritance. Would things have turned out differently had the father given the younger son his inheritance in trust, with a wise and objective third-party trustee? Always consider leaving large inheritances in trust rather than outright.
Build in asset protection. Giving an inheritance outright to an unreliable child (or a potentially unreliable child) can lead to a loss of the principal as the child burns through the money or succumbs to predators, creditors or thieves. Remember, it is not what you have but what you keep that counts.
Consider professional trustee management. Most successful estate plans rest upon the notion of leaving an inheritance “with strings attached.” Leaving an inheritance in the form of an irrevocable trust with professional trustee management is popular, especially where the trustee has discretion to make distributions of net income or principal. Having a trust make distributions to a child to match some milestone or achievement (such as earning income or serving some valuable civic function) is also a popular method for driving behavior.
How is your estate plan structured? Is your plan doomed to wreak the same havoc that was caused by the father’s plan in the parable of the prodigal son?
For more information on estate planning, call (800) 773-7100.
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