Inheritance

Eradicating Entitlement

Even families that don’t consider themselves highly affluent can be raising “trustafarians” without realizing it

Key Takeaways:

  • Entitled people, especially children, don’t develop the capacity for self-reliance or independence.

  • Even in families of modest affluence, it’s essential for kids to learn about spending wisely, saving diligently and sharing generously.

  • Warren Buffet said, the perfect amount to leave your kids, is ''enough money so that they would feel they could do anything, but not so much that they could do nothing.'' 

The wordentitlement” has many negative connotations, but it wasn’t always that way. In the past, it was often about having a right, as in “I’m entitled to certain rights.” In reality, it’s a little bit of both. Many times successful parents become concerned about their childrens’ feelings of entitlement stemming from their family’s ritzy neighborhood, their high-end cars, their affluent school district or the expensive sleep away camp they attend.

Your children or grandchildren don’t have to be trust fund recipients (i.e. trustafarians) to exhibit signs of entitlement that can be difficult to shed in adulthood. We all want to do what’s best for our children. But, giving kids too many things at an early age can prevent them from developing self-reliance and independence as they get older.

Another danger of entitlement is that children become so self-absorbed (both personally and materially) that they have no what other people want or need, particularly those who are less fortunate.

As Warren Buffet famously said, the perfect amount to leave to your kids,  is ''enough money so that they would feel they could do anything, but not so much that they could do nothing.''

Real world example

One family I know, in which both parents are first generation Americans, created significant wealth for themselves. Their children enjoyed the fruits of that hard work. Naturally, the parents wanted provide their kids with more than their parents gave them --more experiences, more opportunities.

The parents were well intentioned, but even those good intentions can give the kids unrealistic expectations. For instance, both kids expected to receive a Mercedes upon graduating from high school—which they did--because that’s what many of their affluent peers received in their circles.

Despite their advantages, both kids started to act out, which teens of all backgrounds inevitably do. The boy even got in trouble with the law, but thanks to his family’s wealth, they were able to hire top attorneys to get the boy off the hook. Unfortunately, he was kept entirely out of the legal process so he never learned his lesson. Before long, he got in trouble again. The parents realized too late that their good intentions—to protect their child—preventing the boy from learning valuable life lessons about being accountable for his actions and suffering the consequences. It took him many, many years to get on the right track to responsible adulthood and caused his family significant pain.


Add inherited wealth to the list of addictions

The Latin root of the word addiction mean “is a slave to a master.” When people are addicted to something, say a drug or alcohol, they’re slaves to that master. In the same way, when heirs inherit wealth, they get used to the regular “hits” from their trust distribution “dealer.” They organize their lives around their family’s money flow, rather than forging their own path to adulthood and self-reliance.

So, how do parents prevent this from happening? Start with the process of “naming.” When we name something, we’re calling it out. To name something, we don’t want to clobber it in the head with a baseball bat and call it “entitlement.” Instead, families that succeed and create family harmony, unity and cohesiveness over the generations are ones that have meaningful conversations about what they have. They discuss the potential risks of their wealth also the potential benefits it can provide to themselves and to others. In many ways, wealth and money can be viewed as members of the family—and we always have to respect our relationship with those special family members.


The Thee S’s

In a family of affluence, it’s important for the kids to learn about Spending, Saving and Sharing. This can begin as early as age five or six. I know of a family in which the father gave a dime to his daughter when she was 7 or 8 years old and he said, “We have a lot of these dimes. And so what I want to do is give you this dime, and we’re going to decide how we’ll spend it, how we’ll save it and how we’ll share it.” That was the beginning of the daughter’s wealth and money education.

I often facilitate family meetings around the qualitative or emotional issues that accompany wealthy families. A three-generation family business had multiple liquidity events over a short amount of time. That was very new to them, and subsequently what they decided to do in addition to getting technical advisors to help them, they brought in a family counselor to help them have meaningful and respectful conversations about what they have and what they want do with it.

