Originally Aired: August 4, 2014
Topic: Will a Tidy Inheritance Help or Hurt your Heirs? with guest Roy Williams
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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Will a Tidy Inheritance Help or Hurt your Heirs?
James Lange, CPA/Attorney
Guest: Roy Williams
|Click to hear MP3 of this show|
- Introduction of Guest – Roy Williams
- Exposing Your Kids To The Value Of Money
- Defining Wealth and Preparing Your Kids For It
- Reliability, Sincerity and Competence Are The Basis Of Trustworthiness
- Admitting Incompetence At Managing Money
- Trusts With Conditions In Order To Receive Money Distribution
David: Hello, and welcome to this week’s edition of The Lange Money Hour, Where Smart Money Talks. I’m your host, David Bear, here in the studio with James Lange, CPA/Attorney and author of two best-selling books, “Retire Secure!” and “The Roth Revolution: Pay Taxes Once and Never Again.” Today’s topic is heir preparation. No, not how you cut your curls, how you prepare your beneficiaries to receive the assets they’ll receive someday. Joining us by phone from San Clemente, California, is Roy Williams, co-founder of the Institute for Preparing Heirs and the Williams Group, which coaches high net worth families through the process of transferring wealth to the next generation. An expert on post transition research and planning, Roy’s written five books on the subject, most recently “Philanthropy, Heirs and Values,” and he has been quoted in numerous national and international publications on the subject. Interestingly, Roy also played football briefly for the San Francisco 49ers as a defensive tackle until a serious injury prematurely ended his gridiron career. Since our show is live, Jim and Roy are available to answer your questions. To join the conversation, call the KQV studios at (412) 333-9385. Hello, Jim and welcome, Roy.
Jim: Roy, thanks so much for agreeing to be on the show.
Roy: Thank you very much, Jim. Glad to be here.
Jim: The book, by the way, that I thought was at least the most helpful, or the most relevant for most of our clients, was “Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values.” First, I guess I thought I would tell you, that is you, the audience, how I got hooked up with Roy. In the Wall Street Journal, there was an article, “What to Tell the Children About Their Inheritance and When,” and the article quoted Roy, and then I was able to contact him and get an idea of what he did, and I have been fascinated with the issue of when should you tell children about money. I have a lot of clients who are very worried about either giving while they are alive, or leaving after they are gone, money to their children on the fear that it will actually not improve their children’s lives, but actually make them worse, make them dependent on the money, lose motivation, and when I was talking with Roy, I expected him to say something about certain ages or certain levels of maturity, and he has a much different slant on preparing heirs and talking to heirs about money. So, if you’re an engineer and you’re looking for a really quantitative, very clear-cut answer on what to do, this probably isn’t the show for you. But if you realize that there are some pretty important psychological personal development and family values that should be discussed, and I think Roy is just a fabulous resource. So, Roy, why don’t we get to the, let’s say, the heart of the issue. Let’s call it the psychological issues of gifting or leaving money, and I know that when I asked you at first, you said it was a wrong question, so you can, you know, take any question you like and make it anything you like, but what are some of the concerns about gifting money to a child either while you’re alive, and certainly there are some tax incentives for a lot of people to make gifts while they are still alive, and to leave money to your, let’s assume, children, although we can talk later about grandchildren, after you’re gone? What are some of the things people should be thinking about, and particularly people who are worried about “spoiling” their children or reducing their motivation?
Roy: Well, first of all, know that it’s not the money. So many professional advisors think it’s the money. It’s not. If your children Googled you, I’ve had clients tell me that I’d want my children to know how much I’m worth, and I said have you ever tried Google yourself? And they Google themselves and they find that within ten cents, they can find out what they’re worth. And how do they know so much? Well, your children are used to the Googling world, and they can Google and know that there’s a lot of money in the pot, for whatever’s there. So, the question isn’t about giving them information that they don’t already have. The question is…and it’s not about money. Money is just a reservoir or storage of energy. If I’ve got a hundred dollars, I can go out and buy me the energy of somebody to cook me a meal, and I can trade my dollar for his energy or her energy in cooking me a meal. So, money is not the issue. It’s our values. What are we doing about our values around money? Have we demonstrated to our children and grandchildren that money determines who we are? Hmmm, that’s an interesting question. Do we say “I have ten, fifteen phones in my house?” “Do I drive the fanciest car?” “What are my children seeing of our behavior as parents and grandparents?” So, they determine whether money is the key, if the money determines who they are or not. And then, the other side is do we give them the $10,000 or $13,000 a year, or do we give them the funds that are necessary, or that we think that are necessary, for their wants versus needs? So, we have to look at ourselves and say “What role am I playing in developing what our children think about money and their actions around money?”
