July 3, 2007

How inheritances are lost (Part 1 of 3)

By Robert P. Bergman
Special to the Times

There is a saying in China that roughly translates to, “from rice paddy to rice paddy in three generations.”

In general, what this means is that the first generation of a family, many times poorly educated but hard working and driven by strong cultural values, often has built a family fortune to pass on to the next generation.

Here in the Silicon Valley, it can be seen in the many family businesses built by the first members of a family to move into the valley, often from other parts of the country or the world. Orchards, farms, restaurants, department stores, wineries, convenience and grocery stores, and many other businesses fit this pattern. It can also be seen in the many success stories of immigrants and others achieving financial success in the tech industry.

The second generation is often better educated, with their education paid for from the family fortune built by the first generation. This generation may still have many of the values of the first generation, and may also have an interest in continuing the family business, which builds further wealth for the family.

The third generation, however, is often more educated than the previous (second) generation, and has likely been raised entirely in the new culture. This generation often has no interest at all in the family business, which can lead to the family business being lost due to lack of interest, which affects the family fortune.

Even if the third generation is interested, there are several forces conspiring together to destroy the wealth of the family. Through a series of stories in these articles, I will discuss the various ways that families and their heirs lose inheritances. In the final article, I will discuss how, with proper planning, a family can work together to guarantee, as much as possible, that the family wealth will not be lost.

Bill’s story
Bill had been in financial difficulty his whole life. He had maxed out his credit cards, was late on his rent, and already had several judgments against him for unpaid bills. His wages at work were being garnished by various creditors. At age 30 years, his prospects were bleak.

Then Bill’s parents died, leaving him everything they owned, including their house. Unfortunately, their property was left outright to Bill. Bill’s creditors took all of the cash, and soon, because Bill had never learned how to handle his finances, he lost the house as well. Forty years of hard work and sacrifice by his parents was gone in less than two years, at the end of which, Bill was still in debt, and had nothing left from his parents.

If only someone had been able to take care of Bill’s inheritance for him…

Ruth’s story
When Ruth’s parents died, they left her a nice inheritance. Unfortunately, four years later, Ruth was in a car accident that incapacitated her, leaving her in a wheelchair. Ruth now needed 24-hour care due to her injuries. Because Ruth had property, she was forced to use her property to pay for her care, including her inheritance from her parents. As a result, not only was her property lost paying for her care, but her inheritance from her parents was lost as well. Ruth is now trying to survive solely on government assistance. She hopes that the government will be there in the future for her, but she is uncertain what her future holds…

To be continued next month.

Robert P. Bergman is a San Jose estate planning attorney and counselor who devotes his law practice exclusively to assisting individuals and couples planning for incapacity and the eventual transfer of their property to their heirs. He has regular seminars on the use of wills and trusts in estate planning. Visit his Web site at www.lawbob.com where you can learn more, register for an upcoming seminar, schedule a consultation, and read other articles on estate planning topics he has written. You can reach him by e-mail at rpb@lawbob.com or telephone at (408) 247-0444. All inquiries are confidential.

This column is intended to provide general information about estate planning ideas, concepts and laws, and is not to be relied upon as rendering legal advice about your particular situation. No attorney-client relationship is created by these articles. The laws concerning estate planning, wills, trusts, and estate taxes are very complex, often state-specific, and change on a regular basis. Consult with an experienced attorney before taking any action that would affect your personal or business matters.