Tips for Grandparents, with Jon and Eileen Gallo

Episode: 53
Originally Aired: May 18, 2011
Topic: Tips for Grandparents, with Jon and Eileen Gallo

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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TOPICS COVERED:

Introduction of Authors Jon and Eileen Gallo
Check with Your Kids Before Helping Your Grandchildren
Teach Children About Marketing Tactics, Influences
Child Should Know Grandparents Are Helping Financially
Leave a Message for the Next Generation, Not Just Money
To Avoid Fights, Make Your Intentions Clear from the Start
Trusts Can Act as ‘Training Wheels’ for Money Management
Set Up Trust to Reward Grandchild’s Ability to Handle Money
Results-Oriented Trusts Are an Alternative to Incentive Trusts
If Parents Can Handle Money, Grandkids Probably Can, Too

Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.

1. Introduction of Authors Jon and Eileen Gallo

Nicole DeMartino: Hello, and welcome to The Lange Money Hour. We are talking smart money with CPA-attorney and estate planning expert Jim Lange. He’s also the author of two editions of the best-seller Retire Secure! and his newest book, The Roth Revolution. Today, we’re joined by Jon and Eileen Gallo to talk about what grandparents should be doing when they’re building their gifting plan. Dr. Eileen Gallo is a licensed psychotherapist and private practice in L.A. She works specifically with individuals and families with psychological and emotional issues related to money, children and family wealth, and Jon Gallo is an attorney and he heads the family wealth practice of a prestigious firm out in L.A. They are the authors of two books: The Financially Intelligent Parent and Silver Spoon Kids. So, good afternoon!

Jon Gallo: Good afternoon.

Eileen Gallo: Hi, nice to be with you.

Nicole DeMartino: Thank you.

Jim Lange: Thank you so much, and before we move on, I just want to say personally that The Financially Intelligent Parent is a wonderful book. Now, we’re mainly going to be talking about grandchildren because our audience skews a little bit older, but some of the same concepts will apply, but for parents who are trying to raise responsible financially intelligent children, there are a couple of books out there. This is by far the best. I’ve even had clients that I’ve given this to come back and say, “Hey, this was a great resource.” So, Jon and Eileen, you did a great job and we really appreciate your work. The other thing that I think that you two more than … I can’t really think of any financial writers who really touch on the topic, or, let’s say the genre that I’m about to talk about, which is you guys talk about the human side of money. All too often, very frankly, in my practice, I get involved in Roth IRA conversions and I get involved in disclaiming and gifting for estate tax purposes and doing things from a financially responsible and a financially optimal point of view, but I think much of your work is … not that I ignore the human side, because that’s obviously perhaps as important, but I think that you focus on it much more, and I don’t see that very often. So, again, I salute you for that.

Jon Gallo: Thank you.

Eileen Gallo: Thanks.

Jim Lange: So, that was actually one of the reasons why I wanted to have you as guests today, because I wanted to talk about some of the human elements of money, and we have a lot of grandparents out there, and I guess some of this would apply to parents, too, and let’s assume, for discussion’s sake, that you are a grandparent, and maybe you’re in your 60s or 70s or even older, and you kind of have a little bit of what I would call a Depression-era mentality, you like to see value for your money, you’re not a huge fan of gifts unless there’s probably a good reason to do it. On the other hand, you have a natural affinity and love for your grandchildren and you want your grandchildren to do well, and let’s say that you are in a position that you can potentially help your grandchildren. One of the concerns that I’ve had from a lot of my grandparent clients is, “Am I spoiling grandchildren by giving them too much too early?” What is the appropriate way, not even necessarily from a financial standpoint, but what is the most appropriate way … and before we even get into the issue of amounts, but what is the appropriate way for a grandparent to help their grandchildren financially? So, I’ll put that out as an open question to either or both of you, and very frankly, I’m very interested in what you have to say.

Jon Gallo: Well, I’m going to defer to Eileen to start this conversation off because I’ve got some thoughts, but as a therapist, Eileen, you deal with all of these tensions between grandparents and children and grandchildren. There’s kind of a triangle there.

