Wealth Education for the Next Generation – Expanding Needs

Many families are not aware of important legal issues that affect their 18 – 21-year-old children. Parents are often so focused on the fact that the drinking age is 21 that they do not realize that their 18-year-olds are, for most other purposes, adults in the eyes of the law. Parents no longer have the same access to information or control over their children after age 18. Proper planning for the legal issues that arise with an 18 – 21-year-old child can help avoid problems later. What should parents and young adults consider?

• Durable Power of Attorney
• Health Care Proxy and HIPAA Authorization
• Will and Trust Investments
• Disclosure of Information / Waivers
• COVID-19 Waivers / Acknowledgements
• Insurance
• "Adulting"
  

The attorneys at Hemenway & Barnes LLP have prepared this checklist:

Continue Reading

A lot has been written on educating the “next generation” about family wealth. There are many strategies and, in our experience, there is no “one size fits all” solution. Sometimes, the most important advice comes from unlikely sources and the area of wealth education is no exception. In fact, a great deal of sound advice can be drawn from the wisdom of Lewis Carroll’s Cheshire Cat.

"Finding your way depends on where you want to go."

The cat tells Alice that finding her way depends on where she wants to go. This is true in families as well. In the past, much family wealth was secured in long term trusts, the operation of which remained a ‘secret’ to the beneficiaries. Today, many families want to expose the younger generation to the family’s situation earlier and over time. Of course, there are still situations where it may make sense to tie up resources so that they are out of the reach of a family member, but generally we have found that gradual exposure to the size and scope of family wealth helps the younger generation get “acclimated.” Strategies range from informal meetings to more formal introductions and this is where the second lesson from the Cheshire Cat comes into play.

“Every adventure requires a first step.”

Many parents find it hard to open the conversation with advisors or their children. Whether they grew up with wealth or are the first generation to enjoy its rewards, they find it difficult to discuss. Sometimes children have to raise questions before parents can focus. In our experience, it is better to be out in front of the children, but the degree of openness depends on the family, their children and the family situation. Sometimes, the family’s wealth is a matter of public record. No parent wants their child to read about the family in the paper before they have a chance to discuss their situation privately as a family. Some families are comfortable right off the bat, sharing information and access to family accounts and the like with children as they grow up. Some families like a concrete strategy; an allowance, a budget exercise, a site visit with the trustees of the family foundation, or a meeting or series of meetings where the family situation is introduced, for example. Others like a slower reveal that might include informal one-on-one conversations over time. Every family must determine on its own what will work better for them. At the same time they must remain mindful of what others in the extended family are doing. If your children are going to find out about the family wealth from their first cousins whose parents have a different approach, it is best to be prepared. Once again, the Cheshire Cat offers some sound advice.

“The proper order of things is often a mystery to me.”

The order and depth of family wealth discussions are highly personal. Some families start when their children are very young and others wait until their children are older. If possible, it is good to start early, when you have more control over your children and the messages they receive. At the same time, you raise your family within a larger extended family and in a broader community. It is important to figure out the best way to introduce knowledge within the larger context. For example, some children are ready to participate in the family foundation before others. Some might prefer access to a smaller donor advised fund rather than the larger, more public resource. Some children can handle trust distributions at 18 and others are better off if the distributions begin at 25, or later. Some people are ready for complete autonomy at 30 and others still need an outside hand on the tiller.

"There are some that never find the way and others who don’t recognize when they do."

And here is the final lesson from the Cheshire Cat. There are some that never find the way and others who don’t recognize when they do. In our experience, there are always a few families and young people who do not become accustomed to their wealth. This is rarely the result of any failure of the family “system.” More likely it is because of family dynamics that may be independent of wealth. When we encounter such a situation, the strategy is usually to go back to lesson #2, every strategy requires a first step. Families can get “stuck,” but this does not mean that one should give up. Some families find their children are engaged in meaningful work and solid relationships. They understand that they are different from other people, that they may require a pre-nup prior to marriage or their family may have annual meeting instead of simply a Thanksgiving dinner. There is no one size fits all solution to getting to this point. Just as Alice had to adapt to her situation, so too do today’s families. We can work with yours to find the right solution for you.

