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Long-term Estate Planning:

On Present Bias and Trusteeships 

Many of us are fortunate enough to have gained substantial assets throughout our lives. How can we insure the future of our children, and even our grandchildren? How can we prevent the waste of our inheritance within a few years or even several decades?

Fears that the future generations may be frivolous with their inheritance are supported by research. Behavioral economists discovered that many people have a present bias. Present bias is the tendency to rather settle for a smaller present reward than to wait for a larger future reward, in a trade-off situation. It describes the inclination of overvaluing immediate rewards, while putting less worth in long-term consequences. The present bias can be used as a measure for self-control, which is a trait related to the prediction of secure life outcomes.

For example, if a person inherits an apartment that is worth 5 million shekels, and can get a rent of 6,000 shekels per month (while keeping ownership of the asset that will probably increase in value), many would prefer to sell it for short-term gains rather than long-term benefits. It is often the easy way, but not the sensible way. It is likely that your son will cash his inheritance and spend it, and leave much less for your grandchildren.

There are several mechanisms to ensure that short term considerations (such as spending all the money on vacations, gambling, etc.) will not come at the expense of our aspirations that our children's children could also enjoy the fruits of our hard labor.

A possible apparatus to avoid the present bias is a trusteeship. Trusteeships can be easily formed and they are an effective mechanism to ensure that your assets and money are spent wisely according to your desires. The alternatives are endless, and can be tailored to your own family needs.

For example, you may wish to pass on assets directly to your grandchildren, while granting a right of accommodation to your children, or surviving spouse. This can be a quasi-trusteeship, without intricate mechanisms for its implementation.

In some cases, such as minors, it is sensible to form a trusteeship until they become young adults, to ensure that the assets remain intact.

In conclusion, while drafting your will, you should take into account the present bias, and where appropriate establish trusteeships to prolong the fruits of your estate to future generations.

For initial complimentary advice, contact Dr Guy Carmi, Attorney-at-Law and Notary, Tel Aviv. Tel: 03 911 1034, Email: This email address is being protected from spambots. You need JavaScript enabled to view it. 

 

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