Jim: Well, how about if we do a case study, because I think it might be useful if you said to somebody…what I’d like to do if it’s okay with you, Roy, is give you a situation, and then have you tell people how you think that they might approach it? So, Pittsburgh’s a working town, and we have a lot of people here who have worked hard for a lot of years. We have a lot of engineers who worked for Westinghouse for twenty, thirty, forty years. We have a lot of college professors. We have a lot of mid-level managers, a lot of blue-collar workers…
Jim: Doctors, God forbid, lawyers, all kinds of people who basically go to work every day, and probably on this audience, which skews a little bit older, let’s say maybe in their later fifties, sixties and even retired, let’s say that they’re still working and their kid sees them go to work every day, and they live in a house. It might not be ostentatious, but maybe is a nice
house. They drive cars that, again, probably are not driving Ferraris, but are driving Hondas and things like that. Probably a lot of them don’t necessarily think about talking to their kids about money. How would you have somebody like that talk to either their younger children or their older children, and what approach would you take even if we accept your premise that it’s not about money?
Roy: Well, then the question that I would ask is what kind of conversations are they having with their children? For example, have those people been giving periodically to charitable organizations? Do they give to the Red Cross for Katrina, or whatever their fancy is? Did they let their children…and I don’t mean necessarily infants, I’m speaking of any age of kids, do we let them participate in the giving, or grant identification? Can we let them follow up with…let me give you an example. We had a family who had a modest charitable organization of money that they gave away. I think there was a total of $50,000 in it and that’s a lot of money, and they gave each one of the children $1,000 to give away during the year.
David: And how old were these children?
Roy: Well, they were twelve, thirteen, fifteen, sixteen, and the thirteen-year old, they said, “Sarah, where would you like to give your money?” And she said, “I want to give it to the children’s home.” So they talked about it and asked her why, and she explained why she wanted to give it to the children’s home, and they gave her the money and she sent the money to the children’s home. The following year, Sarah’s now fourteen, and they said, “Are you going to give your money to the children’s home this year?” And she said, “Oh, no.” She said, “First of all, they didn’t send me a thank you note. And that’s a lot of money to me. And number two, I went down to the children’s home and worked on the weekends and I learned that my money didn’t go to where they said it was going to go. It went to raise more money.” And that fourteen-year old girl is now forty-four. She is a due diligence, she follows everywhere…whether she’s buying a car or anything else, she learned that money is important, and you’d better pay attention to what you’re doing with it.
Jim: I like that story. I’m going to guess that the vast majority of my clients…and by the way, I will include myself in this, have not really had serious money talks with our children. In the past, we have had what I would call, or people who are…let’s call it children and money experts, if you will, and I remember some suggestions about giving them an allowance and discussing how the money will be spent, and I know I tried to implement that myself, and my wife said, “Look, I’m just so busy with things. I just can’t add one more idea that you have.” But now, our daughter’s nineteen and we’re looking at schools and some schools are going to give us some scholarship money, and some schools are not and are likely to be the most expensive choice. Actually, in Pittsburgh, Carnegie-Mellon University is probably the most expensive, and the Computer Science Department is probably the hardest to get into and the most expensive, and that’s, of course, where our daughter wants to go. But we have not had these conversations about money. What would you tell me for either, you know, the person who has not…and by the way, I will tell you that if people are interested in this and they are looking for, in effect, the right questions and how to talk to children about money, I thought your book “Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values” and your, you know, let’s say, Family Mission Statement and the entire family participating, you actually give people a vocabulary on how to do that. So, is this something that is important for people to do, and is buying your book, and is that book a very good first step?
Roy: It is a good first step, and one other thing that you can begin to do is let’s define the word ‘wealth.’
Jim: All right.