2. Check with Your Kids Before Helping Your Grandchildren

Eileen Gallo: Often, grandparents want to be very generous, and the first thing that they have to do is make sure that the parents are on the same page with them so they aren’t causing any increased tension in the family, just to make sure that it’s agreed with by the parents.

Jim Lange: All right, and I assume you’re talking about before the gift is made, not after?

Eileen Gallo: Exactly.

Jim Lange: All right, and whether it’s a financial gift or even … and I don’t mean a $10 birthday gift, but any other kind of, even a substantial non-cash gift, the same thinking applies. Is that right?

Eileen Gallo: Um-hmm, yes.

Jon Gallo: Jim, Eileen and I work together on some matters. I keep thinking of one family in which the parents were trying to teach the kids a bit about frugality, and every time Grandma came over, she’d slip each one of the kids a hundred-dollar bill, which didn’t really go over too well with her child.

Jim Lange: All right, so already we have an important guideline, and the guideline is to check with the parent before you make a significant gift to a grandchild.

Eileen Gallo: Um-hmm. One of the things that I’ve done, and John and I have done with our grandchildren, is for their birthdays, or for Christmas or Hanukkah, to actually take them shopping with a budget in mind. We have X amount of money to spend, and we’ll go to the mall, and it’s a wonderful place for my 10-year old granddaughter, and as she turns 11, just to have a real clear budget and to shop for various items, not to buy them right away, but just to select what she’d like. We found, the last time we did this, some white jeans at Bloomingdale’s, but they were $80, and if she was going to try the Bloomingdale’s jeans, she wouldn’t have a lot of money left over for other things. So, we were finally able to find some at the Gap for 15, and then she was able to get some of the other items that she wanted. But we shop and sort of explore first, and then go have lunch and talk about the various items, what she wants, what she would get the most wear out of, and it’s been a wonderful, wonderful experience.

Jim Lange: So, I like that. So, it was a hundred dollar gift, but it was not just the money, but it was actually a life lesson in budgeting.

Eileen Gallo: Yeah, right, and we stopped for lunch at Bloomingdale’s and she said, “Well, isn’t this interesting? You don’t even have to leave the store to eat! You can still shop.” She said, “This is a good idea for Bloomingdale’s to have a little cafeteria inside the store.” I mean, she made that observation herself. So, it became a lovely day for the two of us to spend shopping with a budget.

3. Teach Children About Marketing Tactics, Influences

Jon Gallo: And the comment, for example, about “Isn’t it wonderful that you can stay in the store and still shop?” was the opening of which to talk to her about marketing tactics, like be aware of the fact that when you go to the checkout counter, they’re going to have all these things right down that aisle. When you walk down the aisle to the checkout counter, there’ll be all these things that you’re going to want to get on an impulse basis, and they’re not there by accident. So, it was a great opportunity to talk about marketing and marketing techniques to make her aware of how marketing works.

Jim Lange: Right, not with the idea of teaching her how to market herself or to sell stuff, but how to resist the temptations of marketing influences.

Eileen Gallo: Right, just to learn about things. I love this experience. I look forward to it twice a year.

Jim Lange: Well, I actually think that’s some great information.

Jon Gallo: And Jim, by the way, we like to think of this as a reconnaissance approach, of what Eileen was talking about, where you go into the store and you’re shopping but you’re not buying anything. You’re looking at different things, you’re comparing things, then you’re going off to have lunch or maybe just a yogurt cone or something, and talk about what have you seen, what are the choices? We did the same thing with our 7-year old grandson, where he wanted to go to the Lego store and we found something like 30 different versions of Star Wars Lego sets, and, of course, he wanted them all, so we looked at different ones and he even made notes, and we went off to Red Robin for lunch and talked about, well, how much do the different sets cost and how much money do you have, and if you buy that set, you can’t buy anything else, and if you’d like to buy two that are less expensive. It was a great way for him to start learning to think reflectively on what are my choices and alternatives, which is a great way to help a child or a grandchild learn to be a little bit less impulsive when it comes to money.

