I encourage you to read the entire article, titled “Will You Sprint, Stroll, or Stumble Into a Career?”

I will be reading Sellingo’s recently published book from which the article was drawn, There Is Life After College: What Parents and Students Should Know About Navigating School to Prepare for the Jobs of Tomorrow.

When I finish, expect to read more analysis here, along with implications for the wealth managers, attorneys, and other advisors who work with families affected by these issues (which, by the way, is almost everyone…).

The article identified three types of “emerging adult.”  (Parents, you may have been one type – or planned for your child to be a particular type – but find out your child is another. So pay attention!)

• Sprinters tend to pick a college major and stick with it, accumulating a “progression of internships that look more and more impressive,” and have “little or no student-loan debt, freeing them to pick job opportunities without regard to pay.” Others are “slow but methodical, assembling the building blocks for a successful career by investing in their own human capital.”
• Wanderers tend to have a poor coupling between college and the job market, often leading to underemployment, followed by a return (retreat?) to graduate school, which often leads to increased student-loan debt.  “Wandering” can carry a high opportunity cost, because “the bulk of salary increases tend to come in the first decade of employment.”
• Stragglers “spend much of their 20s looking for what they were meant to do.”  Many don’t go to college, or if they go, they don’t finish.  Collecting college credits but not a degree burdens them with student-loan debt without giving them a claim on the bachelor’s degree earnings premium.

You can browse what we’ve already written on these issues here:

• “Life Cycle Estate and Financial Planning for Early Adulthood” emphasized the primary importance of skills acquisition, wariness of student-loan debt, and accumulating human capital, first and foremost.
• “Overfunded 529 Plans: Avoiding Too Much of a Good Thing” identified how Section 529 plans are a mis-match in many ways for the “real world” expenses a family has to fully launch a young adult.  Qualified higher education expenses for tuition, room, and board are nice, but they don’t reach to equally important issues like funding starter apartments in Manhattan or Mountain View, or subsidizing unpaid internships on Capitol Hill, or paying for international travel during a “Gap Yah.”

• “Managing Volatility: Inheritance Strategies for the Lower Upper Class” focused on the dispersion in economic outcomes among the “educationally successful” and their children – as aspiring actors in LA and hedge fund analysts from Brooklyn come back to the Flyover and sit down at the same Thanksgiving table.  It explained how targeted investments in economically relevant postgraduate education can be a critical “pre-funding” for a child’s inheritance, and it discussed related  estate plan equalization options.
• “Managing Risk: Inheritance Strategies for the Upper Middle Class” identified the pressures on meritocratic professional families to fund college at the same time as they navigate retirement funding and hedge against risks of unplanned early retirement and/or job loss after age 50. For families in this cohort, we suggested allowing children to incur student loans, but then assist with their repayment after other risks of this life cycle stage such as bear markets and unexpected corporate mergers were navigated successfully.
• “Design Options for Education Trusts” discussed ways families can thoughtfully fund human capital acquisition by their descendants, while mitigating problems of “perpetual students,” preserving fairness among descendants, and motivating timely degree completion.

Even if The Grey Lady had never gotten around to noticing these issues other advisors and I see week in, week out in almost every aspect of our practices, they would still be tremendously important.

I’m heartened to see that Selingo is bringing focus and insight to them, and look forward to reading his book in detail.

Has Life Cycle Planning arrived?

Perhaps so!

The post “Emerging Adulthood” and Life Cycle Planning appeared first on Rumls PLC.

Unfortunately, there are many instances in which these good intentions work out poorly. Usually, this is because the predictable carrying costs for the property (such as property taxes, maintenance, and insurance) don’t overlap well with variability in descendants’ financial situations.

Economic outcomes for children of the lower upper class (i.e., families in which each child will inherit less than $3 million to $5 million, and the class in which there is often one “family property” rather than several that can be parceled out “one to each child”) are characterized by volatility.

Some children tend to end up wealthy (hedge funds, options in venture-funded startups, etc.) while others don’t (boarding school teachers, artists, etc.).  Children with the most available time to use the family’s vacation property are often not the ones with the most money available to pay for its upkeep.

Another trend impacting family property ownership is (as we noted previously) the increasing tendency since the ‘60s for adult children of socially and economically prominent families in the “Flyover” to migrate to the coasts in search of greater career opportunity.

(For vignettes illustrating this, read the obituaries published by the alumni magazine of any “fancy” college or boarding school – you’ll note that “Bigglesworth ’52 from Cleveland” returned home to run the family’s widget company and lived there as a pillar of the community for the next 60 years, while his child, Bigglesworth ‘82 never came back to Cleveland, but instead had a great career in software in the Bay Area, or as a “Beltway Bandit” in northern Virginia….)

Geographic dispersion of adult children matters because it reduces the odds that all (or even most) of a pool of descendants will (as a practical matter) be able to use a family’s vacation property.

A third trend families often don’t consider in planning for vacation property (but should) is that after a family’s balance sheet is divided several ways and descendants revert to the economic mean over time, descendants may need money to educate their children, or retire, and may want or need to raise funds by selling their interest in the family’s vacation property.

Even in families in which descendants get along well with each other, failing to plan for these issues can cause missed opportunities.

Yet, as everyone knows, adult children often don’t get along with their siblings.  When this is the case, parents creating inheritance situations involving co-ownership of family property can create enormous discord, bitter dissension, and expensive litigation.

I believe the right kind of limited liability company can be a solution for family property ownership that both optimizes outcomes in families that do get along with each other, and substantially improves results when families don’t.

