Ethical wills can be a crucial tool for estate planning

An ancient Jewish tradition calling for the transfer of an older generation's wisdom to heirs alongside their wealth can add important directions and a sense of mission to an estate plan.

The creation of an ethical will that is separate from binding documents such as a living will, a trust or an advance health care directive prompts discussions that help supplement those legal records with instructions for clients' descendants and a way to pass down the lessons they learned in generating the family's assets, experts said. Financial advisors could play a lead role in those conversations or suggest a list of topics for families to discuss among themselves, according to Peter Ankeny, founder of Portsmouth, New Hampshire-based Wolf Pine Capital. None of them involve sophisticated forms of tax avoidance.

"It's a document that carries no legal weight, but it carries on the spirit of what it is you intend when you're leaving behind assets to people," Ankeny said in an interview. "It ties into wills and trusts, but it really doesn't even have to be for the ultrawealthy leaving huge sums of money to people. It can be for anyone who wants to pass on life lessons."

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Ankeny noted that there are many available resources online to guide advisors and clients on the key questions to think about in crafting an ethical will. His inventory of subjects for ethical wills includes a family story and communication of values, reflections on wealth, dreams for the future, thoughts and recollections on forebears' legacy, philanthropic endeavors, and inspirational messages to descendants. Clients could also compare an ethical will to a "letter of wishes" or a family mission statement, according to Anne Rhodes, the chief legal officer of digital estate planning firm Wealth.com. 

An ethical will may give trustees more instructions about distributing assets without obligating them, for example, to move a specific amount of money each month to an heir who is spending it carelessly. In other words, trust creators and their advisors could state the intention to provide $30,000 a year to the beneficiary alongside a chronicle of the family history and the motivation behind starting the entity but leave that specific number out of the legal language. 

"If you put it into the binding document, then that income must always come out," Rhodes said. "It becomes this autobiographical document where you have so much more control to tell your own story."

The Jewish practice of ethical wills dates to the Middle Ages, and it's connected to the patriarch Jacob, whose life as depicted in the Old Testament had no shortage of complicated estate planning. Ethical wills stem from Genesis 49:1, which reads, "And Jacob called his sons and said, 'Come together that I may tell you what is to befall you in days to come,'" according to an article on ethical wills by Rabbi Elliot Dorff on the website of the American Jewish University.

"An ethical will is definitely not a prediction of the future," Dorff wrote. "It is rather a letter that a person leaves for his/her relatives and friends. There is no particular form for such a letter; nowadays, in fact, it often is not a letter at all but rather an audiotape or videotape. The point of such a communication is to leave in one's own words some of one's memories, hopes and dreams and values (hence the name 'ethical will')."

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For advisors, helping clients craft an ethical will can "lead to very interesting discussions and open up a part of the relationship that may not have existed before," Ankeny said. The process provides beneficiaries with the "meaning to this account that all of a sudden shows up in their life" and lends the older generation a method of telling them, "These are the sacrifices we made, these are the choices that we made in life to make this account available to you," he added.

"It comes up a lot with real estate. When you pass on real estate, it's one of the easiest ways to destroy a family," Ankeny said. "The parents don't want to sell this and they want this to be a place where everyone comes together for the holidays and they want grandchildren to come. That story is completely lost in the trust documents."

In a time in which investment management is becoming increasingly commodified by new technology, ethical wills represent an important tool for advisors from a behavioral point of view, according to him and Rhodes. 

In addition, they offer a means for advisors to learn more about incoming clients who may have already written one in the past, Rhodes said.

"Read it as an advisor because you're going to find out so much more about your client than you ever imagined," she said. "Where you can bring value is to play devil's advocate a little bit and push your clients to think about certain circumstances. Say they're worried about a beneficiary losing the ability to contribute to society — push them on what they believe it means to contribute to society. Those are the types of questions where you can really expand your clients' thinking."