Jim Lange: Well, for whatever it’s worth, I suspect that there’s some 30- and 40-year-olds that could use a few of those same lessons. Maybe even people who are older! But I think that that is great. We are already being motioned on our first break, so I’ll give that to Nicole and we’ll come back.

Nicole DeMartino: Yeah, we’re going to just take a quick moment break, and when we come back, we’ll continue this conversation. You’re listening to The Lange Money Hour, Where Smart Money Talks.

BREAK ONE

Nicole DeMartino: Alrighty, welcome back to The Lange Money Hour. We are here with Jim Lange and Dr. Eileen Gallo and Jon Gallo. We’re talking about what grandparents can be doing to assist with the gifting process.

Jim Lange: OK, going back to Jon and Eileen, one of the issues in the gifting world … now, we talked a little bit about when everybody’s around, everybody’s alive, and the grandchild knows about the gift. Could we switch to a slightly different topic in what is appropriate gifting if the benefit is to help the grandchild … now, maybe we’re going a little bit closer to Jon’s area, Jon being the estate attorney, to talk about Section 529 Plans and trusts and what we should be thinking about when we are preparing our wills. But on the other hand, and I don’t want it to be purely financial, I’m really more interested in, let’s say, the psychological impact of helping a grandchild with tuition, should the grandchild know about this, should money be set aside in a trust fund for the grandchild? So, I’m certainly interested in the legal and the estate planning aspect, but I’m probably, at least for this show, more interested in the psychological aspect. So, maybe why don’t we start with what are some of the better forms of gifting with the idea of helping a grandchild out in the long run?

4. Child Should Know Grandparents Are Helping Financially

Eileen Gallo: Well, certainly paying for school and paying for medical. That is certainly beneficial tax-wise for the grandparent, and I think it’s important that the grandchild knows about if the grandparent is funding the school.

Jim Lange: OK, so right now, you’re actually talking about primary school, so in the event that the grandchild is considering, or is going to, a private school, whether it’s a colloquial school, that you think that it’s fine that the grandchild knows that Grandma and Grandpa are at least partially footing the bill for that?

Eileen Gallo: Yes, I think so. I think it’s important.

5. Leave a Message for the Next Generation, Not Just Money

Jon Gallo: And we think that it applies to 529 Plans. We think it applies to trusts. We think it applies to anything where the grandparents are leaving funds for the grandchildren. Last Thursday, Eileen and I spent the entire afternoon at a client’s home, and this is a grandparent, and we were actually videotaping a session with him. We’ve come to the conclusion that what testators really should be doing is leaving a message to the next generation that’s more than just simply money and one of the best ways of leaving a message is on videotape. So, Eileen and I have actually turned into videographers and gotten the necessary audio and video equipment, and we went off to a client and we videotaped for about an hour-and-a-half and we’re editing now what’s going to be about a 45-minute high definition video of Grandpa talking to the next generation and the next generation after that, the grandkids, about how he grew up and what his values were and why he has left the money to them and in the way that he’s done it. So, rather than just having a trust to read or a 529 Plan where you get told that Grandpa and Grandma have helped pay for your college education, the family gets to have a nice Blu-ray/DVD they can plop in and the grandkids can watch Grandpa talk to them even after Grandpa has ascended to his well-deserved reward.

Jim Lange: That is such a great idea, Jon. Boy, I’ll tell you what, if we stopped the show right now and that was it, that was worth the price of admission. That was just great. By the way, I will speak personally. My great-grandmother … actually, well obviously, technology like that wasn’t available at that time, but she did, on an old typewriter, this was even before electric typewriters, she wrote out a little bit of an autobiography and it was very clearly meant for the next several generations, and it was how she was very involved in helping to found the Montefiore Hospital and a local temple and the efforts that she went through in the struggles of her life, and it’s really a treasure for me to know some of the history of what my family was like, and I’ve even thought about it from my own mom, who is 94 years old, to have a video, but actually, I didn’t really think of it in terms of, let’s say, why we’re doing what we’re doing in a trust and relating it to money. I just think that’s a great idea.

Eileen Gallo: Um-hmm.