In many situations (subject to family-specific exceptions when it makes sense), some of the features of this type of “vacation property LLC” include:

• Ownership. The LLC’s ownership would be split into voting and non-voting units.  Only one person in each “branch” of descendants would be allowed to own voting units at any time.  No person who was not a descendant (for instance, an ex-spouse) would be allowed to own voting units.
• Governance. The LLC would be managed by a board of managers.  The persons owning voting units would constitute the board of managers.  In instances where there were more than two “branches” of a family, the board of managers would act by majority vote.  When there were only two “branches” of a family, the board of managers would act by unanimous vote.
• Ordinary Capital Contributions. Especially if a family vacation property isn’t rented to non-family outsiders to defray costs, capital contributions would be necessary from time to time to fund property taxes, maintenance, and insurance.  Capital calls for these “ordinary” type of expenses could be made by at least 50% of the LLC’s membership interest (including nonvoting units), or by at least 50% of the LLC’s managers.
• Unusual Capital Contributions. Capital calls above a certain inflation-indexed dollar amount (for instance, for major repairs or renovations) could be made by a supermajority of the LLC’s membership interest (including nonvoting units), or a similar supermajority of the LLC’s managers.  The supermajority requirement should be set thoughtfully in relation the particular family’s “family tree” of descendants, balancing the risk that one family member or “branch” would be “pushed around” by others, against the offsetting risk that the member or “branch” would be an unreasonable “lone holdout.”
• Partial Redemptions of Ownership by Owners Not Meeting Capital Calls. In my experience, few things frustrate high-earning siblings more than having to cross-subsidize co-ownership of a family property by lower-earning siblings who cannot or will not meet their share of a property’s carrying costs.
  To address this issue, the LLC’s operating agreement would provide that when an owner didn’t meet a capital call, other owner(s) could.  If they did meet another owner’s capital call, a portion of the “deadbeat” owner’s ownership interest in the LLC would be redeemed by the LLC.
  This would proportionally increase the LLC’s ownership by the other owner(s) who had met the capital call on behalf of the “deadbeat.”
  This feature seems attractive and fair, because over time, a “deadbeat” sibling co-owner’s stake would shrink, but the effect isn’t a punitive “immediate wipeout” of their ownership stake.
• Valuation.  To avoid fights over the LLC valuation in relation to partial redemptions, the LLC’s operating agreement could provide that the LLC will be valued at the property tax assessed value of its real estate, minus any mortgage debt on the real estate, plus the value of any cash or securities held by the LLC.  Admittedly, property tax valuations often lag fair market valuations, but in this instance the convenience of using the property tax appraisal likely exceed any disadvantages.
• Pro-Rata Limited Annual Tender Offer. Jane Austen might just as well have begun Pride and Prejudice with the observation that “it is a truth universally acknowledged that sometimes family members need money.”
  Because this is a universal truth, the LLC would include a feature to provide limited, periodic opportunities for co-owners to “cash out”: a “pro rata limited annual tender offer.”
  With this approach, each year, the LLC would be required to redeem up to, for instance, 3% to 5% of its ownership interest to interested co-owners.
  If more than one owner wished to participate in the limited redemption for any particular year, the participation opportunity would be allocated pro rata among the interested co-owners, in proportion to their respective ownership of the LLC.
  To raise cash to fund redemptions, the LLC would need to mortgage its property, create more rental income, or receive equity contributions from other owner(s).  Limiting the size of the annual redemption right would allow the LLC’s managers to plan for the LLC’s liquidity needs.  The annual redemptions permit an orderly exit by a family “branch” that isn’t interested in continuing ownership of the property, or that needs to raise cash.
  As above, to avoid valuation controversies in administering the pro rata limited annual tender offers, LLC valuation would rely primarily on property tax assessments of its real property.

Using a thoughtfully designed “vacation property” LLC offers at least two other material advantages.

First, it sidesteps the right each sibling co-owner would otherwise have to seek judicial partition of the property, or a partition/auction sale.  This protects siblings who wish to keep using a property, or who highly value keeping a property “in the family” for sentimental and/or historic reasons, against the forced sale of the property caused by different objectives or needs of another co-owner (even only one co-owner among many).

Second, holding property inside an LLC “wrapper” can increase privacy, and is almost always a prudent asset protection approach – no matter how ownership of the property is divided – especially if the property will be rented to outsiders.  Property ownership presents all sorts of liability risks, including to trespassers as well as renters.  It usually makes sense to “firewall” liability risks presented by the property from other parts of the balance sheets of the property’s owners.  Although asset protection may not be the primary purpose of the “vacation property” LLC, it’s a welcome feature.

Another option a family might consider is “endowing” the maintenance and property taxes of their vacation property with a life insurance policy payable to the family LLC, or a bequest to the LLC in their estate plan, to provide initial working capital.  This approach is particularly sensible when one or more branches of a family foreseeably won’t be able to meet capital calls, and the older generation bequeathing the property wants to mitigate the property’s cost-of-ownership burden.

Surprisingly, some older clients I work with who plan for their descendants to continue using a vacation property and co-own it together haven’t asked their descendants if that’s the outcome the descendants want.  Every situation is different, but in most instances, I don’t think this lack of communication is helpful.  If it turns out that enough descendants don’t have an interest in the property, it may be best to skip the vacation property LLC planning altogether, and instead arrange for its devise to the descendant(s) that do want it, or direct its sale in due course during estate administration.

Simply put, with the right planning, a family’s vacation property or farm can be the sort of “gathering place” clients envision, rather than a flash point for controversy, expense, discord, and litigation.  The positive outcomes, however, usually don’t happen by accident.

If vacation property is part of your balance sheet, or if you have parents or grandparents with this kind of property, you’re well advised to invest time in thoughtful advance planning, to make sure your family’s one of the success stories, rather than otherwise.

The post Fun, Not Friction: LLC Planning for Family Vacation Property appeared first on Rumls PLC.

We’re very pleased to be in a position to give back by sponsoring the 10th Annual Derby Divas event supporting the Norton Healthcare Foundation.

It will be held at Rodes for Him and For Her at 4938 Brownsboro Road on Thursday, April 21 from 6:30pm to 9pm.

For tickets and more information, visit here.

(I have to admit I’m a little intimidated by the “opportunity” sponsorship offers to be a “Man Diva” at the event.)

You won’t want to miss the mirth that happens when trust & estate lawyers wear pink….

The post Ruml PLC is Proud to Sponsor Derby Divas 2016 appeared first on Rumls PLC.

