As discussed in Parts I and II of our series on underutilized wealth, underutilized assets should almost always be transferred to the next generation. Here is some more information on recognizing and managing underutilized wealth.
Inheritances That Will Not Be Utilized:
We sometimes encounter sudden heirs who have planned for themselves, saved appropriately, and are in total control of their income and expenses. These clients may be quite surprised to encounter a significant inheritance. If the inheritance will not impact spending or improve lifestyle, perhaps the inheritance represents underutilized wealth and can be redeployed. It is important to ask this question early, as it may be possible to disclaim the asset to a younger generation. A significant warning however: If the inheritance is outright, (a disclaimer is by definition nearly always outright) it may not provide the donee with adequate protection from divorce, creditors, and other issues. We often prefer to see that the client receive the inheritance, and then we work through the gift tax issues to transfer to the next generation in a more advantageous manner.
The Client’s Children Have Needs and Opportunities to Build on the Nonfinancial Sources of Family Wealth:
These following indicators of underutilized wealth have more to do with need rather than availability, but if the client is bringing up the question, they generally believe they have underutilized wealth. As long as we appropriately help them analyze all of their needs, there may well be an opportunity for redeploying some of this underutilized wealth. These questions come in the following forms:
- Has a client ever suggested to you that their children are putting off having children for financial reasons?
- Has a client ever suggested to you that a child or grandchild would like to increase his or her intellectual capital through graduate school or some other educational endeavor, but does not have the resources?
- Has a client ever indicated to you that their children constantly worry about money, or experience financial-related stressors in their marriage?
- Has a client ever indicated to you that their child has a great desire or opportunity to buy into a partnership, buy into their employer’s business, or start a business, but simply lack the financial capital?
- Has a client ever mentioned a child who would like to stay home and raise their own children, but feel they need to work to make ends meet?
- Have you ever encountered a client whose children want to give back to the community, provide for their in‑laws or a family member with special needs, or do more for their church, but lack the financial capital?
Presuming your client does have underutilized wealth, these questions might be indicators that the client would like to redeploy some of their existing wealth to a future generation, and is asking, “How?” There are often reasons the client has not acted previously. They may be concerned the money will be used inappropriately. They may fear loss of control or be hesitant to help one family member while excluding others. These are all important issues that can be solved with appropriate planning.
A Desire to Create a Private Foundation or Give to a Community, Church, School or Public Foundation:
Some clients have a strong desire to give back, but they are unsure of the best means of achieving this goal. In some situations, these clients may be able to keep current cash flow but dedicate these assets to these spiritual capital needs (charitable remainder trust) or may want to siphon off a portion of their current income for these philanthropic needs but redeploy the assets to the children upon death (charitable lead trust). Others simply have an abundance and want to share it with their community, but are uncertain how to do so (family foundation or other charitable fund).
Legacy Counselors is here to help. If you recognize one or more clients described above, but are unsure how to discuss this with the client, give us a call. We will be happy to assist.