Jon Gallo: Well, Jim, you and I both know as estate planners that trusts are used very frequently to transfer money down to the generations, and if you read the law books, they all say that the trustee is supposed to administer the trust in accordance with the set lawyers, the person who creates it, with the set lawyer’s intentions, and if you look at the typical trust, there’s not a word in there about the set lawyer’s intentions. It’s all the black letter boilerplate law that we estate planners and tax lawyers stick in there to comply with the Internal Revenue code and with state and local law. So, Eileen and I decided about a year ago that we really ought to take up this concept of seeing what the set lawyer’s intent is and how do you find it out? You put the set lawyer down in front of a video camera and lights and you put a microphone on him and you say, “OK, why are you doing this?” and “What are your hopes for your kids,” and “Tell me, if your kids can’t get along, how would you divide this thing up?” and “What words do you have for your grandkids? Do you want them to know something more than the fact that you had a good estate plan?”

Jim Lange: Well, I think that’s wonderful. So, for example, when we do an estate plan, typically, if we are doing a trust for minors, and let’s assume, for discussion’s sake, that the minor is young enough that we don’t know if they’re going to be financially responsible or not. So, I might do what I would consider my standard, if you will, a trust where the money is set aside and the beneficiary, the trustee could go into the trust for the beneficiary for health, maintenance, support, education, post-graduate education, sometimes we include down payments for a house, somebody who’s a real sport, a summer in Europe, and we typically release maybe a third at 25, a third at 30, and then terminate the trust at 35. But what you’re talking about is more specific intent, and frankly, the problem with the way I’m doing it right now is that we’re not giving the trustee a real lot of guidance other than just some, frankly, standard boilerplate.

6. To Avoid Fights, Make Your Intentions Clear from the Start

Jon Gallo: Yeah, absolutely. Let me give you an example of one of the questions we posed to our client, who is a fairly wealthy individual, and he had four children and he was leaving his estate equally among all four kids, and included some business property, and Eileen and I asked him during the videotaping, “Look, if one of the kids just can’t get along with the others and wants to be bought out, should he or she have the right to be bought out?” And our client said, “Yes, absolutely,” and I said, “OK, now there’s a very important question: What are the terms of the buyout? Do you want to make the terms such that it allows the child who wants to withdraw to get his or her hands on the money right now, which means the other siblings have to come up with all of the cash up front, or do you want to make it as easy as possible for the three kids who are going to stay in the business, and do you want to have them pay it out over a long period of time and at the low-interest rate?” And he said, “Oh, definitely, long period of time, low-interest rate.” And I said, “Do you know, right there, that one comment is going to resolve fights, because if somebody does want to be bought out, they’re going to know that your intention is that they get the purchase price over a long time and a low-interest rate because you really want the other kids to be able to keep the family business intact.” It was a great example there of what his intentions were.

Jim Lange: Well, that sounds pretty good. That sounds like some material for your next book. I shouldn’t say that! I know, in the office, I had to promise both people in the office and my wife that I wouldn’t write any books in 2011 because it takes so much time and, at least in the short run, it’s not lucrative. But that might be at least material for an article to provide to other estate planners of what kinds of questions to ask, and maybe even have a setup. I know, for example, we do have video capability, and I’m starting to think about maybe adding that. Already, I think it’s such a good idea.

Nicole DeMartino: Can I pop in? I need to pop in real quickly here. We are going to take a quick break. We’ll be right back with Jim Lange and Dr. Eileen Gallo and Jon Gallo. Thanks for listening.

BREAK TWO

Nicole DeMartino: Welcome back to The Lange Money Hour. A quick review here. I just want to make sure that everybody does know that if you do like the show, it is replayed the Sunday following. So, you will hear this show again Sunday at 9 a.m., and we’re on every Sunday at 9 a.m., so if you miss a show, you can grab it on Sundays at 9 a.m., and if you miss that, you can always go to www.paytaxeslater.com. On www.paytaxeslater.com, we have all of our archived radio shows in a sound file, and we also have a Word document file. So, if you like to read rather than listen, you can print that off and do it that way.