Roy: If you have a conversation about wealth in the family, is wealth in your family about money, assets, stocks and bonds, or is the wealth really your values, the education that your children and you and your sons-in-laws and daughters-in-laws will have? Is it the experience, the background, how about the networking capacity? Now Jim, you have an extraordinary capacity for networking with all the people you know in the world. Is that part of the definition of wealth as far as you’re concerned? I suggest it is, and when the family begins to understand that the whole conglomerate of all of these things that we bring together, education, background, experience, etc., we’re going to work together as a family to decide what is the purpose? Where are we going with this? And so, when the children, like your nineteen-year old daughter, when you say, “Look, what is the purpose of it? Is it for you to consume it and just waste it, or do we build it as a team?” But I’d like to use an example as another team, and I hope your audience are football players, okay?
David: Well, it happens there are a lot of those in Pittsburgh.
Jim: I don’t know if they’re football players, but this is Steeler Country, and we’re all football crazed around here. In fact, I was going to save some football questions for you, but if you want to interject a few footballs, that’s okay too!
Roy: Let me share with you a great story.
Jim: All right.
Roy: A thing that you can use.
Jim: I like great stories.
Roy: If an offensive line is our lawyers and accountants and the best advisors in the world, okay? That’s our offensive line. Our receivers are the heirs, okay? My children and grandchildren are the heirs, the little receivers often in the end. Mom and Dad are the quarterbacks, and when we’re gone, that ball’s gone. The kids have never had a pass, they’ve never run a pattern, most of them don’t even know how to put the uniform on, and we’re asking them to run a pattern against the Pittsburgh Steelers tomorrow morning? They are not prepared. How do we begin to prepare our heirs to be the receivers we want them to be? We can’t wait until the day we drop dead and some advisor is sitting there in his office telling them they’re going to receive, you know, millions of dollars or hundreds of thousands of dollars. But they’re not prepared. Look at what goes on in the lottery. 80% of the people who win the lottery lose it. It’s gone in eighteen months. Why? And they’re not kids. These are people who are forty, fifty, sixty years old. They’re not prepared to be receivers. So, what are we doing to prepare our heirs? We need to begin to have some conversations about these things. What it means to be prudent. Can we put a piggy bank in front of a child who’s five years old and put a third of it in savings, a third to give away to charity and a third for them to consume, and you match whatever they’re saving every quarter?
Jim: By the way, I heard the, I think exact same recommendation from Neil Godfrey, who is, let’s call it, a child and money person, so I love that, by the way. And I’ll repeat it real quickly for the listeners: an allowance gets split three ways: savings, charity and spending, and the savings is then matched by the parent at a certain point. Anyway, go ahead, because I just think that that’s a great idea.
Roy: Another example is one of our clients told his daughter, ten or twelve-years old, that any change on his bureau dresser in the evening, she could have and put into a milk pail, and you guys know what milk pails are.
Roy: And she’d put all extra…she’d take a dollar that was loose on the top of the bureau, and pretty soon, she had a milk pail full of coins, and she saw Katrina, the hurricane, and she went to her mother and she said, “Mommy, I want to give some money to the homeless because of the Katrina event.” And so her mother could hardly pick up the pail, it was so heavy. But she finally got it in the back of the station wagon and took it down to the homeless shelter, and those people with big hands got to take one handful, and those people with smaller hands got to take two handfuls. And she gave away about two-thirds of the pail of money. When she got home, her daughter was just beaming with pride because she was able to help poor people with her money. What a wonderful transformation in that young girl’s life to be able to help people with the money that she was gathering off of her dad’s bureau dresser every night. She was a little squirrel! She was really aggressive and wouldn’t let a penny get off that dresser without her getting it in the pail!
David: Well, listen, let’s take a quick break right now, and when we return, Jim and Roy will continue the conversation. Remember, since we’re live, call us with questions at (412) 333-9385.
David: And welcome back to The Lange Money Hour. I’m David Bear, here with Jim Lange and Roy Williams. If you have a question for either of them, call (412) 333-9385.
