Author: Mitchell Kauffman, Managing Director, Certified Financial Planner™

As managing director and owner of Kauffman Wealth Services, Mitchell Kauffman has been providing wealth management and financial advisory services to his clients for over 25 years. With offices in Santa Barbara and Pasadena, Mitchell’s practice serves the needs of retirees, business owners, corporate executives and other professionals.

ILIT As An Effective Estate Planning Tool

Protecting one’s estate from creditors, predators, in-laws, and outlaws is a key reason clients with larger estates may consider establishing an Irrevocable Life Insurance Trust, or ILIT.

Acronyms can be mystifying, so let’s start with a definition.  An ILIT is a trust wherein the grantor gifts assets (and thereby gives up all incidence of ownership) so that the ILIT itself becomes the owner of the asset(s). That effectively removes the asset(s) from inclusion in the grantor’s estate.  So if all goes as it should, upon death there could be less or no estate taxes because the estate is smaller.  This makes the ILIT an essential tool for financial and estate planning.

As with many things that sound too good to be true, there are downsides.

1. Benefits of Ownership

Top is that the grantor typically also irrevocably forfeits the incidents of ownership.   This may include control as well as economic benefits such as cash flow.  The extent to which this occurs may depend on state law and the trust language.

2. Pull Back

If an individual owner dies within three years of gifting the asset, the value of the asset is pulled back into the estate for tax purposes.  It is important to remember that it is the death of the owner, not the insured, that influences the clock for this three year rule.

Depending on the client’s goals, ILIT’s often have either one or both of these objectives:

3. Liquidity

If the estate size is large enough to potentially be taxable, an ILIT can provide cash at death that could be used to pay estate taxes and estate settlement costs.  Under this scenario, life insurance on either one or both spouse’s lives is often used as the funding vehicle.  This contrasts with life insurance that is owned by the grantor and would thus be included in his or her estate for tax purposes.  It also provides a leveraged effect in that the dollars paid for premium are typically a fraction of what the actual death benefit can be.  The goal is to make sure the estate has sufficient liquidity so there is no pressure to liquidate assets at an inopportune time just to settle the tax bill.

4. Estate Reduction

Since an ILIT can hold virtually any asset of value, another goal may simply be to transfer the asset out of the estate.   This will make the estate smaller at death and thus subject to less or no estate taxes.  The strategy can be even more effective if the asset is expected to appreciate in value, since that appreciation would hopefully be out of the grantor’s estate and therefore also not subject to estate taxes.

So if the husband owns an insurance policy on his wife, as an example, and she dies, the proceeds that would be available to the estate at that time would not be subject to estate taxes.  However, upon the husband’s subsequent death, the value would be included and possibly taxable.

Using life insurance within an ILIT can offer an alternative.  First, life insurance proceeds are generally received income tax free by the policy beneficiaries.  Also, there can be creditor protection, since in many states life insurance proceeds paid to a named beneficiary are not subject to the claims of the policy owner’s creditors.  The specific rules of course can vary from state to state.

If the estate is named as beneficiary, the proceeds are still paid income tax free.  However by doing this we have converted a non-probatable asset into one that is subjected to the probate process.  This can create several disadvantages, including:

  1. Expenses are greater due to attorney and court fees;
  2. More time is needed to go through the probate process as opposed to just a beneficiary payment;
  3. Estate creditors could have access to the insurance proceeds depending, again, on prevailing state laws.  Hence a reason we would not usually recommend the estate as beneficiary of an insurance policy.  This also speaks to the prudence of always naming a contingent or secondary beneficiary;

In short, an ILIT is really a financial bucket designed to hold assets.  In dealing with life insurance, the policy’s value is not the insurance proceeds but rather the cash value or the market value, as determined by an IRS formula.  So when dealing with existing coverage, it is a simple matter of having the owner transfer or assign the policy to an ILIT by filing a change of policy ownership and beneficiary form with the insurance company.  Once the ownership change has been recorded by the insurer, it is also important to now name the ILIT as the new owner as well as the policy beneficiary.  Since this is a gift, a gift tax return form 709 should also be filed with the IRS even if there is no tax due.

Clients often ask how gifting an insurance policy to an ILIT could affect their annual gift exclusion.  In considering this, it is important to remember that the exclusion applies to present interest gifts which can be enjoyed now.  By contrast, gifts to an ILIT are of a future interest so they do not typically qualify for the exclusion.

As an alternative, we use a technique called the “Crummey” provisions.  The Crummey provision is based on prior case law and allows an exception when the ILIT trustee sends a letter to the trust beneficiary saying they have a specific time, say 30 days, to claim their portion of the gift.  Although they may not opt to do so, that the option exists effectively creates a “present-interest” gift exclusion.