Boomers are avalanching into retirement – a time when it’s natural to revisit estate plans.  Because it is such a large cohort, even with welcome increases in life expectancy, estate administration activity seems to be increasing too.

The demographic context facing any particular Boomer household will be influenced by the size of their cohort, and what the Boomer cohort wants to do with its balance sheet will, in turn, have large collateral effects on the generations downstream.

Consider three key balance sheet elements: equities, residential real estate, and closely held businesses.

If you consume investment commentary, the idea that the Boomers accreting retirement assets was positive for equity valuations in the 90s and early 2000s, isn’t a new one – nor is the concern that required minimum distribution outflows from Boomer retirement plans will be a headwind against future stock price appreciation.  Many commentators called the Boomers-sell-stock issue far in advance.

The buyers in the emerging overseas middle class who are positioned as the solution to the Boomer stock sale wave, however, aren’t as likely to buy your residential real estate or closely held business (although Chinese or Russian oligarchs may want your commercial real estate…).  Those asset classes are captive to this region’s trends in population, wealth creation, and economic vitality (spoiler alert: this is not necessarily an advantage).

I believe we may be seeing Boomer demography at work in the Louisville residential real estate market.

Just this week, a friend shared a LinkedIn post with data from the Louisville Association of Realtors about the local housing market. Affordable real estate is in comparatively shorter supply, but the higher up the price range you go, the greater the supply and the more adverse the landscape for sellers.

Who tends to own (but want to downsize) larger, more valuable houses? Boomers.

Who has the appetite and capability to buy those homes (and then spend a seemingly near-infinite amount of money further renovating their kitchens)? Gen-X mid-career professionals.

There are 118 Boomers for every 100 Gen-Xers. One can’t help but think that demography is driving a lot of what’s happening here.

I think it’s a similar story with closely held business owners. The Boomer cohort has tended to have fewer children than they had siblings. Further, the last 30 years in Louisville and similar “flyover” cities have seen many business owners’ children migrate to the coasts seeking a more vibrant opportunity set.

All other things equal, these trends reduce the pool of potential next-generation family business inheritors. Boomers are no different than earlier cohorts of business owners in that a business sale is often an express (or, very often, implied) part of the owner’s retirement plans.

The size of the Boomer retirement wave (and the shrinking pool of children available to continue running these businesses to generate retirement cash flow for their Boomer parents) leads to a situation where the pool of sellers is larger relative to the pool of buyers than it was a generation ago.

A sale to a private equity buyer can be an alternative if your business is large enough to attract interest, but if your business is too small, features a lot of goodwill, or can’t be profitably leveraged, streamlined, and re-sold in a relatively short 3 to 7-year time frame, the private equity market may not be interested.

You don’t need to have read very much by Adam Smith to intuit that this situation isn’t favorable for strong pricing and quick sales of closely held businesses.

What’s a Boomer to do? How can they sidestep the collateral effects of just how large their selling cohort is compared to the cohort of buyers behind it?  Some suggestions are relatively obvious, but still bear repeating:

• Sell the big house or the family business uncomfortably early. Boomers born in 1951 are turning 65 this year, and the Boomer cohort grew year-on-year every year through 1959, which means the supply-demand equilibrium for Boomer asset sales will get worse every year through 2024.The natural human tendency to procrastinate about making difficult decisions means that the comparative advantages of acting even two or three years before others could be quite large, given the demographics in play in the next decade.
• Consider a gift/sale of a family residence. If you can’t sell your house for what you think it’s worth, then shouldn’t your child get a good deal, rather than a stranger? If you have an out-of-town child who won’t get the benefit of the gift/sale, you can update your estate plan to provide an equalizing bequest in favor of the out-of-town child.
• Now, more than ever, build retirement plans with non-business, non-residential assets. Even when the demographic tailwind is favorable, plans that rely on selling an asset for “Price X” at “Time Y” are vulnerable to recession and/or a liquidity crunch.  These plans weren’t ever robust, and now, in this demographic context, they really aren’t.
• Cultivate connections with younger people. I’m often surprised and amused about how much “pre-sale” word-of-mouth activity occurs in the high-end residential real estate market.Now, more than ever, the 43-year old Director at the Fortune 500 company that just moved to town (or that mythic creature, the young radiologist who moved here after the residency in Cleveland) is critical if you’re going to sell your “$800,000 house” for the price you want, on the time frame you want.If your civic, business, community, or charitable activities offer opportunities to meet people a generation behind you, take advantage of them!

Similarly, if you’re a business owner, cultivate younger professionals who might be looking for an exit from corporate America (before they themselves are “exited”).  Get to know middle-market M&A advisors and business brokers.  Start planning for a sale or transition at least three to five years before your intended retirement date.

None of us can change the demographic context in which we conduct business, plan for retirement, and pay taxes.

But until more clients and their advisors give demography the importance it deserves as a planning variable, there will be opportunities for those who do to comparatively outperform.  Be one of those people!

The post The Demographic Context for Asset Sales by Baby Boomers appeared first on Rumls PLC.

Along those lines, this week I enjoyed a long lunch with a close friend who works in the high net worth department of a local trust company.  The conversation turned to how he invests his own money.  Surprisingly, his personal account departs markedly from conventional asset allocation wisdom one often sees expressed in ETF-based “Mini-Swensen” portfolios.  Instead, he owns positions about fifteen individual securities.  He succinctly observed that wealth is built through concentrated positions, and only preserved through broad-based allocations.

Similarly, it called to mind an article I’d read earlier this week by James Ledbetter in The New Yorker, “Is Passive Investing Hurting the Economy?”  Ledbetter’s article discussed a recent paper published by the Olin Business School at the University of Washington in St. Louis. The basic idea was that as passive investing in capitalization-weighted indices increases, price signals corrode, and this creates negative externalities in the real economy.

It started me wondering whether too much passive, low-cost, diversified investing might be a bad thing.  Does this approach guarantee mediocrity?  These questions are delightful wormholes that reward closer consideration – but not today!

