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MASTERPLAN 101 - Lesson 2 is HERE
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“You’re only leaving me how much?!”

The adult son blurts out this question while he and the immediate family assembles around the dining room table at Mom and Dad’s house. They are gathered for the second of three pre-arranged meetings to discuss their parents’ finances, legacies and final arrangements.

It is a sincere question whose answer is sometimes disappointing. However, full disclosure is critical to these meetings, so parents should update everyone on where they stand financially and health-wise.

Here’s why:

  • In case Mom and Dad’s investments have not kept pace with inflation
  • In case Mom and Dad will have medical debt from caring for their own parents
  • In case Johnny and Judy receive less if Mom or Dad’s health care expenses eat up what was earmarked for them, legitimate cause for concern here.

Genworth’s 2017 annual cost of care survey, one of the most comprehensive studies of its kind, reported nursing home costs for one year at almost $100,000; receiving chemo in a hospital for one year was $102,395, and three months of radiation averaged $35,761. These figures are revised annually.

Can the kids handle large inheritances?

It’s important to set accurate expectations about how much children will inherit, when they will inherit it and how. Typically, children receive equal shares.

Warren Buffett made a commitment to The Giving Pledge, to leave 99 percent of his wealth to philanthropic organizations during his life or upon his death. His children have already received significant sums.

“They will live comfortable and productive lives,” said Buffet. “And I will continue to live in a manner that gives me everything that I could possibly want in life.”

Forbes estimated his net worth at $88.3 billion.

The sudden wealth syndrome

Unlike Buffett, regarded as one of the most generous philanthropists in the world, having donated more than $46 billion since 2000, very wealthy people are concerned that their kids don’t share the same financial and charitable giving values as they do. And for good reason: wealthy families lose their fortunes in three generations.

So one would hope that parents teach their kids about charitable giving and helping others, as Warren Buffett did, and about finances, proper use of money, and the drawbacks of excessive, mindless spending before the $30 trillion Baby Boomer wealth transfers.

It is typical for parents or grandparents to leave the kids a lump sum to do whatever they want with, in some cases, without prudent financial supervision. Therein lie two major blunders:

  • A disciplined, professional, financial management responsibility is nonexistent
  • The kids aren’t emotionally outfitted to make risk vs. reward decisions

If Johnny or Judy has wild spending habits, a lump sum is not the answer – but a trust could be. An Incentive Trust protects the kids from themselves. The trust provisions control the money, the payouts and the timeframe.

As an example, the assets can be distributed in portions – one-third at age 25, one-third at age 30 and one-third at age 35. The trust can defer distributions to a later date if the child has a substance abuse or related problems.

“Don’t I deserve to have some fun?”

The answer is a resounding “yes!” and receiving an inheritance, whether $25,000 or $2.5 million, is truly exciting. But self-control is essential, because an inheritance is not “fun money,” but you can and should enjoy some portion of it.

Excessive spending – buying large home(s), exotic cars, jewelry, all the big-boy toys, gambling, drugs, etc. will surely do you in. Professional athletes and celebrities do it, but their financial team allows it up to a point. They put them on a budget after some controlled spending. And so you, too, must have both a plan and a budget to avoid possibly ending up like them, and lottery winners who went broke.

“Lottery winners are, in fact, more likely to declare bankruptcy within three to five years than the average American,” writes Economist Jay Zagorsky, in U.S. News and World Report.

Shirtsleeves to shirtsleeves in three generations

Tradition has it that the first generation experiences hardship and hard work to achieve their goals. The second generation understands the importance of their parents’ hard work and builds upon it. The third generation knows nothing of previous struggles and squanders what their family has built over many years.

By the end of the third generation, 90% of families have little or nothing left of money received from grandparents. Ultimately 95% of all traditional inheritance plans fail. It is not what you make, but what you keep that is in play here.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.
Financial Planning Department
Hefren-Tillotson

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