Another option is to allow for spousal access.  This means that the trustee in his or her sole discretion may distribute money to the spouse or the grantor for health, education, maintenance or support.  We usually see this in the form of separate ILIT’s for each spouse with the non-insured spouse being the beneficiary.  If done properly, the provision can allow the spouse to withdraw dividends and interest earned by the policy at, say, retirement, while keeping a majority of the death benefit available to the estate.

With any irrevocable trust, and ILIT’s are no exception, there can be an issue of retaining too much control over the transferred assets.  When this occurs, we face the danger of having the policy being pulled back into the estate for tax purposes.  That is why it is often advisable to spend the additional expense in order to involve a professional trustee.  Professional trustees, often a trust company or bank, typically bring a high competence to the table that may help assure all functions as it is intended.

Uncertainty over the economy and financial markets has many people concerned about their financial futures.  For friends, relatives and colleagues who may find this information helpful, please feel free to share with them.  Remember, for those who could benefit we offer a complimentary, no obligation “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth advisory firm like ours—one that delivers services according to the needs and perspectives of its clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara, Santa Barbara City College and Pasadena City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC. Kauffman Wealth Management is a separate entity from WFAFN.

How Can Stealth Inflation Threaten Your Retirement?

How can it be in recent years that gas prices exceeded $4 per gallon and food prices rose, yet inflation, as measured by Consumer Price Index hovered around the 2 to 3 percent range?  Does there seem to be a disconnect to you?

If your answer is “yes”, you are not alone.  Despite repeated reassurances by the Federal Reserve Bank that inflation was well in hand, a growing number of notable economists have been questioning how accurately the CPI actually tracks the true rise in the very same consumer goods and services that we use every day.

Continue reading “How Can Stealth Inflation Threaten Your Retirement?”

Socially Responsible Investing

“Try to leave the earth a better place than when you arrived.” [1] Sidney Sheldon’s famous quote resonates with many of us, but the pathway to making a positive impact beyond volunteerism and philanthropy may not be clear.

Socially Responsible Investing (SRI) offers the potential to influence corporate actions toward common good. The premise is simple: investors support companies whose practices promote environmental stewardship, human rights, consumer protection and/or diversity. This most commonly translates into avoiding so-called “sin” stocks (those perceived as profiting from exploiting human weakness and frailties: tobacco, gambling, sex exploitation, alcohol, weapons including nuclear, and the military) and pollution contributors. Often investors are drawn to those “screens” or “filters” that are most near-and-dear to their hearts. [2]

The roots of SRI can be traced back to the mid-eighteenth century, where the Religious Society of Friends (Quakers) in 1758 prohibited participation in the slave trade. [3] Concurrently, the Methodist’s John Wesley (1703-1791) advocated “not to harm your neighbor through your business practices.” [4] Dr. Martin Luther King subsequently established early SRI models by advocating the Montgomery Bus Boycott and Operation Breadbasket Project in Chicago. However, it was SRI’s critical role in abolishing the South African apartheid government in the late 1970s that brought the field to world prominence. [5]

Today, about $1 of every $9 under professional management in the U.S.. can be classified as an SRI investment [6], putting the industry over $3.74 trillion by early 2012 [7]. Common vehicles that comprise the industry include:

  • Government-Controlled Funds including public pensions
  • Mutual Funds
  • Exchange Traded Funds (ETFs)
  • Separately Managed Accounts

While the concept of Socially Responsible Investing has increasingly broad appeal, there are a number of shortcomings of which investors need to be aware:

  • Financial Returns Trade-Off: Critics argue that restricting a manager’s universe of investments may inhibit performance. [8] Specifically, socially responsible investment “… is more likely than not to underperform an appropriate market average…” on a risk adjusted basis. [9]
  • Additional Expenses: SRI funds are usually more costly because of the additional expenses in screening out those stocks deemed undesirable, which in turn can inhibit returns. [10]
  • Increased Cost of Capital: By avoiding “sin” stocks, non-sin stocks’ cost of capital is driven relatively higher, which makes sin stocks cheaper by comparison. This can represent an opportunity cost in that socially responsible investors may miss out on more “value-oriented” opportunities and the potentially greater returns that sin stocks may offer. [11]
  • Stand Alone Deficiency: Negative screening by itself may be limited in its actual results. To be effective, SRI “…needs to be combined with shareholder advocacy and community investing,” according to Amy Domini, leading SRI advocate, author and CEO Founder of Domini Social Investments. [12]
  • Lack of Purity: Screening environmental polluters, for example, does not guarantee that those same firms support equal rights. While their end products and services may have social appeal, the internal process by which those goods come to market may or may not have that same appeal. Similarly, corporate policies may embrace SRI when economic conditions are strong, only to curtail those programs when times get lean. [13] These behaviors can be difficult to track and may inhibit the social good that SRI efforts seek to accomplish.

