Wealth Transfer or Wealth Reception – Part #2 – The College Years

I went to U of I in Champaign-Urbana. Both undergrad and law school. A lot has changed since I left law school in 1995. Many new buildings, and tuition has gone way up. Do you know how much it will cost now for 4 years of undergrad, including tuition, books, room and board, etc.? Somewhere around $100,000.

Suppose your kid is ready to head to college this fall. He gets all his stuff packed, buys that little fridge, picks out a shower caddy thing, and is ready to head off to college. The day comes where you pack up the mini-van and head to Champaign. You help carry all the stuff into the dorm, give him a hug, tell him to behave himself. Then you pull out your checkbook and say “Well, since we know it’s going to cost you about $100,000 to get through the next 4 years, I thought I would go ahead and give it to you now.” So you write out that check, hand it over, get in the car and drive back home.

Assuming you had $100,000 sitting around that was earmarked for your child’s college, would you do it this way? Would you hand the entire amount over on the first day he moves in to the dorm? No? You wouldn’t do that? Why on earth not?

Well, I guess there could be a few “complications”.

1. He might not spend it wisely. You know, parties or a new car or who knows what? Then runs out of money before he gets the degree.

2. He might be taken advantage of. If word got out that he had a big wad of money just handed to him, do you think he would have any new “friends” that might be interested in hanging out? I’m sure there would be plenty of kids willing to help him make some financial decisions.

3. He might be less motivated to work hard. Hey, you’re only young once. Doesn’t it make sense to have some fun with a little of that money now? He figures he can always get a job during his last year or two of college to make up the difference.

4. What if he gets in trouble? Maybe gets in a car wreck and gets sued? Or gets in with the wrong crowd and makes a bad decision that leads to property damage or criminal charges?

5. He isn’t emotionally ready to handle that kind of money. You just handed him $100,000, even though he’s never had more than $500 in discretionary money to himself before now.

6. What if his plans change? Maybe he flunks out, changes his major, takes a semester off, or drops out of school to start a band? Are you expecting to get change back on your $100,000 if he doesn’t finish with a degree?

7. He might fall in love. Yes, love can do strange things to someone’s financial decisions.

WEALTH RECEPTION?

Well, I guess you realize that people die all the time leaving assets to their kids. And those kids may not be any more ready to receive it than your college student was to receive that $100,000 right now.

Let’s say something happens to you tomorrow and you left all your assets (house, retirement plans, life insurance, bank accounts, etc.) to your kids. Would the amount of money you leave them make an impact on their daily lives? How much impact? Very little, some, or a whole bunch? Would the lifestyle they could afford be changed?

Think of the specific amount of money you would leave if you died tomorrow. How much will it increase your child’s net worth? Double it, triple it, make it go up 10 times or a 100 times? or more?

All those issues that cause concern about the college student are the same issues we address with clients in estate planning. These issues are what I call “wealth reception” issues. It’s not just about how quickly we can get the check to the kids. More important is what impact, good or bad, will the money have on the kids after they get it. And will the wealth better their lives one year, 5 years, or 10 years after you’re gone?

Michael Jackson: King of Pop (and Estate Planning?)

Are you tired yet of hearing about the Michael Jackson saga? One thing for sure, the gossip media should have plenty to talk about for quite a while. It turns out Michael did have a Last Will & Testament after all. (Thanks to those who sent me links to good articles on his estate issues.) Despite the circus atmosphere, Michael’s estate situation gives us some reminders about important planning issues:

1. Wills are public. Usually, there are many issues that are much more important to your family than keeping your estate matters secret. But at the same time, do you really want people to see your private info? And with increasing online access to court records, it will be easier and easier for your neighbor or nosy relative to look at your Will in court records without leaving home.

