Ruling from The Grave

Poor little rich kids have never evoked much sympathy. How could they? Most of us aspire to have their problems. Yet substantial wealth, especially when it's acquired suddenly and early, can be both isolating and debilitating. Just try distinguishing genuine friends from parasites after you've come into a few mil. Even heirs who don't turn paranoid may become lazy and unproductive, and ultimately unfulfilled.

A co-founder of Ben & Jerry's Homemade Ice Cream, Ben Cohen once told me he will give most of his tens of millions to charity and leave just $1 million to his daughter, a nice cushion but not enough to live well on without working. Other rich folks, including Bill Gates and Warren Buffett, have similar plans to spare their heirs what wealth advisers call "affluenza," an affliction that was fleetingly pandemic during the dotcom daze. Wealth doctors have lost a few patients since then. But even as stocks have slumped, home prices have swelled. Household net worth is down only slightly from its 1999 peak. Meanwhile, tax changes this year raise the limit on annual tax-free gifts to $11,000 a person (for as many people as you want to enrich), up from $10,000. You can leave $1 million free from estate tax, up from $675,000. The top marginal estate-tax rate drops to 50% from 55%.

Over the next 15 years, heirs will come into more than $10 trillion, and most will rejoice. But those who aren't prepared may find that sudden wealth complicates their life. "I've seen kids in the inheritance business," says Don Weigandt, an adviser at J.P. Morgan Private Bank. "All they ever thought about was how to get Dad's money. What happens after they get it?"

Wealth advisers say that your heirs should be told by their teens if they stand to inherit a sizable amount and should start learning how to manage it. Early disclosure gives you time to groom them for a life of philanthropy, civic duty or other worthy pursuits, should they elect not to work for money. If you doubt that your heirs are prepared, test them with an early gift and see what they do with it. If they mess up--say, by blowing it all on a series of vacations and paying for their friends too--or seem as if they're just waiting for you to die to get the rest, you may need to build in safeguards and incentives through a customized trust. A basic trust typically releases an inheritance in thirds, at ages 25, 30 and 35. But it can be designed to reward achievement, like graduating from college or starting a business or holding a job.

Such incentive trusts are a hot topic in estate-planning circles, in which the issue of how to leave money behind without ruining your heirs is getting almost as much attention as tax planning. In Beyond the Grave, authors Gerald and Jeffrey Condon argue that incentives don't work. "True character cannot be molded by money," they write. "You cannot salvage by inheritance what you fear you have not accomplished during your life." But others endorse incentive trusts as a useful way to motivate silver-spoon heirs. "Provide a resource, not an entitlement," says Joanne Johnson, a wealth-adviser manager at J.P. Morgan Private Bank.

In general, wealth advisers say trusts should lift all conditions by the time the heirs are in their 40s or 50s. For younger heirs, though, Johnson favors trusts that provide money in proportion to the lifestyle they have attained on their own. A trust might provide a 20% down payment for a first home--with the size of the home limited only by the monthly payments the heir's salary can support. A trust set up by one of Johnson's clients pays heirs three times their annual salary but no more than $200,000 a year to any one heir. That allows them to live comfortably while pursuing careers that are rewarding if not lucrative, like in the arts or teaching.

Most advisers favor disincentives too, like trusts that hold back money in the case of ongoing gambling or substance abuse. But often incentive trusts go wrong in tying distributions to marrying or raising children within a faith. The courts won't uphold such conditions. It's also a bad idea to give one heir leverage over others by choosing one to be trustee. Likewise, rewarding an underachieving heir with a larger inheritance may leave the slighted heirs resenting you after you're gone. If that's what you want, just leave it all to the dog.