Teach them money management skills when they're young

Business Times - 29 Jul 2009

By PAUL SULLIVAN

THIS is the summer of reviling the rich. The financiers at Goldman Sachs got a populist drubbing after the bank reported record quarterly earnings and analysts began predicting average bonuses of US$700,000 an employee at the firm this year. Now, Congress is debating whether high earners should be hit with a surtax to pay for health care reform. In states like New York and California, that could mean that top earners are paying more than 50 per cent of their income in taxes.

But the rich and the not-so-rich do have something in common this summer: worrying about their children's financial future. This may come as a shock to those middle-class Americans who imagine wealthy parents sunning themselves by their infinity pools, confident that their children, having been given every opportunity, are on their way to productive lives.

In truth, the image is fairly rare at this point. What is more common among the wealthy is their fear that the lives their children have known, and the futures they expected, may be gone.

'The notion that you're entitled to goodies has to be dispelled,' said Fredda Herz Brown, a partner at Relative Solutions, a consultant who works with family businesses. 'They really do think life is going to continue as it has. But most of them are not getting jobs, no matter what their parents do.' While the wealthy are in a better position to help their children financially, having money doesn't guarantee that their child will be responsible and productive.

So that leads to the question: How can parents help children with a healthy sense of entitlement adjust to the new economic reality?

Emotional reassurance: The first thought that pops into many parents' heads when they worry about their children is bailing them out. But the best thing many parents can do, particularly those with children who are not asking for money, is to set the right example.

While children may be idle this summer, many parents are out of work, too, and casting about for ways to pay the bills. If they mope around, their children are going to pick that up. If, on the other hand, they discussed what has happened over the last year, their children will be better equipped to make their own financial decisions.

'The patriarch can say, 'This is the risk I took, this is how I felt, these are the lessons here',' said Evan Roth, founding partner of BBR Partners, an adviser to ultra-high net worth clients. 'It's, 'Look at how I'm handling this - I'm teaching you a valuable a lesson here'.' That lesson is often the need to work hard if you want to earn money. Ms Herz Brown tells the story of a financial services client who got used to flying on private planes. When his role at work was reduced, he started spending less time on jets and more time at home with his teenagers.

'He had a sense that too much came to them,' she said. 'It came from a basic belief that what he had created for his kids was this sense that everything comes to you.' So he made them look for summer jobs. And when they couldn't find any, he made them take odd jobs to earn money. He also gave them a budget for school clothes and other incidentals and made it clear that if they budgeted poorly, they were not getting more money.

The point was that he recognised he was enabling his children's sense of entitlement, she said. While his children will probably never want for money, he realised his actions had been just as indulgent as a parent who gives in to his child's every request for fast food.

Financial planning: There are, of course, many reasons to give money to your children. A popular one during the bull market was estate planning - the more you could pass on while you were alive, the less subject to estate tax later.

One of the most popular structures during the bull market was a grantor retained annuity trust. This arcane-sounding trust was predicated on assets going up. The idea was that parents could put an asset they thought would appreciate into the trust for a set period of time, usually two to 10 years. At the end of that period, their child would get the appreciated value tax-free, less a small interest payment paid to their parents.

Now that most asset values have gone down, these trusts look as if they have failed. But there is a chance to salvage them. The grantor can swap out the original asset for one of equal value without penalty and start another trust with the original asset, if he believes it unfairly lost value.

Rich Kohan, partner at PricewaterhouseCoopers Private Company Services practice, said people who set up the trusts should take advantage of the opportunity. 'If the asset has dropped in value, it's likely not to leave anything for the benefit of children,' he said.

Then there are trusts set up for reasons other than tax savings. Joan Crain, senior director of wealth management strategies at Bank of New York Mellon, said she had seen an increase in older clients setting up trusts for their adult children.

'Their children are in their late 30s to 50s, and they're not good stewards with money,' she said. 'Parents want to protect them from creditors but also ex-spouses, even if the children are happily married or not married.' Money put in trust is doled out to the beneficiaries and kept away from creditors, but it is not shielded from estate taxes. That people are employing this strategy, though, should be a stark lesson to parents: Teach money management skills to your children when they are young.

Practical support: In tough times, parents may need to set aside their estate plan and bail out their child. One way parents or grandparents can help without seeming intrusive is to cover all medical and education costs for their children and grandchildren. If they pay the hospital or school directly, they can transfer the money without incurring gift tax.

Separately, if a husband and wife pool their annual gift exclusions, they can give up to US$52,000 a year to a child and his spouse to help make up for a lost job.

'Parents worry it's humiliating,' Ms Roth said. 'But paying their mortgage is not a direct handout. It's the same thing, but if you don't see it, it doesn't affect them as much.' On the positive side, this may be the right time to finance a child's entrepreneurial idea.

'The consensus is the fortunes of tomorrow are going to be made today in this downturn,' said Mary Duke, head of private wealth solutions for the Americas at HSBC Private Bank.

The key is not to give your child a handout. Ms Duke suggests setting up a board of advisers to look over the plan and provide assistance with framing and carrying out the idea. This takes the child's request out of the realm of asking Mom and Dad for money and into the arena of an actual business plan.

'It's important kids understand budgeting,' she said. 'Everyone is more focused on living within their reduced means.' If a parent can instill that discipline in a child, then the rest may just fall into place\. \-- NYT