Is now the right time to buy a second home, or to buy another major asset, or to start a business, or to make a major charitable gift by starting a private foundation or donor advised fund?

In every case the answer to these questions comes down to comparing your realistic expectations of benefit from the purchase to your realistic costs of making the purchase. The problem for most of us is that it is very easy to exaggerate the likely benefits of a purchase and to minimize the real costs.

What are the possible benefits?

1.Greater happiness

Greater happiness from possessing or using a home or other object or from being involved in a new business or leisure activity.

2. Creating a legacy

Creating a legacy for your family – a place that they might gather long after you are gone to maintain family relationships – an asset that they might share the use of – a business or a charity purpose in which your family can be involved in the future.

3. Financial Returns

Financial returns from appreciation in value of the asset or income from renting it out or dividends or salary from a business.

But consider the costs, including costs that most people don’t really consider:

1. Opportunity costs

If you tie your money up in this asset, how will it impact your ability to do other, perhaps more critical, things such as: buying some other asset in the future, making it through retirement, paying for current expenses, paying for a child’s education or other needs. In the case of a charitable gift the money is gone forever. In the case of a business you have to assume that the money is likely gone forever (one-half of all new businesses fail – don’t assume you will be in the other half). Did you need that money to be available for the future and being invested in the meantime to make your future expense budget work? Even in the case of a hard asset that you are buying, how confident can you be that it will not go down in value (art and collectibles often do, real estate sometimes does). Even if the value of the asset remains intact, will you be able to reach that value if you need to as quickly as you will need to (real estate and businesses can take a long time to sell at the best price). Will there be as much financial return as there would have been if you simply invested the money used for the purchase?

2. Direct costs

If you borrow to make the purchase you will have to repay the amount borrowed with interest even if the asset purchased loses value. If you borrow for investment, business or second home purchase purposes the government may help you out by making the interest tax deductible but that help will never fully offset that interest expense. Any of these purchases have on-going expenses in terms of time and money. If you buy a second home you will have property taxes, repairs and maintenance and insurance premiums to pay. If you start a business you will have to manage it or pay someone to manage it for you and will likely have to put more money into it to keep it going at least for the first few years. Even a charitable gift to a donor advised fund or a private foundation requires you or a family member to monitor it and make future decisions about how to distribute charitable funds.

3. Psychological Costs

Researchers have proven that most people don’t get as much satisfaction in the long term out of acquiring a new object as they expect to. Perhaps you are overstating the psychological benefits to you of this expenditure. You may assume that this new thing will be a unifying factor for your family, but maybe it will just be something for them to fight about. We have seen many family conflicts start as a result of a second home that only one of several children actually uses or a family business that employs some, but not all, members of the family. Will the purchase become a source of anxiety for you rather than a source of happiness? – will you worry when there is a coastal storm that your home at the beach will be swept away, or that the graceful pine tree next to it will fall on the roof, or that someone will be harmed by your new business and sue you? Some people are worriers and some are not, but if you are a worrier this will be another thing to worry about – will the positive psychological benefits outweigh these negatives?

How can your H&B lawyer help?

1. Provide a wider perspective

Unfortunately, we have seen most of the ways that things can go wrong. If you are having trouble thinking of possible negatives we can help.

2.Take the proper legal steps

Many times things that could go wrong will not if the proper legal steps have been taken. Depending on the situation we can draft stockholder
agreements, co-ownership agreements, or suggest risk management strategies.

3. Quantify costs

If you are having difficulty quantifying direct or opportunity costs, we can draw on our experience to identify costs and can do financial modeling to determine how much you might not have in the future as a result of a major expenditure.

4. Documentation

Once you decide to go ahead with the purchase we can assist with all of the documentation necessary for the purchase and can provide guidance about the operation of your purchase going forward whether the issue is getting a property tax abatement, obtaining appropriate insurance, following the rules that govern private foundations, dealing with employment law and all the other issues that come up in a business.