SRI critics argue that investors may be further ahead by investing for maximum profit potential consistent with their goals and risk tolerance, and then supporting their favorite causes directly (e.g. via charities) with those profits.

Despite these drawbacks, the concept of Socially Responsible Investing is appealing, especially to people who are concerned over increasing societal scarcity and governmental ineffectiveness to address an expanding list of social and environmental challenges. SRI allows us to support companies that may help address these challenges plus potentially earn a competitive financial return.

Whether you decide to allocate all or a portion of your portfolio to SRI goals that are consistent with your “passion causes,” it is important to have realistic expectations. A thoughtful review of these with your financial advisor is the best assurance of constructing an SRI program that can potentially meet both your financial goals as well as address your social concerns.

This information is not considered a recommendation to buy or sell any investment or insurance and is being provided for information purposes only and is not a complete description, nor is it a recommendation. We strongly recommend an advanced tax and estate planning expert be contacted for further information since Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.  Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN)/Member SIPC. Kauffman Wealth Management is a separate entity from WFAFN.

Written By

Mitchell Kauffman, Managing Director

Certified Financial Planner™

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN).  Kauffman Wealth Management is a separate entity from WFAFN.


1 Brainy Quotes http://www.brainyquote.com/quotes/quotes/s/sidneyshel361892.html

2 “The Fund Route to Sin Stocks,” by Thomas M. Anderson, Kiplinger http://www.kiplinger.com/article/investing/T041-C000-S002-the-fund-route-to-sin-stocks.html Feb.2008

3 “History of Socially Responsible Investing in the U.S.” by Melissa D. Berry http://sustainability.thomsonreuters.com/2013/08/09/history-of-socially-responsible-investing-in-the-u-s/ 8/9/13

4 “SRI Funds – Definition” by Kent Thune, http://mutualfunds.about.com/od/typesoffunds/a/Sri-Funds-Definition.htm

5 “A Short History of Socially Responsible Investing” by William Donovan, About Money http://socialinvesting.about.com/od/introductiontosri/a/HistoryofSRI.htm

“Socially Responsible Investing: What you need to know” 4/24/13 http://www.forbes.com/sites/feeonlyplanner/2013/04/24/socially-responsible-investing-what-you-need-to-know/

7 “SRI Basics” by Forum for Sustainable and Responsible Investment http://www.ussif.org/sribasics

8 “Socially Responsible Investing,” by Allison Hughey and Pamela Villarreal, National Center for Policy Analysis http://www.ncpa.org/pub/ba657, 5/11/09

9  “The Shortcomings of ‘Socially Responsible’ Investing” by James Osborne, http://www.basonasset.com/the-shortcomings-of-socially-responsible-investing 12/14/12

10 “The Issues with Socially Responsible Investing,” by Larry Swedroe, CBS News Moneywatch http://www.cbsnews.com/news/the-issues-with-socially-responsible-investing/ 9/20/11

11  “The Price of Sin: The Effects of Social Norms on Markets,” by Harrison Hong and Marcin Kacperczyk from Princeton University and New York University, respectively, Journal of Financial Economics http://pages.stern.nyu.edu/~sternfin/mkacperc/public_html/sin.pdf, 4/8/09

12 “Investing with Purpose: The Evolution of Socially Responsible Investing.” By Amy Domini, Huffington Post http://www.huffingtonpost.com/amy-domini/investing-with-purpose-th_b_4251242.html 11/16/13

13 “Corporate Social Responsibility;” Small BizConnect funded by NSW Government http://toolkit.smallbiz.nsw.gov.au/part/17/84/366

Are Your Financial Goals Achievable? The Importance of Having “Your Number”

Regardless of your level of affluence, studies show that you need to know what you want out of life before you can achieve it.  So states the wisdom of Lee Eisenberg in his bestseller, The Number: A Completely Different Way to View the Rest of Your Life.[I]

Eisenberg’s number refers to that amount of savings a person or couple must accumulate to enjoy a “secure” post-career lifestyle. His “completely different view” is based on the premise that the clearer your goals, the more likely they can be achieved. Establishing a precise goal, analogous to business planning, can be the best assurance of its attainment.

In practice, “Your Number” is typically not a single number but rather a series of numbers. Knowing the important role this kind of objective clarity can provide to our clients, we have spent considerable effort to develop this capability. Our version is a process capable of helping clients objectively understand their trade-offs so they can make more informed decisions.