Conclusion

For children of privilege, wealth can be a tremendous tool for helping others and for achieving a life of fulfillment. It can also be a dangerous and highly addictive drug. It’s never too early to teach your children and grandchildren about the 3 S’s and the responsibility of money. Contact me any time if you have concerns about your gifting or estate planning.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Identity Crisis

There is no one-size fits all strategy for gifting or transferring assets. Make sure your advisors know your unique needs and motivations

 

  • Before you can ask your advisors for help, take some time to think about what’s most important to you and your family about giving back.

  • Sometimes volunteering time is more fulfilling than donating money. Make sure you and your advisors are in sync when it comes to mapping out your philanthropic and life goals.

  • There is no magic formula for deciding how much to donate vs. how much to pass on to your heirs. A skilled advisor can help you set the appropriate criteria.

 

Giving time and money to causes you support is one of the most powerful freedoms that wealth provides. But, just showing up to volunteer without a plan or just writing checks when the pleas flood into your mailbox, can leave you feeling unfulfilled with a trail of missed tax-saving opportunities in your wake.

Giving can be done effectively at any age, but as Boomers age out of careers, many are finding fulfillment in giving back to their community by volunteering. Also, with children typically grown and out of the house, Boomers generally have more capacity to give. If that sounds like you, use this period to begin to convert dormant assets into planned gifts and also to help increase community involvement.

One of the key findings in the latest U. S. Trust study is that affluent Boomers want to give more than they currently do, but they need help discovering what they are passionate about. A good advisor knows how to tap into your passions and values by asking the right questions about your financial and life goals—on an ongoing basis.

No two people (or families) have the same motivation to give. It’s important that your financial advisors don’t apply a one-size-fits-all approach to your philanthropic goals.

What research says about how and why we give

Both Fidelity Charitable and U. S. Trust conducted extensive national surveys about charitable giving trends among the affluent and soon-to-be affluent. Here are just a few of the ways that successful people differ when it comes to giving back:

Fidelity found that women tend to be more committed and strategic in their giving. They tend to volunteer more time, ask more questions about the financial aspects of their gifts and generally feel that giving to charity is a very satisfying aspect of having wealth. According to Fidelity, women tend to be more spontaneous; captured by a cause, a movement, or an empathetic response.

Parsing even further, Fidelity research indicated that Millennials seemed particularly motivated to give more than just money to the causes they believe in. Why these reactions occur is not entirely understood, but industry observers see both Millennial men and women wanting to see results and to measure the impact of their giving. The younger age cohort also seems to desire hands-on experiences and involvement, more so than other groups, sometimes even leading their own efforts ala Zuckerberg/Chan of Facebook fame.

Much has been written about how Millennials are re-shaping giving and our firm works very hard to understand the different populations we serve.

Further, different gifts make sense at different ages. In fact, some younger donors may not even qualify to implement a Charitable Remainder Trust (CRT)—a common tax-advantaged way to give to charities and beneficiaries--because the trust won’t qualify under the 10 percent remainder test.

The 10-percent minimum remainder value test says that all CRTs must have a remainder value that is equal to, or greater, than 10 percent of the funding amount.  If a CRT fails the 10 percent test, it does not qualify as a charitable trust and loses all the favorable tax treatment that a qualified CRT enjoys.

In terms of giving their time, U.S. Trust found that HNW volunteers are highly motivated to respond to needs (51% agree) and by the belief that their service makes a difference (49% agree). Other important motivations include: Personal values or beliefs (39% agree), concern for a particular cause or group (32% agree), and concern for the less fortunate (28% agree). Researchers found that women were significantly more likely than men to indicate that “responding to a need” is a top motivation for volunteering

Researchers also found that women and younger individuals were significantly more likely than other cohorts to say that education was a top public policy concern of theirs and they were more likely to express confidence in a nonprofit organizations’ ability to solve societal or global problems. According to U.S. Trust, African Americans were also more likely than other groups to give to religious organizations and both women and African Americans of both genders were more likely than other groups to give to women and girls’ causes and/or organizations. U.S. Trust also found that women and younger donors were more likely to give to causes that support animals and K-12 education. Younger individuals were significantly more likely to make giving decisions independently of their partners/spouses.  Finally, younger donors were significantly more likely than other groups to donate online or through crowdfunding.