Jim Lange: Yeah, I was just telling Nicole that we might have one of the top audio libraries, particularly for IRA and retirement plans that are out there.

Nicole DeMartino: Yeah, we’re almost at 60 shows!

Jim Lange: Yeah. Anyway, getting back to Jon and Eileen, in the area of gifts, I’ll tell you what I have been telling clients, and then maybe you can say how you might change that advice or things that you might do differently. If somebody is in a position to gift, I usually like to say that there are three types of gifts that you can help a client with: one is Section 529 Plans, which, by the way, are, in effect, a fund or set of funds that you invest in that grow income tax-free, and then when the grandchild is old enough and is going to college, then they come to you and say, “Guess what, Grandma and Grandpa? Good news! I got into Stanford. Tuition is only $500,000 a year now, and I understand you have some money put away.” And you have the discretion to say, “Yes, here’s some money,” or if they come to you and say, “Well, I’ve gone to the University of the Sun Devil Worshipper and every morning, we climb up the mountain and we worship the devil,” that you can say, “Well, no, that’s not exactly what I had in mind for your education.” So, you can control it. You can actually shift it, among not only siblings but first cousins. But anyway, I’ll say I’m a big fan of 529 Plans. I’m also a fan of direct gifts to parents, presumably people who are responsibly mature, although maybe Jon and Eileen have some opinions on the psychological impact of gifting to parents.

And the other thing that I like, and this is more from a long-term financial standpoint, is I like second-to-die life insurance because not only is it economically usually a good deal, but it also typically creates a fund of money for the parents, and then in our estate plan, Jon, what we often do is if there is enough money available, particularly from the second-to-die life insurance, is we have the children disclaim some of the IRA and Roth IRA benefits and have that money go into well-drafted trusts for the benefit of grandchildren. And I was wondering if there was anything that I said there that maybe touched a nerve or if you had an opinion on anything in that area?

7. Trusts Can Act as ‘Training Wheels’ for Money Management

Jon Gallo: Well, let me start by saying I think that there’s probably a fourth thing that Eileen and I like to do since we’re really talking about the human side of it, and these are gifts and trusts for the grandchildren in which we use the trust as a kind of training wheels to teach the grandchildren how to manage money, and the idea there is that if the grandchild is over the age of 18 or so, you might consider making the grandchild a co-trustee of the trust, but only for purposes of making the investments, not for purposes of deciding how much and when the grandchild gets the money, and you allow the grandchild to work with the other trustee(s) to learn how to manage that money. If the grandchild is a minor, you might use the trust as a way to invite him to attend meetings with you as the investment advisor, Jim, and with the trustee whom you’re working with, and maybe set aside 10 or 15 minutes, because that’s probably the grandchild’s attention span, just to talk a little bit about some basic concepts. What’s a stock? What’s a bond? What do you mean about asset allocation? What do you mean by risk or whatever? And start getting the grandchild interested in money management.

Jim Lange: Jon, hang on for one second. Are you talking now, is this while Grandma and Grandpa are still alive, or is this after they’re gone?

Jon Gallo: Well, this can be either.

Jim Lange: OK.

Jon Gallo: Grandma and Grandpa, if they are alive, they can create these gift trusts for the grandchildren and have the child be the trustee and the grandchild maybe be a co-trustee or attend the meetings, or the parents, instead of leaving everything in trust to their children, could carve out a relatively small amount and put that into a trust for the benefit of the grandchildren, or each grandchild have the parent as a trustee, and again, use that as a vehicle to teach the grandchild about money management. Basically, if you want your kids to play in the sandbox, they got to have sand. You want your grandkids to learn how to manage money responsibly. They’ve got to go have some money to practice on so they can learn to manage it responsibly.

Jim Lange: Yeah, and by the way, I will tell you, even though that might sound a little bit radical to some of the people, that seems perfectly consistent with some of the things that you write in The Financially Intelligent Parent. By the way, I should also mention again to our listeners that Jon and Eileen Gallo are the authors of The Financially Intelligent Parent. Where would be the best place to get that? Would that be on Amazon, or do you have a website that would be better?