2. Living Trusts are private. A living trust is a good way to keep your info private at your death. And that’s exactly what Michael did. Look at his Will. It is what we call a “pour over will”, meaning his will doesn’t have much in it except instructions to dump assets at his death into what they are calling his “Family Trust” (which is private and will stay private). So all the gory details about who gets what and when they get it are only in that private document, incorporated by reference into his Will. And it seems to me that Michael’s Will actually included more info than necessary. For instance, I usually would not put something in the Will about disinheriting anyone (as he did with is ex-wife). That kind of info can go in your trust to keep it all private.

3. Asset titling is key. We haven’t seen how this part plays out yet. Even though Michael had a living trust, if he didn’t properly title his assets in that trust before his death, then the probate court will have to do it using his will. Without assets organized properly, he will lose part of the benefits of the living trust.

4. Feeding frenzy? Michael’s death is a media frenzy, but also a money frenzy too. Friends, relatives, business associates, will all be scrambling to take financial advantage. Those who are controlling his assets will be approached by all kinds of people with all kinds of ideas and schemes, all designed to get some money from the estate. Marlon Brando’s estate attorney said people came “out of the woodwork making all sorts of claims” after Brando died. At your death, who will be in charge of your estate and who will be at risk for being taken advantage of?

5. Personal items are important. There is a court dispute over 2,000 personal items. Michael’s mom has control of them, but the real executors want them back. The judge told them to try to work it out. I have seen a lot of hurt feelings and disputes over personal items, sometimes of small dollar value. But sometimes the items of small dollar value have huge sentimental and emotional value. What have you done to make sure your personal items don’t cause a dispute later? What have you done to preserve the stories behind items of emotional value?

6. We never know when. We look at Michael and figure he was living a life on the edge that could lead to an early death. But the fact is that none of us know when our time is up. One thing about estate planning – you need to do it when you don’t need it, because when you need it, it’s too late to do it.

Despite some feeling like the topic has been covered way too well, there is even more we can learn from this situation, including how to choose guardians for your children. Check out Part II of this post here.

Protecting Your Family Like an NFL Lineman

The other day I had a chance to speak at the Rotary Club. My topic, like the article “How (and Why) Athletes Go Broke” in the latest issue of Sports Illustrated, was about protecting the money you’ve worked so hard for. There are many ways your spouse, children or grandchildren could end up losing what was so important for you to leave behind. I know you can’t imagine your loved ones blowing your hard earned money (or maybe you can), but sometimes it happens in the blink of an eye. What are some of the risks to an inheritance?

  • Lawsuits The SI article is riddled with stories of lawsuits. Though it may not be something you think about, imagine your spouse, devastated by your recent death, running a red light and causing an accident involving a school bus. In an instant, all that you worked so hard for could be given away by the courts to the injured parties leaving nothing to care for your family in your absence.
  • Divorce One NFL owner was once asked by one of his players what the most dangerous thing to happen to them financially could be. His answer: Divorce. Many players, who marry their hometown sweetheart, can never imagine a divorce in their future. Even if your son has married the sweetest girl in the world, there is no way to see what the future holds. Would you be OK giving half your hard earned money to her if they end up getting divorced a few years after you pass away? It happens regularly when people don’t plan ahead.
  • Remarriage If you die, and your spouse remarries, do you mind if part of the money you left is split with the new spouse, or even later left to the new spouse’s kids? This could either be a gold-digger (or “bimbo” as some of my clients like to say) or a stand up, class-act new spouse. But either way, without planning, there is a risk those assets will end up where you did not intend. Your children could even lose access to the money they would need for college.
  • Wild Spending Lots of quick money means a happy life, right? Well, that’s not what the stats show. Quick money (winning the lottery, getting an inheritance, or multi-million dollar NFL contract) can lead to wild spending, divorce and bankruptcy. If your children end up with large assets at the young age of 20, they could quickly blow it like any upstart professional athlete. If someone isn’t prepared to manage the money, the money will manage them. You’ve worked hard so your kids will be ok without you, but will they really be better off with a large sum of money that has no safeguards?

Nobody likes to think about these difficult issues, but with proper planning these assets can be protected and your loved ones will be protected – even if you can’t be around to do it.