For generations, Americans have heard about the famous and wealthy Hunt family from Dallas, Texas. H.L. Hunt, the family patriarch who amassed his oil fortune beginning in the 1930's, was once known as the richest man in America, according to a recent article in the June 2008 issue of Vanity Fair magazine. The story of Hunt's grandson, Al G. Hill, Jr. ("Al Jr."), and great-grandson, Al G. Hill, III (known in the family as "Al Three"), and the unintended consequences of Al Jr.'s generosity toward his son is now subject of a classic court case pitting father against son.
The saga of Al Jr. and his son, Al III, is not unlike that of many other families, wealthy or not.
Sharing a family trust with a child - and its unintended consequence
The father in this story, Al Jr., and his two sisters stood to become the beneficiaries of a large trust upon the death of their mother, Margaret Hunt Hill. In 2005 and prior to his mother's death, Al Jr. signed a document, known as an irrevocable disclaimer, under which he agreed that he would share his right to receive income from his mother's trust during his lifetime with his three children, one of those children being Al III.
When Margaret died in 2007, the share of the annual trust income that would have belonged to Al Jr. was estimated to be about $22.5 million. However, as a result of the disclaimer, Al Jr. would now share this income equally with his three children. That meant that son Al III was in line to receive over $5.5 million of income from the trust each year. Shortly after Margaret's death, Al III learned that the trustee of the trust was planning to sell the trust's most significant asset, a 48% interest in Hunt Petroleum. Al III wanted to stop the proposed sale. And as a result of his father's generosity and because he was now a beneficiary of the trust, Al III was in a position to demand information about the trust and its management.
Perhaps realizing what a mess he had created, several months
after Margaret's death in 2007, Al Jr. attempted to
retract the disclaimer, saying that he had been incompetent to
understand its meaning when he signed it in 2005. Al III
is fighting that retraction, claiming that the disclaimer was
"irrevocable" when it
was made.
The legal wrangling is underway. Al III, with the help of a powerful Dallas law firm, is pursuing his rights as a beneficiary of the trust to challenge the trust's management by its long-time trustee, much to the chagrin of his father.
Supporting a child's lifestyle – and its unintended consequence
How many parents have given money to a grown child, thinking, perhaps, that with a little financial support, the child could resolve his current financial problems and get a fresh start? And how many times does the parent discover that the requests for financial help not only continue, but also increase in size and frequency?
As you can read in the Vanity Fair article, Al Jr., like so many other parents, fell into this trap. Even though the three generations of the Hunt family that began with H.L. Hunt may not have flaunted their wealth or lived extravagantly, it seemed that Al III was on a different path.
In 2002, father Al Jr. first stepped in to help his son pay off debt that had reached over $20 million. Al Jr. paid off over $2 million of Al III's personal debt, and Al III declared bankruptcy to discharge the balance. Al Jr. probably believed that would be the end of it, but it wasn't. Even after 2002, Al Jr. continued to pay off his son's ongoing debts. Meanwhile, son Al III and his wife, Erin, supplemented their extravagant lifestyle by taking loan advances from family companies, including advances between June 2004 and September 2007 of almost $6 million. All the while, Al III earned an annual salary of almost $1 million.
Did Al Jr. unwittingly send the message to his son that his extravagant spending would be tolerated?
Lessons learned
What lessons could be learned from the Hunt family saga? Certainly, money doesn't necessarily buy happiness. But there may be two other practical lessons to consider:
- Before you decide to include other family members as
owners of your business, as beneficiaries of a trust, or in
any other important family venture, consider the rights,
benefits, duties, and responsibilities you may be bestowing
upon those family members. For instance, if you give or sell
interests in your business to your children, your children
may acquire rights to examine the business records, vote on
important business decisions, or perhaps remove you as an
officer or director of your own company. Look before you
leap.
- Giving cash to your child or paying your child's
debt may resolve the child's short term financial
crisis, but it might also lead to a sense of dependence and
entitlement. Rather than giving your child cash
outright, or paying off your child's debt, consider
instead the idea of lending money to your child, documenting
the loan with a promissory note that is secured, perhaps, by
the child's home. And require payments on the note as
they become due. Remember also that if you make gifts to a
child, or pay a child's debt, you might be making
taxable gifts that should be reported on a gift tax return.
These taxable gifts might reduce your lifetime exemptions
from the federal gift and estate tax. You may also want to
consider whether you will create hard feelings among your
children if you give one child more than another without
being explicit with your children about your decision.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
