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Wealth Planning Advisory 4Q18

Estate Planning the Warren Buffett Way

Everyone knows that Warren Buffett believes strongly in charitable giving, as evidenced by his $37 Billion gift to the Bill and Melinda Gates Foundation. Yet, Mr. Buffett is also well-known for his philosophy on how best to leave wealth to children and grandchildren.

In that regard, Mr. Buffett is credited with saying, “Leave enough so that they can do what they want, but not enough that they can do nothing.” Many people agree with Mr. Buffett. They want to provide for their children and grandchildren, but they also want to encourage them to be productive in society. In other words, they want to prevent their children and grandchildren from becoming so-called “trust babies.”

As a parent or grandparent, how can you encourage productive behavior and discourage unproductive behavior? One possible answer is to place incentives in a trust that promote the values and behaviors that you want to instill in your children and grandchildren.

The following are examples of incentives that can be incorporated into a trust:

  • Entering College. The trustee can be authorized to make a lump sum payment to a beneficiary who enters college.
  • Academic Goals. Special academic accomplishments can be rewarded. For instance, a specific monetary payment can be made to a trust beneficiary when he or she completes each year of undergraduate school or graduate school, and a certain grade point average has been attained. As a precautionary note, this type of provision should be drafted in a manner that prevents a trust beneficiary from becoming a lifetime student.
  • Matching of Income. The trust can be authorized to make an annual payment to a beneficiary equal to his or her earned income as reflected on a W-2. Flexibility is important with this kind of a provision. For example, how do you treat a beneficiary who becomes sick or disabled during the year?
  • Charitable Values. The trust may provide for annual distributions to charities and grant a beneficiary the right to designate the qualified charities that will receive the distributions. As an alternative, the trust can provide that it will match charitable contributions that are made by a beneficiary.

In closing, a critical component for successfully promoting your values is to discuss those values with your beneficiaries long before any transfer of wealth occurs.

This Planning Advisory is not intended as tax or legal advice. Also, it is not intended to offer penalty protection or to promote, market, or recommend any information contained herein. Before acting on the information in this Planning Advisory, a competent professional should be consulted.