Jim: So, before the break, Roy, we were talking about some advice that…or some stories about young children who were encouraged to, in effect, save and then gave money to charity. Let’s go back to our listener whose children might not be young, and let’s assume that there are children with different values on money, and by the way, including some parents who are not too happy with the way their children are spending money. And by the way, I’ll speak personally. My wife and my daughter have about zero tolerance. They don’t want to talk about money at all. They just want to, I don’t know, ignore the issue or go about their lives. What should some of our listeners be doing, and again, I think that if somebody wants to do this, and I know that you’ve written a bunch of books, the one that appealed to me the most anyway, was…now by the way, and for the listeners who are interested and you’re looking for a resource, and I might ask Roy for a website, too, in case they don’t want to buy the book, but the book is “Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values,” and again, you’re not going to see specific trust provisions in there that you might find in a legal journal, and you’re not going to see financial projections, but I think you’re going to get a new vocabulary where, in Roy’s exact words, “It’s not about the money.”
Roy: Let me help you with just some ideas here, okay?
Roy: In order for you and your daughter and your wife and people to go forward, they have to develop what we call a ‘commitment-based lifestyle.’ And by commitment-based, we mean to become trustworthy. How do we become trustworthy? Are we trustworthy? How do we know we’re trustworthy? Because of a visceral feeling? Or do we know it because there’s some evidence that we can point to? And I suggest that there’s a milk stool (I keep going back to farming). There’s a three-legged milk stool. The legs are the basis for trust. One is reliability, doing what we say we’re going to do when we say we’re going to do it. Gee, you mean when Mom says be home at 7:00 for dinner, we’re there at 7:00 and not 8:00? When we’re reliable, when Dad’s busy and he forgets to go to the football game or recital or dance or whatever the children’s program is, and he doesn’t tell the children, is he being a role model for unreliability even though he had good reason because of business or crises or whatever? Well, what happens is that we’ve become role models for our children and we don’t even know it. Reliability is one of the legs of trust. The second leg of trust is sincerity. Is our public story and our private story the same? Gossip is an example in a family of insincerity and is one step away from betrayal. When we start gossiping in a family, it undermines trust. How do I want to be in business and/or give any money to my children if they’re not trustworthy? And the third leg of that stool is competence. Do I have the capacity to do what I promised I’m going to do? So, when you talk about competence, is someone competent at managing money? It doesn’t sound like you have people in your family who are very enthusiastic about it. They may be okay, but they’re not running red hots on it. So the question is, if they’re not competent, if they’re insincere or unreliable, then we have reasons that we don’t trust them. And the seat that holds all three legs together is called care because you have to care enough to take care of those three aspects. So, when you begin to work with your children and say, “Okay, kids, we need to build a trusting relationship because do you want to do business with people or work with people that you don’t trust? Of course not. Well, then, why would you build a public persona of being untrustworthy?” So, what happens, Jim, is we begin to develop a different language, a different atmosphere in the family, about trust, competence, reliability, sincerity, so that they can begin to understand that when you give them money, that’s a gift that you’re giving them, that their trust is going to be…their competence is going to be questioned. And so, all of a sudden, they get a whole different view of what it means to be an adult.
Jim: What advice would you have…let’s say that you are…and it doesn’t even matter if the man or the woman who is maybe in your radio or maybe at home, and the show is streaming or even months from the live date of this performance or this show, you’re listening, and you think, “You know, this guy Roy Williams, he’s making some sense,” (and by the way, I loved your football analogy), “that sounds like an interesting idea,” and then maybe he brings it up and the spouse kind of shoots it down, as frankly, happened in my house! And I know it’s not about the money, but do you have any ideas there, or is it just kind of one of those things that you should kind of persist and say that this is important, and even if we don’t talk about it now, we should in a month, or three months, or something like that?
Roy: I would get “Preparing Heirs.”
Roy: Get a copy of the book, and get it on Amazon at a reasonable price today, and just highlight some of the aspects in there that are important to you.
Jim: Well, to me, I’ll tell you the thing that I liked. I mean, I think the book is a wonderful resource, I really do, and I think a lot of people would be well served to buy it. On page 57, you have a wealth transition checklist, which I think is very good, and by the way, you also have other books that are probably centered around philanthropy, which I think are probably equally good, if not better, but I’ll just say that I kind of just, for whatever reason, didn’t concentrate on that. I just concentrated on some of the other areas, and I’m starting to walk away with yes, people should buy the book and start implementing some of these awareness ideas, and again, going back to your analogy of teaching the receiver to receive, you know, well before the ball’s in the air, is really going to be one of the keys to this. Is that fair?