If you don’t agree with all of the generalizations about giving patterns above, that’s okay. Just make sure your advisors do NOT assume you want to give along the lines of the findings in these widely cited reports about philanthropy and volunteering.

Conclusion

If philanthropy is truly one of America’s great freedoms, then it is incumbent upon your advisors to help you best enjoy that freedom. Make sure your advisors have a deep understanding of your life goals, family values and causes you support so they can help you structure the smartest way for you to give with the maximum impact. Contact us any time if you or someone close to you has questions about planned giving or legacy building ideas.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Incentive Trusts

Tips for handling the transfer of funds from one generation to the next

Key Takeaways:

  • An incentive enables parents or grandparents to financially reward heirs for desired behaviors.

  • Make sure your trustee is fully aware of your trust’s intentions and how the funds should be distributed.

  • Incentive trusts allow you to transfer assets to the next generation in stages—rather all at once—pending the beneficiary’s ability to reach certain life milestones.



Sometimes parents want to leave funds to their children, but they are concerned that their kids may not be responsible enough to manage those funds. Other parents or grandparents wish to ensure that inherited funds do not cause the beneficiaries to become lazy, financially reckless, or unproductive citizens.

To address this concern, funds from trusts are often distributed in stages, such as one-third at age 30, one-third at age 35 and one-third at age 40. For other families, in which the children are already somewhat older, but perhaps the parent is not fond of the in-laws, the funds can be distributed at intervals such as 50 percent upon the death of the parent and 50 percent five years later but not exceeding a date later than when the child attains the age of 65.

Parents and grandparents are typically concerned about education, morals and family values, business and vocational choices, and charitable and religious opportunities. In these types of situations, a parent or grandparent may want to establish what is known as an “incentive trust.” An incentive trusts allows the grantor of the trust to reward heirs for desired behaviors. Likewise, incentive trusts can be structured to penalize heirs for engaging in undesirable activities.

Common incentives

Incentive trusts may be used to provide extra support to the heirs who pursue advanced degrees or who focus on family life. For instance, the trust could be designed to provide enough income for an heir’s family so that only one of the two parents needs to work, thus enabling the second parent to stay home with the heir’s children until those children attain a particular age. There also may be a trust designed to provide funds to heirs who are committed to maintaining the family business, and additional financial support may be provided to beneficiaries who choose to work in lower-paying, but highly rewarding professions that help people, such as social service or teaching.

Finally, some family members may wish to encourage certain behavior in their heirs by requiring specific observances such as religious or charitable opportunities. So, if heirs are involved in a particular cause, such as missionary work, the trust fund will provide them with additional support for themselves and their families. And, they won’t have to worry about requesting additional funds from the trustee on a periodic basis.

When setting up an incentive trust, it is very important that the trustee is aware of the intentions of the grantor. Therefore, in addition to the usual provisions (such as having all income distributed with principal at the discretion of the trustee), the trustee should be given specific authority within the trust, and possibly even a letter of intent from the donor, explaining when and how much of the funds are to be distributed at any given time. It is also important to ensure that the trust does not violate any constitutional or public policy law or standard that would cause the trust to be in violation of a statute or regulation.

Conclusion

In short, it is easy to discuss the establishment of an incentive trust, but there are significant and complex legal, tax, and investment issues that also will arise when creating this type of document. Incentive trusts are not for everyone, and they should be used only in situations in which other types of trusts or investment vehicles are not appropriate. Always consult your advisors before setting up a trust. Contact us any time if you, or someone close to you, is interested in the possibility of setting up a trust to benefit future generations or causes you believe in.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

Can I Delay the RMD from the Traditional IRA I Inherited?