Jon Gallo: That would be on Amazon, or you can get it through our website, which is www.galloconsulting.com and go to the store.

Jim Lange: All right, and by the way, if I was a consumer, and again, I will personally endorse the book, I would probably go to your website because that way, I’m going to get on your email list and I’m going to get some other goodies, too. Is that right?

Jon Gallo: That is correct.

Jim Lange: OK. So, that’s www.galloconsulting.com?

Jon Gallo: www.galloconsulting.com.

Jim Lange: OK. So, hearing some of the things that you’re saying, even though it might be a little bit of a shock to people, in terms of usually they think of trusts as protecting money from the grandchild, and you’re kind of including the grandchild even starting with the decision of which jeans to buy and helping them, in effect I guess, crawl before they can walk, or play in the sand while there’s some sand in the sandbox I think is actually a very good idea. I never heard of the idea of making the grandchild a co-trustee, but that’s a pretty interesting idea. And I will also freely admit that I rarely draft a trust for a grandchild, known as an inter-vivos trust, which is a trust while the grandchild is alive, and I used to do more of them, but since section 529s for college education is so easy, and administratively easy and basically without cost, I haven’t done many of those. But if we could go back to the, let’s say, trust for the grandchild, so money that could either go directly to the grandchild, or in my estate plans, I tend to leave money to the children first, but each set of children have the right to disclaim into a well-drafted trust for the benefit of their children. So, that is, the grandparent’s grandchildren would be … if the child disclaims, then the money would go to the trust for the grandchild, so I even sometimes have the parent as the trustee of that money, where I think a lot of typical trusts, you’d have to have the parent be deceased before the grandchild got any money. But in either case, whether the parent is alive or the parent isn’t alive, do you have any guidelines on when grandchildren should have access to money and, let’s say, other than the video idea, which I think is a great idea, some guidelines of terms that you put in those trusts and at what ages grandchildren should have access to money if we’re trying to be not only financially smart, but, let’s say, psychologically smart?

Jon Gallo: Well, Eileen and I … Jim, you are familiar with the Heckerling Institute, I’m sure?

Jim Lange: I sure am, and by the way, for our listeners’ benefit, it’s just a pure coincidence that it happens to be in Miami, you know, right in the coldest part of the winter! So, you get all of these crazy estate planners down there, I always have a good time down there and I always like it down there. But anyway, go ahead.

Jon Gallo: Right, it’s probably the largest estate planning institute in the country. It has about 3,000 to 4,000 people attend it each year.

Jim Lange: It’s really grown, too. It was not that big. Of course, I’ve been doing this for 25 years, but it was nowhere near that big back then.

8. Set Up Trust to Reward Grandchild’s Ability to Handle Money

Jon Gallo: It’s really gotten big. And this year, Eileen and I introduced a new kind of a trust for children and grandchildren which we call a ROTE trust, our results-oriented trust environment, and the concept behind it, which ties in directly to what you’re talking about, is if we want kids to learn to be responsible with money, let’s go create a trust which looks at the various results of being responsible with money. The results, for example, having a budget, sticking with a budget, saving some money, being able to invest and manage what money that you have appropriately, and that trust concept that we introduced at the University of Miami Institute might be the answer to what you’re talking about because we basically say to the trustee, we’re not going to tie this to what age the children are. We’re going to tie this to whether the kids are able to be responsible with money, take a look and see whether they have a budget, whether they are living within that budget. If they are having problems with it, you can use the money in the trust to help them get an accountant, to help them get a life coach, or whatever it is that they need to learn how to manage money responsibly, and when they begin to show that they’re managing the money responsibly, then let them take over as the trustee of their trust, or at least let them become a co-trustee. And after five or ten years of being a co-trustee, then if they’re continuing to be responsible with money, let them become the sole trustee of their trust.

Jim Lange: Well, this touches close to something that I’m familiar with (maybe you can tell me the difference) between this and an incentive trust, an incentive trust being if you’re in school, you get this money, and then sometimes people have other concerns in terms of education … and it looks like we are being pulled away for a break.