Roy: Yes, because you can begin early on with your children and give them little tests. You can put some money in a trust fund and let them work with a money manager and learn what it means to manage money. You can’t expect children to have the competence and to be able to work. A family down in North Carolina, Dad gave each one of the children $300,000, and that’s the years when you could give $600,000 away?
Roy: And the children blew it. They just dissipated the $300,000, each one of them. And he was so angry. And I said, “Well, did you prepare them before you gave them the $300,000?” He said, “I gave them a college education. They’re married. They’re thirty-five years old. They’re adult, mature people.” I said, “No. Did you prepare them about managing $300,000? That’s a lot of money!” He said, “No.” He gave them without…remember the receiver on the football analogy?
Jim: I sure do.
Roy: We need to begin to prepare the kids.
Jim: How long does that process take? Because there are some listeners…now, I think this is not the usual, but there are some listeners with substantial amounts of money, and we do have a situation where right now, the gift tax exemption or exclusion is $5.12 million. Next year, unless there’s something that’s going to change, which we all certainly hope is going to happen, it’ll be a $1 million exemption, and there are a lot of people, a lot of estate attorneys, guys like Bob Keebler, who are saying “Now is the time to make very significant gifts to your kids.” And then, if those children are not prepared, then that might not be such a smart thing.
Jim: Do you have a time guideline, or is it going to be dependent on each situation?
Roy: It varies depending on the individual, and the maturity and Dad and Mom’s willingness. For example, you can put some money into a trust fund and hire the money manager I talked about earlier. You can begin to train the kids, depending on their level of sophistication. For example, some kids that have a variety of hindrances that they don’t think left-brain. They think more right-brain. They may be geniuses, but they’re not academically or financially oriented. Well, let’s find out what their passion is. Now, there’s two or three organizations, one back in Philadelphia, that if you want, I’ll get you that information on. They’ll help you develop the passion, help the children develop what their interests and passions are so that when you begin to become competent at something, it may not be management of money. Maybe they can just hire and be able to monitor the money managers rather than to worry about having to manage the money themselves because they’re not competent, and they know they don’t have that skill level, and may never have it. Well, God bless them. Let’s use other tools. Let them go into what their passion is and make what their genius is designed for them to do and not worry about the money. So, let’s find out what their passions are and help them.
Jim: All right. Let me ask you a little bit more of a specific and probably even a more difficult question, but it comes up in my practice a lot, and that is a situation where either the child has demonstrated incompetence or unreliability in terms of money that has been gifted, or the parent doesn’t like the values that the child has. So, for example, the child doesn’t put a lot of money in savings, but buys a very expensive house, and then the first thing they do with the expensive house is they knock out the old perfectly fine kitchen to make a new and better kitchen so their kitchen is nicer than Mom’s or Dad’s, but they don’t have any savings. Or there are other kids who are, what we would call, spendthrifts, or sometimes they’re married to people who might have different values of money. So, what do you do…by the way, I get it and I think a lot of listeners get it. This discussion should come early and we should prepare kids. We should do the dollar for the charity and the dollar for savings and the dollar for spending, and I think that’s good, but what do we tell parents like me…and by the way, I already have a first correction. If I said nineteen, my daughter is actually seventeen. So, she’s a senior now. But what do we do for people who are already behind the eight ball in that area?
Roy: Well, first of all, we have to have an agreement. Let’s agree what your competencies are. Is this where you’re highly skilled? And what they’ve demonstrated is that they’re not, that they’re very incompetent. That’s a major step. Just the acknowledgement that I’m not competent in that domain. And if they want to be a beginner, declare themselves a beginner, then be open to learn. You know, it’s amazing what happens when someone says, “I’m not competent. I don’t know how to do it.” And Jim, I find people who have sold their companies and are very wealthy because they sold their company. They were great managers, but then you ask about money management, and they are totally incompetent. But they’re afraid to say “I’m incompetent” because they’re supposed to know when they’re sixty years old. And they have no more idea of how to manage money than my ten-year old great-granddaughter.
Jim: Well, I have a feeling that your ten-year old great-granddaughter, or even my seventeen-year old daughter, if I sat her down and in any way, even indirectly, implied that she was not competent, she would say, “Dad, what are you talking about? I got an 800 on my math subject test!”