What we should consider carefully today is that when a person establishes a trust, they’re opting in to a set of default rules about how those trust assets will be invested.  Sometimes, those default rules are likely to work tolerably well.  Other times, however, they’re a severe mismatch with the person’s goals for the trust.

Let’s play this out, shall we?

Kentucky’s law regarding trust investments requires trustees to act as “prudent investors.”  What does this mean? You’ll find the answer in a statute blandly titled “Standards for bank or trust company acting as fiduciary.”

In relevant part, this statute requires a trustee:

• To act “as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances” of the trust
• To exercise reasonable care, skill, and caution – in context of the account portfolio and as part of an overall investment strategy, which should incorporate risk and return objectives reasonably suitable for the trust
• To diversify the investments of the account unless, under the circumstances, it is prudent not to do so

Nonetheless, the statute also provides that the trustee’s duties as a prudent investor are subject to the rule that in investing trust funds, the trustee has the power expressly or impliedly granted by the terms of the account, and has a duty to the beneficiaries to conform to the terms of the trust agreement directing or restricting investments by the trust company.

It’s worthwhile to unpack these provisions very carefully if you are a person creating a trust to accomplish particular purposes, because they set the default rules about how a trustee will invest trust assets if you don’t provide otherwise.

If you don’t provide otherwise, the trustee is going to act cautiously and diversify the trust investments. If you have strong investment convictions, or if you want the trust to accomplish certain purposes, this may be a problem for you.

For instance, what if you became very wealthy holding a concentrated position?

If so, it’s rather likely that the position will have large embedded capital gains.  If you want the trustee to prioritize capital gains reduction over reducing its own potential liability for holding the concentrated position, you should state so clearly in the trust agreement.

Your concentrated position might be so large that it gives you and your descendants an influential (or even controlling) voice in the company’s governance, management, and dividend policy.  If you want the corporate governance potential of that concentrated position preserved (or expressed in a particular manner), you should likewise make clear provisions for that in the trust agreement.

What if you believe that certain asset classes at certain times (e.g., long-term government debt) are hazardous for long-term wealth preservation at particular times (for instance, in the US from the 1950s through the early 1980s)?

If so, then you’d want to provide careful instructions for the trust’s fixed income investment policy.

What if you believe that certain asset classes aren’t socially responsible (as you define “social responsibility”)?

If so, you’d want to specify which asset classes (e.g., defense contractors, tobacco companies) you want excluded from the trust’s portfolio.

What if the trust’s primary purpose is to preserve a minimum source of financial reserves for a surviving child or sibling, but otherwise, grow purchasing power for grandchildren, nieces, or nephews?

In that instance, expressly authorizing concentrated positions for a portion of the trust’s portfolio might make sense.

As you can see, there is a very broad array of instances when the objectives for a trust and its settlor aren’t well served by the statutory default rules for trust investing.

With thoughtful, customized drafting, however, you can opt out of these rather bland, “down the middle of the fairway” default rules, and instead use the trust to carry out your investment philosophy when you’re not there to do it yourself.

Because trustees tend to be even more allergic to their own liability than they are to investment risk, I believe the pragmatic way to incorporate your own investment philosophy into a trust agreement is to provide for an advisory committee to the trustee.

The advisory committee would be authorized to direct the trustee on matters of asset allocation, security selection, and other investment decisions – and, critically, the trustee would be released from any and all liability for acting at the direction of the advisory committee.  Then, the trust agreement would provide clear instructions to the advisory committee customized to reflect the settlor’s investment philosophy and objectives.

This approach makes sense even if, initially, the trustee and the sole investment advisor are the same person, because in the future, a replacement or successor trustee might require directions from the advisory committee.

The post Customizing a Trust to Reflect Your Own Investment Philosophy appeared first on Rumls PLC.

Job loss after age 40 (and particularly after age 50) presents heightened risks compared to those faced by younger workers. These risk factors were mentioned in a recent New York Times article discussing a research study by Connie Wanberg of the University of Minnesota and others. Intrigued by the NYT coverage, I read Wanberg’s study in full (you can too, here).

The study has tiny print and lots of statistics, but even so, a picture emerges that isn’t pretty.

Key findings include:

• Finding a replacement job is harder after age 50.  In one study Wanberg cited of over 3,000 workers who lost jobs during 2011, 2012, and 2013, 67% had become reemployed by 2014. But – within the study group, only 58% of workers over age 50 were reemployed – compared to 72% of workers under age 50.
• Finding a job takes longer after age 50.  The data set from that same study indicated that during any particular week of unemployment, each additional year of age lowered the odds of finding a job by 1.3%.
• After age 50, it’s harder to find a job with the same compensation.  In the study data set, workers below age 30 who found jobs landed in positions paying (on average) 37% more, and replacement jobs for workers between ages 30 and 39 paid 7% more (on average).  Workers over age 50, however, who found replacement jobs earned only 1% more on average.

The study tried to tease out the factors that make the job search landscape more difficult after age 50, and it focused on two main issues:

How does age correlate with changes in any particular person’s array of job skills and job-hunting resources? And, how does age determine exposure to environmental and cultural issues like changes in employment trends, technology, and employer stereotypes?

The study observed that compared to younger workers, older workers are less likely to be willing to relocate, which causes slower reemployment.

It also noted that social networks tend to shrink as workers age – reducing access to the informal job market and making it harder to match workers with opportunities.

Another issue Wanberg discussed very perceptively was how older workers are at heightened risk for skills obsolescence, given their tendency to have longer job tenures.  Older workers also tend to have more “firm-specific capital” than younger workers – for instance, deep knowledge of one employer’s people, products, and history.

This capital is valuable to a particular firm, and tends to support higher compensation for older workers – but if the older workers are displaced, other employers tend not to value the former employer’s firm-specific capital, making it harder to find a replacement job and avoid a pay cut.

Older workers are more likely than younger workers to work in declining industries, often due to structural economic change since the time the older workers began their career.  When these declining industries shed workers, more job seekers are competing for fewer job openings, which causes longer job searches and lower-quality replacement jobs for the affected workers.