There often comes a time when you must reverse the relationship you have had with your parents since you were born. You must become the one who provides care while they must accept your care. This is difficult for both parent and child

Having seen hundreds of families pass through this stage in their lives we can help you by:

• Sharing the experiences of other clients with you
• Connecting you with professional caregivers who can take some of the burden off you
• Dealing with legal issues involved in obtaining government or private retirement and health benefits
• Planning to downsize a home or buying into an assisted living community
• Budgeting for your parent’s remaining years
• Dealing with employment and tax law issues when you have household employees

Because we are a relatively neutral party we may be able to start and facilitate the difficult conversations you know you need to have with your parents. Productive conversations begin with key questions.

• How are your finances?
• Who will take over your business?
• What insurance and other pre-need arrangements do you have in place for health care and other expenses?
• What do you want for living arrangements and health care?
• How will end of life decisions be made?

At times it can be harder to ask these questions than to manage the implications of the answers, but good care starts with smart questions and frank conversations.

Retirement Planning is all about answering three questions:

1. How much wealth or other resources do I need to retire when I want to retire with the lifestyle that I want in retirement?
2. How can I best manage my finances before retirement so that I reach that target amount?
3. How can I best manage my finances after retirement so that the answer given now to the first questions turns out to have been the correct one?

On the surface, these are simple questions but getting to the answers is very complicated, which is why most Americans spend far more time every year planning their next vacation than planning for their retirement.

We can help you determine how much you need to retire by working with you to identify your cash flow needs in retirement (your budget) and your sources of cash flow (spending down savings and retirement accounts, investment income, social security, pensions).

We can then use sophisticated financial modeling software to determine the probability that you will not run out of money during your life and, if that is important to you, the probability that you will have some minimum amount to leave to your family and/or charity.

Based on the results of that analysis you may be able to conclude that (a) you can retire earlier or must try to retire later than you expected; (b) that you can afford to spend more or less than you expected in retirement; (c) you must save more now or invest differently than you are now to have enough to retire or to maintain adequate cash flow in retirement. This puts you in a position to make rational choices up until retirement and then sets the basis for your initial budget in retirement.

Once you are actually retired we can help you determine optimal spending and investment strategies to get you through retirement with the largest amount of money available to you to spend or to leave to your heirs.

In order to get the optimal results in your retirement planning you must consider how to best manage the following risks starting immediately and continuing through retirement:

1. Inflation

Having a guaranteed cash flow from a bond or an annuity is great unless it turns out that because of inflation the payment that you receive when you are 75 only buys you half as much food or housing as it did when you are 65. Consider investments that tend to keep up with inflation such as stocks and real estate and consider inflation adjusted sources of income such as social security or certain private annuity products.

2. Longevity

Living a long life is great unless you outlive your money. Think about long term investing even in retirement because a current retiree at 65 can reasonably expect to live to 90 or older. Consider maximizing social security benefits and other life-long annuity type sources of cash flow. Living too short a life is also a problem if family members are dependent on your earning power to build up a retirement fund. Consider buying appropriate amounts of life insurance.

3. Health Care/Long Term Care

Plan for health care expenses well in excess of what Medicare provides. You will need to budget for Medigap and prescription drug coverage or costs and out of pocket costs for co-pays, non-covered medical expenses and private pay doctors. You should plan for medical costs to increase at a rate significantly higher than the general inflation rate. Plan for possible long term care expenses in an assisted living or nursing facility (rarely covered by Medicare) by factoring those possible costs into your retirement budget and/or buying long term care insurance.

4. Market Risk

Own a diversified portfolio of relatively safe investment assets. But not so safe that you don’t get the rates of return needed to support your retirement lifestyle. Have enough cash or stable value assets such as bonds on hand to weather market down turns so that you don’t have to sell more volatile investments when they are down.

5. Other Financial Risks

Protect yourself from catastrophic financial events such as property damage, theft, disability, legal claims, and bankruptcy. Have good property and liability insurance and disability insurance. Take available risk management steps such as declaring a homestead, moving assets to lower risk family members, holding assets in limited liability entities such as corporations, LLCs and LPs.

Our experience can help you to find appropriate investments, evaluate and find appropriate insurance products, create risk management strategies, documents and entities.