Jim: “Hardly anybody in my class did that! And I’m in all these AP classes, and I’m taking advanced level math and advanced level economics…in fact, what about that, Dad? Advanced economics! I’m learning all about the economy!”
Roy: Ah-hah, and what you’re telling me is you’re a competent academic. We’re talking about a different domain, competent at managing money. Different domain. Show me the competence you’ve demonstrated in that domain. And so, what happens is, by asking questions, not accusing, I’m not attacking, I’m just asking questions in discovery. Help me understand where your competencies are best exemplified. And so, we’d begin to develop, “Gee, I don’t have any competence in this domain, and I’ll have to declare myself a beginner.” That’s the first major step, Jim, declaring yourself a beginner and saying, “I want to learn,” or you declare yourself self-proclaimed ignorance and “I don’t want to learn about money. Let me learn how to monitor. Help me learn how to monitor the managers. I’m better off to do that if I don’t want to become competent.” For example, I don’t want to become a CPA. Not my shtick.
David: Well, Roy, let’s take time for one more break here. We can continue the conversation when we return. Since tonight’s show is live, if you have a question, there’s still time to call at (412) 333-9385.
David: And welcome back to The Lange Money Hour with Jim Lange and wealth transition specialist, Roy Williams.
Jim: Roy, let me ask you another question: I know that your emphasis, both in your book, which again, by the way, I’ll mention one more time in case somebody is tuning in late. We’re getting some very good information on wealth transition from Roy Williams, who I learned of from the New York Times, and he wrote a book called “Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values,” and it seems that, right now, everything that you’ve been telling us up to now is really helping prepare heirs to act responsibly when they get money, and some of your suggestions in terms of budgeting, allowances, and overseeing relatively small charitable donations that will eventually turn large, I think those are all excellent. Do you have any sense…now, this is maybe, perhaps, a selfish question from me as a drafter of wills and trusts, and let’s assume, for discussion’s sake, that I am drafting a trust for a grandchild. So, let’s say the client is seventy years old. They have children in their thirties, and grandchildren who are very young, and probably even too young for us to know what their maturity level is regarding money, whether they’ll be a spendthrift, whether they’ll have a drug problem, etc., and let’s assume that I’m not one of the attorneys such as Bruce Steiner, who by the way, is an excellent New York City estate attorney who tends to draft trusts even for adult children who are not spendthrifts. Do you have any guidelines on, say, when kids should have some money? So I’ll give you an example: let’s say that you came to me and you said, “I want a trust, I want to leave money to my kids, but if my kids are not around or if my kids disclaim, that is they don’t want the money, then a portion of what I left them would go into a special trust for their children.” I might do something like the trustee is empowered to distribute money for health maintenance and support, education, post-graduate education, down payment for a home, seed money for a business. When that child is perhaps twenty-five years old, or at some point, the child will have access to one-third of the corporace. When the trust continues, when that child is, say, thirty years old, they’ll have another access to half the remainder, and then at, say, thirty-five, we terminate the trust. And the reason I’ve done that is I don’t like the idea of a kid basically having no responsibility for managing their own money to all of a sudden, one day, boom! They get it all. At least in mine, I’m kind of breaking it up a little bit. Do you have any ideas for clients when they ask for these trusts to be drafted, or for me, in drafting, particularly when a client hasn’t thought about it a lot? Although, frankly, I’m going to be trying to encourage people to think about it a lot more.
Roy: Yeah, let me give you a quick summary of that: first of all, what we’ve found is that many times, when someone gets the money at age thirty-five, or forty or whatever the age is, it’s very detrimental and it can destroy a marriage. We had a woman, thirty-five, who got a phone call that she was going to get an inheritance, and she and her husband were both making about $60,000 a year, and she was going to get, like, $500,000 a year from her trust fund that her grandfather put in her name when she was born, and when she was forty, she was going to start getting principle, and three years later, she and her husband were divorced because it emasculated him because he no longer felt he was needed in the family. So, over the years, what we’ve developed is kind of an interesting process that might help you. First of all, in my family, what we’ve said is if there’s going to be money to be delivered to you at age thirty, thirty-five and forty, under the following conditions: first of all, you have to be employed for five years prior, fully employed, and received increases in compensation during that five-year period prior to the first distribution. Number two: you must work with a money manager with the money that’s in the trust fund and become competent, okay, by the trustee’s definition of competence and would develop some standards for competence for money management, and if you don’t do that by thirty-five, then you have until forty to get it, and then at age forty, if you haven’t fulfilled those standards, then the money goes to charity.