Nicole DeMartino: How about if we get back to that when we come back?

Jim Lange: OK.

Nicole DeMartino: Is that OK? This is the last break of the show.

Jim Lange: All right, very good.

Nicole DeMartino: We’ll take a quick break. We’ll come back. We’ll finish Jim’s point. You’re listening to The Lange Money Hour, Where Smart Money Talks.

BREAK THREE

Jim Lange: All right, and Jon, I can’t help but be a little bit of a, let’s say, concerned … by the way, I like the idea of your trust and I am interested in probably two things: how that’s a little different from an incentive trust, and whether also … now, this is slightly technical, whether you’re going to have any problems if the underlying asset is an IRA or a retirement plan and whether we have any problems with the five conditions in order to qualify as a designated beneficiary? So, let’s say there are two different issues and you can take on either one. One is how is that different from an incentive trust, and two, let’s say, my technical issue with is, can that still work as the beneficiary of an IRA?

Eileen Gallo: Jim, it’s an alternative to an incentive trust.

Jim Lange: OK.

Jon Gallo: As a matter of fact, the title of the article was “The Use and Abuse of Incentive Trusts: Improvements and Alternatives.” So, as Eileen said, it is an alternative. If what you want to incentivize is for your kid to go to college, that’s fine. You can go provide for benefits if the child goes to college, but most people have provisions, such as income matching and we’ll pay you money if you go to college in the belief that those things, graduation from college and having a job, indicate that you are good at being a money manager and you’re a responsible money person, and you and I both know people who are college graduates who are declaring bankruptcy and people who have good paying jobs who are over-spenders.

Jim Lange: Right.

9. Results-Oriented Trusts Are an Alternative to Incentive Trusts

Jon Gallo: Those aren’t any guarantee that you’re a responsible money manager, so what Eileen and I did was to look at what would a responsible money manager do? And a responsible money manager, for example, would have a budget. A responsible person with money would live within the budget. They would not abuse credit. And those are the factors that we look at in our alternative to incentive trusts, which we called the results-oriented trust environment, the result being that you are behaving as a financially responsible individual.

Jim Lange: Is that article available on your website or on the internet? If somebody is interested in that … and by the way, I have had a growing interest in incentive trusts, and frankly, I personally am very interested in taking a look at this language and considering adding that …

Jon Gallo: To the best of my knowledge, it is posted on our website and I will double check to make sure that it’s there, and if it isn’t, I will make sure that by the end of today, it is posted there.

Jim Lange: OK, and could you give our readers again the name of your website? And by the way, I think that we have established that your website is the best place to buy the book The Financially Intelligent Parent. So, there’s going to be some great stuff for free, and then there’s also going to be an order place to order The Financially Intelligent Parent, and the subtitle of that is Eight Steps to Raising Successful, Generous, Responsible Children, and then the other thing that I will put in there is also a section on charitable giving that I don’t see very often.

Eileen Gallo: Which is a very wonderful way for grandparents and grandchildren to connect and share experiences, through charity.

Jim Lange: Yeah, I think that’s great. But anyway, back to my direct question, can you give our listeners your website again, please?

Jon Gallo: It is www.galloconsulting.com.

Jim Lange: All right, and that’s G-A-L-L-O.

Jon Gallo: Just like the wine.

Jim Lange: OK! All right, let’s say that somebody says, “OK, that sounds like an interesting idea, but I’m probably going to go with some of the more traditional thinking,” and maybe you think that’s even a little bit tough. Do you have any guidelines in terms of age or, let’s say, a mental development, or at what point it’s OK for a child to have money and know that they have money? I know, for example, some grandparents … now, you’re saying, “Yes, tell them that yes, there’s money put away for a 529.” Will a child knowing that they have money in a trust fund, or that they will receive money in the future, will that reduce their incentive to go out and do well? Because that has been the concern of many of my wealthy clients, and even … and this might even be a little bit off-topic for grandchildren, but even for their 30- and 40-year-old children, and I usually think, “Oh man, he’s 35 years old. His financial values are already developed by now and he could use the money. Why don’t you give him the money?” The parent might be thinking, “Oh no, I don’t want to spoil him.” Do you have any guidelines for when and how to give money to both children and grandchildren if one of your concerns is giving them too much too early and having them lose incentive to go out and make their own way in the world?