Longer average job tenure for older workers often means a longer time has passed since they have searched for a job, which may leave the older workers unfamiliar with current job search tools, tactics, and interviewing norms.  This can trigger a vicious cycle, if these workers feel more uncertainty and concern about the job search process, reducing the intensity and efficacy of their search efforts.

So, given this landscape, what can you do in the career management area to increase your odds for a quick and successful rebound if job loss affects you? I think the Wanberg study suggests several responses:

• Don’t stop networking. Even if your job doesn’t require you to “always be closing” and even if you don’t want to change jobs, you should “always be networking.”  This doesn’t have to be endless rounds of business card swaps at the Chamber of Commerce, but it should be some way of intentionally nurturing meaningful relationships with people you find interesting, who are doing interesting things (and not just lunch every day with your three best friends in the offices down the hall).
• Cultivate new connections and maintain old ones before (ideally, years before) you might need them.
• If you work in a declining industry, think about the ones that are growing.  Are they “adjacent” to your industry? Do they draw on skill sets similar to yours? Who do you know working in those growing industries? What can you do to improve relationships with those people?
• Avoid depreciation of your network by intentionally cultivating people younger than you.
• Take aggressive advantage of any tuition reimbursement or executive education opportunities your employer provides.  If those opportunities aren’t employer-provided, go get them yourself.

The Wanberg study also has financial planning and estate planning implications:

• It may be wise to reconsider conventional advice about a six-month emergency fund. If you are highly compensated and in mid-career, or late-career, finding a replacement job will likely take (much) longer, so your emergency fund should be commensurately larger.
• If you’re under age 59 1/2 and don’t have access to capital outside a 401(k) or IRAs, your career problems can trigger income tax problems. Withdrawals from these plans will incur a 10% income tax penalty, and create income tax liability at the most unwelcome of times.
• You might consider permanent (cash value) life insurance as a very effective place to “park” the cash you might need if you face a mid-to-late career job loss, but don’t want to sit around idly in an era of near-zero yields on bank deposits.  Cash value in many policies accrues tax-free dividends at rates comparable to those on high-yield bonds, yet is accessible within a few days through policy loans.  These loans don’t affect your credit rating, and don’t require any credit checks.  Receipt of the policy loan proceeds isn’t treated as taxable income, and there are no income tax penalties.
• If you don’t have enough wealth accrued yet to finance your own retirement, be cautious about funding (or overfunding) Section 529 plans.  Loans are available for college, but not to cover lifestyle burn rate while you job search. As you get closer to a normal retirement date without an unwelcome career disruption, you can always help a young adult child repay those loans.
• Likewise, until you have your own retirement fully funded, be cautious about estate planning strategies that move wealth irretrievably outside your control.  Spousal limited access trusts or completed gifts to self-settled asset protection trusts may be preferable to funding grantor retained annuity trusts or charitable remainder unitrusts.

Even as the post-2009 recovery ages, the U.S. economy still seems to be pretty resilient, and has shown considerable strength relative to the rest of the world. But as the recovery ages, so too are we. Don’t panic, but be mindful of how aging influences your job skills, options, and situations.  Even when the pictures from your 20s have become dated from a fashion standpoint, keep developing your human capital, first, foremost, and always!

The post Sidestepping Risks From Job Loss After Age 50 appeared first on Rumls PLC.

In that sort of environment, credit shelter trust planning for married couples felt almost mandatory.

We live in a very different world today. The Internet, no longer new, has gone social and mobile. A Clinton third term may occur.

The estate tax exemption is $5.43 million and indexed for inflation – with the result that 99.8% of estates won’t be taxable.

Yet, as we’ve discussed recently, taxes weren’t the only reason to use trusts.

One of the most significant non-tax reasons to use a trust is planning for a surviving spouse’s remarriage.

What are the risks to family wealth when a surviving spouse remarries, and how can using a trust (and designing that trust thoughtfully) reduce them?

• Asset Leakage to a New Spouse. We’ve covered these risks in depth. Simply put, Kentucky’s elective share statute allows a surviving spouse to elect against their deceased spouse’s will, and instead receive one-half of their deceased spouse’s probate estate (except real estate, in which a surviving spouse has only a one-third elective share).

Here’s why the elective share statute is a problem when a trust wasn’t part of the estate plan: the surviving spouse might get remarried, without getting a prenuptial agreement.

If your spouse has inherited outright from you, and doesn’t get a prenuptial agreement before remarrying, and their second spouse survives, the second spouse has strong economic incentives and the legal right to divert half of the inheritance your spouse received from you away from your descendants.

Does that sound like a good outcome to you? (I’d expect it doesn’t.)

Placing a spouse’s inheritance into trust solves the elective share problem, because assets remaining in the trust at your spouse’s death won’t be included in your remarried spouse’s probate estate – the asset “bucket” that’s vulnerable to the elective share statutes.

• A Surviving Spouse as Gold-Digger’s Target. You don’t have to follow the media in any particular depth to see numerous examples of wealthy widow(er)s finding themselves remarried under circumstances that may not relate entirely (or at all) to true love.

When a substantial inheritance is held in trust, it’s much easier for a surviving spouse to be more confident that a suitor is interested in him or her, and not their wealth.

It also makes it much more likely that relationships among a surviving spouse, his or her children, and their new stepparent won’t be strained by fear of disinheritance.

• New Half-Siblings. If a surviving spouse has or adopts additional children, the new spouse is likely to seek ways to increase inheritance for those children at the expense of their child’s half-siblings.

Bluntly: if a surviving spouse’s inheritance isn’t held in trust, and the spouse has additional children, the deceased spouse’s children are likely to eventually inherit less.

Using a trust is a first step to protect the long-term flow of wealth to descendants even if a spouse remarries, but it shouldn’t be the last.

