We are in the First Quarter of the year. It is that time of year where we find ourselves waiting for our 1099s to “dribble in” to complete our tax returns. And as our thoughts turn to income and taxes it may also lead us to dreaming about becoming wealthy enough not to care. Which may lead to thoughts like: Why did my Powerball ticket not pay off? Or how come that bonus the boss promised never materialized? Or where is that large inheritance from Uncle Fred?
Of all of these scenarios, the most likely one for children of the Baby Boom generation is an inheritance. Over the next 30 years, an epic $30 trillion will be passed down from baby boomers to the next generation. Depending on your family circumstances, you may actually have a chance at this particular lottery.
For the parents and the offspring receiving this wealth transfer, the next sobering statistic is 65 percent of family wealth is lost by the second generation and 90 percent gone by the third generation. For some families these statistics may just reinforce a thought to give it all to charity, the kids are going to lose it all anyway. And for some families this might be the right choice.
For some other families, the opportunity missed here is strong communication of family values and having planning professionals in place that work closely with them and their children while both generations are still alive.
All wealth is not created equal and every family situation is different. But, let’s say we have a family that puts a high value on education and for sake of argument they have two children who inherit $2 million each. We will also assume the kids were paying attention and also value education as their parents do. We will assume the parents die when the oldest graduates from college. We will put them out of college at the 2014 starting annual salary of $48,000.
What could they do with their inheritances? Let’s assume the two children want to start families and send their children to college. We will make the leap of faith that they have invested money in a diversified portfolio to target a 6% to 8% return and plan to withdraw an annual 4% return ($80,000). This gives them a high probability of growing the portfolio over time even as they take their 4% draw. We will assume they will have average corporate careers with 3% annual raises and an occasional 10% raise for a promotion.
What could happen here? Well, if these kids save the 4% for a few years (3 yrs. at $80k = $240,000 before taxes) they could have a significant down payment on a nice house, which could reduce the mortgage they might need. Once the house is taken care of, they start saving part or all of the 4% draw for college for their kids and depending on their spending a private school may fit in the plans. They could also balance the value of education against spending some of the draw on vacations. They may also feel the need to share some of this draw with charities in their community.
Having a trusted planner can go a long way to preserve family assets over multiple generations. The planner can help put in place clear strategies for the many moving parts; the income and expenses, the draw, the return on the portfolio. If you have children that will put two sports cars and a yacht into the equation dramatically impacting the portfolio, you may feel skipping the kids and investing in your favorite charity has the most value. With wealth comes challenges. Strong family values, communication, and planning can meet them.
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As a Financial Planner, Peter brings three decades of consumer product industry experience and a high level of customer service to the financial services business. After a successful 25 year sales career at Blistex, Inc., he was employed at Morgan Stanley as a Registered Marketing Associate and Financial Advisor from 2010 to 2013. Peter believes in diversified portfolio management to meet college savings goals, retirement lifestyle objectives, charitable giving goals, and estate planning objectives.
Peter is involved in his local community in Annapolis, MD. He has served on the Vestry and chaired six Stewardship Campaigns at St. Anne’s Church. He currently supports St. Anne’s as the Planned Giving Committee Chairman. He has been active in local Boy Scout units and also serves on the Board of the Trustees for the Chase Home in Historic Annapolis on the Endowment Committee.
Peter and his wife Molly live in Annapolis, MD and are “empty nesters”. Their son, Hunter, graduated from the University of Mary Washington in Fredericksburg, VA and their youngest son, McLean graduated from Belmont University in Nashville, TN. To email Pete: firstname.lastname@example.org