10. If Parents Can Handle Money, Grandkids Probably Can, Too

Jon Gallo: Well, it makes me think of the campaign slogan for one of the presidential campaigns not too long ago, “It’s the economy, stupid.” “It’s the parenting, stupid” would be the slogan that I’d put up there. If parents raise their kids so that the kids see the parents being responsible with money, and the parents teach them to think about choices and alternatives of where they spend money, and to put money away and to use money also to help other people through charity, I don’t think money’s going to be something that’s going to harm the kids. In that kind of a scenario, what I would do would be to, if I were writing a will, I’d say that when I pass away, my child is going to become a co-trustee with someone else I trust, and will serve as a co-trustee for perhaps five years or ten years, and at the end of that time frame, the child will then become the sole trustee of the trust or it will be distributed outright to the child. So, I’m not really keying into the child’s age, but rather a kind of an apprenticeship under the trust that I have created with the child to help that child learn to manage the inheritance.

Jim Lange: OK, I have a lot of wealthy clients, and frankly, they have a little depression-era mentality and let’s say somebody has between one and $2 million dollars of investible assets, and their Social Security and their pension probably covers most of their needs. So, let’s say they themselves don’t have a lot of needs; on the other hand, they are financially conservative, and they might have children who are struggling to make housing payments, maybe they have grandchildren and the grandchildren who want to have piano lessons and they want to have some of the extras. Do you have any feelings about when the grandparent is alive in terms of helping out their children, and whether you think that the child could be harmed by that, or does that go back to “It’s the parenting, stupid”?

Jon Gallo: I think it’s the parenting. Eileen, what do you think?

Eileen Gallo: Yes, I believe so.

Jim Lange: All right, well, let’s be more practical. In the real world, let’s say you’ve kind of botched it a little bit. You’ve been a, not horrendous but not great, financial parent, and now your kids are in a little bit of hot water, and the other thing that I see a lot — in fact, I had one recently — is a kid going through a divorce, and otherwise a fairly responsible fiscally sound child who is in a tight spot. Are we reducing incentive or is that just helping out a child who is in a bad spot?

Eileen Gallo: I think that if our kids are young adults, adult children go through some tough times and sometimes they do need some financial help, like going through a divorce or illness or maybe losing a job and having it be a while before they find a job. I think there are times when it’s fine to help out, as long as it’s very clear what is the help. Is the helping out a gift? Is it a one-time gift? Is it a loan? That should be clear between the adult child and grandparent.

Jim Lange: Right, and by the way, I’ll just say that, from a professional standpoint, a lot of times, people want to make it a loan because it’s presumably a legal hook, but then you get into a little bit of trouble with imputed interest. So, I usually, for tax purposes and to keep things simple, I usually try to avoid the loan. And I’m getting the two-minute sign …

Nicole DeMartino: Two-minute warning!

Jim Lange: Two-minute warning, and it has been terrific. You have been full of good ideas …

Nicole DeMartino: Absolutely.

Jim Lange: And what again is the name of the trust that you came up with that is on your website?

Jon Gallo: We call it the Results-Oriented Trust Environment because the trust is looking at what are the results of what you want to encourage the kids to do? If you want to encourage them to be good financial managers, then the results are good financial management, and then we look to see if you are managing your assets responsibly.

Jim Lange: OK, and that’s on www.galloconsulting.com.

Jon Gallo: That’s correct.

Nicole DeMartino: Alrighty, well, thank you so much. Dr. Eileen Gallo and attorney Jon Gallo, thank you for joining us. If you want to hear this show replayed, like I said, it will be on this Sunday at 9 a.m., and you can also listen to www.kqv.com. I think that’s it for today, right Jim?

Jim Lange: Yes, it is.

Nicole DeMartino: Alrighty. Have a good day everyone. You’ve been listening to The Lange Money Hour, Where Smart Money Talks.

END