How the trust is designed can be just as (or even more) important. Trust design issues to consider carefully include:

• Who Should Control the Funds? If your surviving spouse is trustee of the trust when he or she is remarried, practical risks present themselves. Will the new spouse encourage your surviving spouse to be (overly) generous in distributions? It’s not unlikely.

A simple solution to this potential problem is to provide that a surviving spouse may serve as trustee of the trust for his or her benefit only when not remarried.

• Should a Spouse’s Inheritance Provide “First” or “Last” Dollar Spending?

Most married couples I represent want a surviving spouse to be provided for as generously as possible, and of course this instinct makes sense.

But if a spouse remarries a wealthy person (or a person who likes the finer things in life), should generous distribution standards in a trust directly or indirectly subsidize an enhanced lifestyle for the new spouse?

Will generous distribution standards allow rapid depletion of the trust, and accumulation of wealth outside the trust – wealth which might pass to the new spouse, or to new children?

To reduce these risks, a trust could provide that at any time a surviving spouse is remarried, the spouse himself or herself couldn’t be trustee, and that the successor trustee should consider the availability of other assets and income available to support the spouse when making distribution decisions.

• What Control Should a Spouse Have Over Ultimate Flow of Trust Assets?

Trusts often include powers of appointment allowing a beneficiary to direct the distribution of remaining trust assets when the beneficiary is no longer living.

When narrowly drafted, powers of appointment often limit the “permissible class” of appointees to the descendants of the person whose wealth funded the trust.

When drafted more broadly, powers of appointment may permit assets to be appointed not only among descendants, but to any person or entity.

(Sometimes the person holding the power is allowed to appoint to themselves, their estate, their creditors, or the creditors of their estate – a general power of appointment. Other times these potential appointees are excluded – a limited power of appointment.)

Whether general or limited, broadly written powers of appointment provide valuable flexibility – as, for instance, when a surviving spouse might choose to appoint assets to support worthwhile philanthropic objectives, without unreasonably depleting descendants’ inheritance.

When a surviving spouse remarries, broadly written powers of appointment can lead to unintended consequences and discord.

A surviving spouse allowed to appoint trust assets to any person or entity certainly might direct them away from descendants in favor of a new spouse, or to additional children, or to a new spouse’s children.

Although imperfect, potential ways to reduce risks relating to powers of appointment held by a spouse include limiting permissible appointees to descendants and/or charities, and providing that at any time after a spouse has remarried, the spouse may only appoint to descendants, rather than to any person or entity.

Remarriage of a surviving spouse may not be a topic spouses want to discuss in depth, but at the very least, it’s one their advisors should keep in mind, and seek opportunities to plan for thoughtfully.

The post Designing Trusts for a Surviving Spouse’s Remarriage appeared first on Rumls PLC.

I believe examples are everywhere about how Smith was correct – ranging from California water shortages and student loan debt, to tax policy and white collar crime.

If incentives matter in these areas, shouldn’t they matter in designing trusts that maximize successful outcomes for descendants?

Clients often have an instinct that “incentive trusts” may improve outcomes for their descendants.

While I don’t discourage this instinct, I do try to channel it.

Precisely because incentives do matter, it’s important to design incentive trusts very thoughtfully.

 Incentive trust design begins with several questions:

• What do you want beneficiaries to become?

Usually, answers center on the general theme of “becoming productive, engaged, flourishing adults.”

• What do you want beneficiaries to do?

Certain achievements and behaviors tend to correlate with highly successful, fulfilling life outcomes – and clients often want to encourage these.  Examples include the obvious – finishing college and/or graduate school, avoiding debt, working productively, dodging divorce, and staying healthy.

• What do you want beneficiaries not to do?

There are obvious pitfalls clients want beneficiaries to avoid, often including substance abuse problems, criminal activity, serial failed relationships, and workforce non-entry or failure.

Once a family develops clarity on the key questions above, they and their advisors can consider a wide range of incentive trust design options, including:

• Delay distributions until certain age(s).

Reducing distributions (or delaying them entirely) until a beneficiary reaches a particular age (for instance, 30, 35, or 40) will have incentive effects on career choice, attention to studies, and workforce effort when a beneficiary is young.

It’s easy for young adults to overestimate the long-term financial security provided by a particular amount of assets.

Remember when you were in college – didn’t $100,000 seem like an almost “infinite” amount of money? Now, at mid-career or nearing retirement, perspective changes, doesn’t it?

Because careers last so long, and the compounding effects of income differences can grow so large, avoiding distortions in beneficiary career choice because they (incorrectly) feel they “don’t need to earn very much” can be a very positive outcome of delaying distributions until somewhat older ages.

• Delay distributions until certain accomplishment(s).

A family might want to use the “carrot” of future trust distributions to encourage a beneficiary to complete college and/or graduate school in a timely manner – avoiding the “perpetual student” problem.

Alternatively, a very wealthy family with beneficiaries who will not need to work for economic reasons might, nonetheless, want beneficiaries to gain experience and perspective from paid employment for while, before receiving a large inheritance.

A family with a closely held business which they hope descendants will enter might require the child to work in the business (or, more commonly, gain experience working outside the business) before receiving distributions.

• Allow a beneficiary to be his or her own trustee on certain conditions.

Trusts can provide asset protection from creditors and divorce that can be difficult for even the most responsible and competent beneficiary to replicate on his or her own.

Even so, trusts are also commonly used to protect assets from being depleted by bad beneficiary decisions.

With these issues in mind, a trust could be designed to initially use a third-party or corporate trustee, but permit a beneficiary showing maturity and stability to be his or her own trustee.

Although there’s no airtight way to measure maturity and stability, one can try.

For instance, a person who has stayed out of jail, avoided bankruptcy, completed college and/or graduate school, and gotten and stayed married to the same person for a long period is more likely to be stable than a person who has done none or few of those same things.

Once a family settles on attributes of maturity and stability that fit its goals and values, the qualifications for a beneficiary to be his or her own trustee can be written into the trust agreement accordingly.

• Only permit distributions for certain purpose(s).

If a family wants to dilute the effects money will have on their beneficiaries, they could limit distributions to particular purposes – for instance, funding educational expenses, or paying for unusually large health care bills.