Jim: Ooh, man, that’s tough! Ooh, you’re brutal!
Roy: No, believe it or not, I didn’t design that. You know who designed it?
Jim: No. I am curious.
Roy: My sons and their wives and my grandsons.
Jim: Oh, I love it. That’s so tough.
Roy: They set that standard.
Jim: I want to get back to that in one second, but I have a, let’s say, a slightly similar story that…I have a client, very tough, crusty engineer from Westinghouse. He actually gave me permission to tell this story, and what he did is he passed out my book “Retire Secure!” to all his kids, and he said to his kids, “Here’s the deal, kids: I’m not going to leave you one nickel unless you read Jim Lange’s book.” But reading a book is a little bit easier than holding down a job for five years with increasing compensation, and demonstrating that you’re competent. Now, the thing is, if we’re doing this for people’s grandchildren, and these kids are, say, eight years old or ten years old now, then what we’re doing…and by the way, I’m just thinking very mechanically as a drafting attorney who drafts estate plans all the time. That is called an incentive trust, and basically, if a certain condition is met, then money will be forthcoming, and if it’s not, then it would go to a charity. And by the way, just on a technical note, that might work okay for after tax dollars, but that would probably be a disaster if the underlying asset was an IRA or a retirement plan. But, anyway, why don’t you tell us a little bit about that, whether you’ve used it personally and whether you have seen any clients use it, and whether they actually went to charity?
Roy: You know, I’m not a CPA, and so I can’t make an assessment of whether it should be any kind of a tax sheltered funds or not.
Roy: What you’re trying to talk about is after-tax funds that are in the trust funds that the kids are going to receive, and my sons and their wives and my grandchildren, who are adults, this is their standard because they felt this was fair, and that everybody knew what…for example, all of my family members were given a copy of all of my wills, all of my trusts, everything that’s ever been written, everyone has a copy of it from the time they’re eighteen years old and they have a chance to read it. So, they know what the standards are. Interesting.
Jim: What if a kid gets laid off? I mean, I have a client who has a child who…and this client has a lot of money, at least by my definition, it’s somewhere around $8 or $10 million, has a child who is doing…by the way, not so different than some of the examples that they used in the New York Times article, doing some very worthwhile work, but if he was in corporate, and then he switched to do this worthwhile work, then he wouldn’t meet your criteria.
Roy: Not necessarily. If I’m a teacher, and I work for five years as a teacher and I get small increments of pay, if I’m working for a charitable organization, no one says you have to be rich or be a money manager. All we’re saying is that whatever you do, and if you get laid off, that’s not your responsibility. And so, then we’ll help you find a job, or you can help yourself find a job, but those are extenuating circumstances.
Jim: Okay, so this isn’t hard and clad. You’re willing to cut the kid a little bit of slack.
Roy: Oh, yeah. But I’m not the one making the decisions. My sons and their spouses are the trustees.
Jim: Okay, but if you’re drafting a trust…and by the way, actually, you know something? We’re going to run out of time. So, I want to talk about…I want to give people the name of the book one more time. That’s “Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values,” by Roy Williams. You have been a terrific guest, and I want to thank you for your time, and I believe David wants to give us an announcement of a very special show that is coming up.
David: Well, first I want to say, before I get to there, I want to say thanks for listening to this edition of The Lange Money Hour, Where Smart Money Talks, and thanks to Roy Williams. As always, you can hear an encore broadcast of this show at 9:05 this Sunday morning here on KQV, and you can always access the archive of past shows, including written transcripts, on the Lange Financial Group website, www.retiresecure.com. Please join us for another new Lange Money Hour on Wednesday, October 3rd at 7:05 right here on KQV. Jim’s guest will be Todd Tresidder, entrepreneur, investor, and author of “The Smart Investor’s Guide” series of books that show not only how to accumulate wealth, but how to enjoy it. And a forward note to our November 7th show, when John Bogle of Vanguard Group will be our guest. Please join us that Wednesday, October 3rd, and then November the 7th, and I’m David Bear.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.