Traditional IRAs allow the owner several tax advantages: it allows for an upfront tax deduction as well as tax-deferred growth.  Upon withdrawal of funds, the account owner is taxed at ordinary income rates. Inherited IRAs require the new account owner to begin taking withdrawals over their lifetime regardless whether or not they need the funds.  Why?  Because Uncle Sam wants to collect his share.  Here are some potential strategies for delaying RMDs from Traditional IRAs as long as possible.

Are you the beneficiary of a Traditional IRA from someone other than your spouse?

If you inherited a Traditional IRA from a spouse, you are likely able to delay taking RMDs until you reach 70.5 years of age.  Check out our “Should I Inherit my Deceased Spouse’s IRA?” flowchartIf you inherited the IRA from a non-spouse, move on to the next question.

Did the person pass away before their Required Beginning Date (April 1st, the year after turning 70.5)?

They have reached their Required Beginning Date

This allows you two options: electing the “5 Year Distribution Rule” or taking RMDs based on your life expectancy using the IRS Single Life Expectancy Table.  The “5 Year Distribution Rule” means all assets must be out of the account at the end of 5 years.  You could withdraw all funds immediately, spread them out over the 5 years, or take them all out just before the end of 5 years.  Keep in mind you will need to pay ordinary income tax on the whole amount distributed. 

If you take RMDs based on your life expectancy it will spread out the tax burden.

They have not reached their Required Beginning Date

You will be required to open an Inherited IRA and take RMDs based on your life expectancy according to the IRS Single Life Expectancy Table.  Depending if the deceased had satisfied their RMD for the year of their death, you may be required to take one this year.

If you’ve made it this far, you may be able to delay the RMD from your inherited IRA.  Check out this flowchart to learn more.

If you would like to schedule a call to talk about the best strategy for delaying RMDs from Inherited IRAs, give us a call at 303-440-2906 or click here to schedule a time to speak with us.

 

 

 Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

 

 

What to Do After Inheriting an IRA

Here is a nice article provided by Kimberly Lankford of Kiplinger:

 

By Kimberly Lankford, Contributing Editor   

 

September 1, 2017

 

Heirs must begin taking withdrawals once they inherit an IRA, but how they choose to make those distributions can have a big impact on their account balance over time. 

 

Q. My mother just passed away at the age of 60. She has $110,000 in a traditional IRA, and my sister and I are the beneficiaries. The bank said it will have to open an IRA account for each of us and then distribute the $110,000 equally between us. Do we need to keep the money with that bank or can we transfer it to another brokerage firm? Also, when do we need to withdraw the money? I'm 39 years old.

 

A. Because you and your sister are non-spouse beneficiaries, the bank will open inherited IRAs for each of you and transfer the money directly into the two accounts (the options are different for spouses who are beneficiaries and can roll the money into their own IRAs). You can keep the IRA at that bank or transfer it to a different IRA custodian, such as a brokerage firm or mutual fund company. Money from an inherited IRA must be directly transferred from the old account to the new one, so check with the new administrator to find out what steps you need to take to do this. "The new IRA custodian must be willing to accept inherited IRAs," says Christine Russell, senior manager of retirement at TD Ameritrade. You may also have to complete special paperwork for the transfer.

 

As a non-spouse beneficiary, you have two options for taking the money: You can withdraw all the funds from the inherited IRA within five years, or you can start taking periodic payments by December 31 of the year following the year of your mother's death.

 

Given that you are only 39, you're probably better off taking periodic payments. That's because your required withdrawals will be smaller under this method, so you'll have more money left in the account to grow tax-deferred for years. 

 

The periodic payments for inherited IRAs are similar to required minimum distributions for IRA holders over age 70½, but they use a different life-expectancy table to calculate the annual withdrawals (Table 1 single life-expectancy table, in Appendix B of IRS Publication 590-B, Individual Retirement Arrangements).

 

Make sure the IRA custodian knows you want the periodic payment option. Otherwise, its IRA documents may require you to withdraw the money within five years, says Russell.

 

Whatever option you choose for withdrawals, the distributions will be taxable, except for any from nondeductible contributions. With an inherited IRA, though, you won't have a 10% penalty for early withdrawals before age 59½.

 

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.

 

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.