Because other purposes (such as vacations, or buying a larger house, or retiring early) wouldn’t be permitted purposes for distributions, beneficiaries might be less likely to make career choices or design lifestyles that families believe aren’t desirable.

• Reduce distributions when a beneficiary is not working.

Wealthy clients often want to make sure that beneficiaries live in safe circumstances with a certain dignity (a “minimum lifestyle”) even if they turn out to be very low functioning (for instance, due to mental illness, substance abuse, or perhaps just outright laziness).

On the other hand, they usually don’t want a beneficiary’s incentives to work productively to be reduced or removed because of trust distributions.

In other words, like Warren Buffett, they want their children to be rich enough to do anything, but not so much that they could do nothing.

One way to balance these concerns is to provide for a trust to make an inflation-adjusted minimum distribution (for instance, $50,000) at any time a beneficiary is working age and not disabled or providing full-time care to minor children, but make the trust’s distribution standards much more generous if a beneficiary is working, past ordinary retirement age, disabled, or providing full-time care to minor children.

• Use distributions to “match” income from a job or a business.

It’s a very values-driven decision whether a wealthy family prioritizes descendants being economically successful (e.g., investment banker) or instead perhaps just being productive and happy (e.g., boarding school teacher).

If a family does want to transfer wealth to descendants, but still provide ordinary (or even enhanced) incentives for wealth creation by beneficiaries, a trust can certainly be designed to do that.

For instance, a trust could distribute a fraction (or a multiple) of a beneficiary’s documented W-2 income, or distributions received from a closely held business. If a family was ambitious, and tolerant of complexity, the extent of matching could be varied at different levels of income.

Obviously, trust design could differ substantially, depending whether a family’s goal was for children to amass as much wealth as possible, or instead for children to achieve a certain level of income, and then focus on other priorities (such as health, creative pursuits, or relationships with friends and family).

• Reduce or stop distributions when a beneficiary isn’t substance-free.

It’s not too difficult to design a trust that provides substantial financial incentives for sustained recovery from substance abuse problems. Testing for substance use (paid for by trust assets) and negative test results could be a condition to receive distributions.

In addition, the trustee could be expressly indemnified from trust assets against all costs (including legal fees) relating to any effort by a beneficiary to challenge the trustee’s distribution decisions.

The result would be that a disgruntled (and, possibly, addicted) beneficiary would be depleting his or her own eventual inheritance if the beneficiary sued the trustee.

Based on what a family believes is best for each beneficiary, the incentive trust design options outlined above (along with others) can be combined in a myriad of ways to customize incentive trusts with a personalized, individualized approach.

And that raises a larger question: are incentive trusts a good idea?

I believe that’s a decision for each family to make – and not one for a trust and estates attorney to impose.

I’ve seen many situations where incentive trusts weren’t used, but very difficult and unpleasant outcomes could have been avoided if they had been.

I’ve seen other situations where incentive trusts were poorly aligned with a beneficiary’s actual circumstances, and beneficiaries were very resentful.

At a minimum, families considering whether an incentive trust might fit their circumstances should know their wide array of options, consider them carefully, and apply them thoughtfully.

While musing on those issues, they might consider a question Smith posed in The Theory of Moral Sentiments:

What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?

The post Designing Incentive Trusts: Adam Smith and The Wealth of Beneficiaries appeared first on Rumls PLC.

As non-tax issues in trust design assume greater relative importance, what factors should a family consider when deciding whether to use a trust?

If they will use a trust, how should that trust be designed?

To answer these questions, a family should do the best it can to look ahead to its future, and make reasonable (but unavoidably imperfect) estimates of what its future might look like.

That takes us back to the Quadrant at the heart of a Life Cycle approach to estate and financial planning, with its four domains of Facts, Forecasts, Life Stages, and Unexpected Events.

The decision whether or not to use a trust to hold an inheritance begins with a family’s Facts.

• Who would be receiving the wealth?

The array of options includes the obvious, but thinking about the beneficiaries is the right place to start.

Common potential inheritors include a widow(er), a surviving spouse and children, adult children, nieces or nephews, parents, siblings, and/or charities.

• What will the trust’s funding level be?

Funding is a tremendously important Fact underlying good trust design.

Funding often occurs during estate administration, when probate and non-probate assets (such as retirement accounts and life insurance proceeds) are gathered, and transferred to the trust.

A quick review of a family’s balance sheet will suggest the anticipated potential funding level for a trust.

Funding is only the first stage of a trust’s life cycle; the stage that follows is administration – investing the trust’s assets and making distributions to its beneficiaries.

Designing a trust well requires taking into account the Life Stages of the beneficiaries during the trust’s term.

For instance, if clients are a married couple with young children, the trust might need to “financially parent” the children through primary and secondary school, and then possibly college and graduate school.

In contrast, if a married couple had adult children, the trust might be protecting assets for those adult children to help boost the children’s retirement savings.

It might also be protecting against claims of a child’s creditors, or against loss of assets to divorce by preventing commingling a child’s inheritance with marital property.

The Life Stages of a trust’s beneficiaries will suggest how long the trust should last, as well as the “exit strategy” for trust assets – the distribution stage of the trust’s life cycle.

Examples of distribution options for trust assets include:

• All at once. The trust might distribute its remaining assets among beneficiaries when its youngest beneficiary attained a specific age.
• Stages – at ages. The trust might make partial distributions when a beneficiary attained particular ages (such as 30, 35 ,and 40). This approach fits when clients believe maturity in financial decision-making comes with increasing age.
• Stages – at times. The trust might make partial distributions at particular times (such as 5, 10, and 15 years after funding). This approach fits when clients think good financial decisions come with opportunities to learn through experience, or even by making poor choices about the use of early distributions.

Another key variable in deciding on the best distribution design for a trust requires a Forecast of the remaining value of assets in the trust at the time of distribution, the number of beneficiaries at the time of distribution, and – by extension – the likely amount of distributions to each beneficiary.

