COVENANT BUSINESS PLANNING SOLUTIONS

How Much is Too Much Wealth to Pass to Your Children

For many successful business owners, the question of how to leave as much money as possible to children begs a more important question:

Given the financial success of the business, the real question is how much money should the children receive and how much is too much?

As our fictional owner George explained, “I want to give the kids enough money to do something, but not enough that they won’t do anything.” That’s a noble sentiment, but one difficult to execute - at least without careful planning. George preferred that his children receive nothing rather than instill them with the dreaded Trust Baby Syndrome. 

When wrestling with this question of “how much is too much,” remember that your children need not receive money outright. Rarely are large amounts of wealth transferred to children freely or outright. Instead, access to wealth is restricted through the use of family limited partnerships (or limited liability companies) and the use of trusts. These tools are primarily designed to reflect the parents’ desire to restrict their children’s (and spouse’s) access to wealth. This is true regardless of the amount of wealth the parent wishes to transfer. Let’s look at the steps in a typical “access/control” scenario. 

CONTROLLING ACCESS TO WEALTH 

Step One. Parents form a limited liability company (LLC) or family limited partnership (FLP) in which the parents own both the operating interest (or general partnership interest) and the limited partnership interests. Limited partners have no ability to compel a distribution, to compel a liquidation of the partnership (or LLC), or to vote. In short, limited partners enjoy few rights and have no control. 

Step Two. Trusts are created for the benefit of each child. The trusts will eventually own the limited partnership interests. A child will be entitled to receive distributions from the trust based on guidelines, parameters and restrictions that the parents prescribe in each trust document. 

Restrictions can take several forms. Perhaps the most common limits a child’s right to gain access to funds held in the trust. Typically, distributions are made at predetermined ages (as an example, one-third of the trust principal at age 30, one-third at age 40, and the balance at age 50). The intent is that children be sufficiently mature to handle the assets. Further, if a child mishandles an early distribution, he can learn from his mistakes and presumably will not repeat them with later distributions. At least that’s the idea. 

Parents can use Generation-Skipping Trusts (or Dynasty Trusts) to allow a child access to trust funds, but without compelling distributions. The biggest benefit to these trust are: 1) the avoidance of estate taxes when the child dies and 2) creditor protection. Creditors (including ex-spouses) may have no ability to access trust assets (depending, of course, upon trust design). 

In our next blog series, learn more about distribution of wealth through trusts and written standards.