Like any Forecast, uncertainty can’t be avoided, but reasonable forecasts aren’t impossible.

One can consider plausible investment returns and the likely costs of Life Stage events that will be funded with trust assets (for instance, college, or a surviving spouse’s costs in retirement).

It’s important to align Forecasts of a trust’s remaining assets with its distribution design.

If a trust would be funded with $5 million and its pricipal purpose would be to pay for college and graduate school for a couple’s sole child, an outright distribution of remaining trust assets when the child attains age 25 may not be wise.

Similarly, if a family has four children, none over age 10, and the trust would be funded with $1.5 million, keeping remaining assets (after all the children are raised and educated) in separate lifetime trusts for each child may be more complicated than necessary.

Trust design should also incorporate Unexpected Events – occurrences that aren’t uncommon in the overall population, but tend to take any individual or family by surprise (such as divorce, an illness, the birth of a special needs child, or a spouse living much less than their life expectancy).

Simply put, the more Life Stages a trust’s administration will cover, and the more assets it will hold, the more closely clients should consider ways to make the trust adaptable to Unexpected Events.

Examples of planning for flexibility in the face of Unexpected Events include decanting, powers of appointment, and defining precisely who may be a qualified trustee in various circumstances.

With these variables in mind, it’s possible to evaluate on an individualized, case-by-case basis whether and how a trust might be helpful – even in situtations not dominated by estate tax issues.

Future posts will explore some of these situations, which include:

• Anticipating a spouse’s remarriage
• Planning to conserve family assets when a surviving spouse is very elderly
• Protecting family assets against a child’s divorce
• Using a trust as a substitute for a prenuptial agreement
• Defending against sons- or daughters-in-law who make unwise business or spending decisions
• An “asset protection wrapper” for a child’s inheritance
• Protecting a family’s core capital for grandchildren, when children seem unlikely to make good financial decisions
• Incentive trusts to encourage particular behaviors and choices by descendants

For each of these situations, when clients and their advisors thoughtfully consider Facts, Forecasts, Life Stages, and Unexpected Events, they’ll likely reach better estate and financial planning outcomes.

The post Design Factors For Your Family’s Trust appeared first on Rumls PLC.

I also work with “Inheritors” managing wealth built in prior generations for the benefit of descendants.

Although every instance has unique aspects, in general, I find that Wealth Creators have conflicted feelings about what being Inheritors will mean for their descendants.

They often tell me they don’t want their children to have “too much” wealth.

Obviously, this presents a difficult question: how much wealth is too much? Answers to that question vary.

Amidst that variance, a very common instinct is that even if they aren’t confident about whether their children (or, instead, charity) should receive the bulk of their wealth, they do want to leave assets in trust to pay for their descendants’ education.

This instinct makes a tremendous amount of sense, and I never discourage it.

Education is a critical component of human capital formation, and human capital has often been the unique element in why any particular Wealth Creator built such success.

If funds are going to be left in trust for descendants’ education, what should the key provisions of those trusts be?

If a family doesn’t have detailed preferences, an education trust will probably be written to provide for the “education” of descendants.

A more specific trust might expressly include independent primary and secondary schooling, along with undergraduate and postgraduate education.

This is all well and good but (for Wealth Creators especially) it sometimes raises concerns about descendants becoming “professional students.”

No one wants to be anti-intellectual, but it is often true that certain programs of study feature a higher return on investment than others, and that the costs of various programs (even those in the same field) vary dramatically.

In the last several years, I’ve seen Wealth Creator clients take two particularly thoughtful approaches to reducing risks posed by the “Professional Student Problem.”

You could describe the first approach as the “State University Funding Cap.”

A client taking this approach might limit annual trust distributions for education to the then-current combined tuition, room, and board charged by the in-state public flagship university where the beneficiary is then living. (For reference, that amount is $26,700 at the University of Kentucky this year.)

The trust might also provide that such distributions would be made for only four years (for undergraduate work), or for the standard length of the graduate program that was being funded.

A second approach is “Loan Payoff Upon Completion.”

With this approach, a beneficiary might assume student loans, but if a program was completed on time (and perhaps with a minimum GPA), then the trust could make distributions to pay off the loans.

Sometimes Wealth Creators want to create a multi–generational educational “endowment” for their descendants (or, perhaps, descendants of siblings).

I think trusts written for this purpose are best designed when they anticpate the following trust administration issues:

• If a trust is only intended to fund beneficiaries’ education, then there may be years (or periods of many years) when no descendants require any distributions for education, and it might make sense for the trust to acknowledge this.
• It’s very likely that certain branches of a family will have more descendants than other branches. Settlors should consider actual (or perceived) fairness issues that may arise as time passes, and a family tree changes.
• Certain beneficiaries may want (or require) expensive education (including graduate school) and others might not. If potentially unequal distributions aren’t seen as a problem, the trust should expressly allow this inequality.
• In most situations, the eventual expansion of a pool of descendants and trends in education cost inflation will likely leave the trust substantially depeleted. An inflation-adjusted minimum floor (for instance, $250,000 or $500,000) below which the trust will be distributed outright to family or charitable remainder beneficiaries may make very good sense.
• These “family educational endowment” trusts tend to last a long time. For that reason, using a corporate trustee may make more sense than using an individual trustee. If the trust is intended to fund education costs of more than one branch of a family, any particular family trustee might be biased, and using a corporate trustee can increase actual (and perceived) fairness in trust administration.

It’s been interesting working with both Wealth Creator and Inheritor clients to help them create education trusts.

You won’t often meet a client with strong opinions about allocations between principal and income, or about estate tax apportionment.

In contrast, almost everyone tends to have strong opinions about what they want for education trusts.

It’s natural that these opinions would reflect their own experiences and values. I think that’s appropriate.

After all, isn’t education all about one generation passing to the next not only knowledge, but also experiences and values?

The takeaway for clients and their advisors is that personalized design of education trusts so that they fit a particular family’s needs and situation is possible – and it may be one of the most important “non-tax” estate planning issues.

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