For those still saving, as well as for those near or in retirement, clients often grapple with covering their own financial needs versus how much to leave for their heirs and/or charity. Many have found that by having “Your Number,” they are better able to address these issues once they know the estimated cost of supporting their lifestyle. With what remains, they can more confidently decide how much can go to philanthropy and heirs, and whether that happens during their lifetime or after they pass.

2017-10 Legacy Risk

Lifestyle Goals Feasibility: Determining the feasibility of your lifestyle goals is an important starting point. Certainly if overly ambitious, the low probability of attaining those goals may render other goals inconsequential. Our process involves providing an average, annual after-tax return (ROR) needed for the lifestyle goal’s attainment. That ROR can then be compared to historic returns of different asset classes to determine the associated risk involved.

For example, if to achieve their lifestyle goals the study calculates that a 10 percent average ROR is needed, that figure compared to historical returns, may suggest a more aggressive portfolio heavily weighted in growth stocks.  A specific, meaningful discussion can then ensue wherein the clients can consider how comfortable they may be with that level of risk. If not, to bridge the “gap” they can consider options that may include reducing  current  spending, increasing  savings,  postponing retirement  age,  or some combination.  Whatever they decide, they are able to feel more in control to do so based on objective feedback that can make these oft times nebulous conversations, much more tangible.

pic 2

“How am I Doing?” is likely the most common question clients have asked over my 35+ years as an advisor. The “Your Number” process helps address this question by projecting the value a portfolio needs to attain each year to assure we are on track. For example, a couple may have a $133,000/yr. retirement income goal when the husband reaches his desired retirement in five year’s time. To generate that, they may need nearly $2 million. Their “Your Number” study may suggest they will need $1,827,515 in three years to show they are on track to their retirement income goal. We are able to compare their then- prevailing balance to that figure, to readily gauge our progress and, hopefully, ease their concern.

“Am I Running Out of Money?” Concern over spending too much and not having enough later in retirement is another common concern. Again, the “Your Number” process gives us annual benchmarks from which clients can easily determine where they stand and if they may be spending too much, or perhaps not spending all that they could. Similarly, at ten years into retirement, the same client’s plan will show a $1,869,340 balance is needed to help assure they will not run deplete funds prematurely. Comparing that to their then-current balance can quickly help them determine where they stand. This capability gives clients a greater sense of confidence and control over their futures.

Benefiting from Greater Clarity as We Age: The clarity provided by this approach may prove consistent with the normal aging process.  “As people mature, their cognitive patterns become less abstract and more concrete…,” according to psychologist David Wolfe.[ii] Research attributes this to a normal shift from left to right brain orientation during the aging process. The result is a sharpened sense of reality, increased capacity for emotion and an enhanced sense of connectedness.

The left hemisphere helps us with rational functions such as logic and organized, quantitative processes. The right hemisphere is the intuitive side that gives us creativity and analogic reasoning. Theory suggests that many of us may be slightly dominant in one side or the other, which may lend insight into how best we learn.  “In other words… ,” as Daniel Pink notes in his recent book, A Whole New Mind, “… as individuals age they place greater emphasis in their own lives on qualities they might have neglected in the rush to build careers and raise families; purpose, intrinsic satisfaction and meaning.”[iii]  It makes intuitive sense that as we age and face our own mortality, we would become more sensitized to higher level emotional issues. That there might be a neurological or bio-chemical reason for this seems intriguing. Evidence of this trend may be found in the fact that over 10 million U.S. adults now engage in some form of regular meditation, double the number in 2005. Further, about 15 million people currently practice yoga, twice that in 1999.

While greater specificity is needed around the quest for money, Eisenberg cautions that we need to know ourselves and spend some time determining what makes us happy before we can make informed plans for leaving the world of active income.  What do you want your retirement to be? Who do you want to be in retirementEisenberg’s research shows that even the affluent tend to procrastinate on addressing these issues.

Thus it would seem that, when tackling the three main questions we each must address—What will my retirement look like? When can my retirement plan happen? How much will it cost?—the traditional financial services approach makes a fundamental error in attempting to address the last question first. Eisenberg muses that we need to know what we need the money for before we can estimate how much. Hence the rise of various types of “life coaches” to help us wrestle with these more elusive issues.

The bottom line of the “Your Number” process is that, regardless of your state in life, better planning can often help both from an aesthetic and practical standpoint. As Eisenberg notes, “An unexamined life may or may not be worth living, but it is certainly more expensive.”

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

[i] The Number: A Completely Different Way to Think About the Rest of Your Life, by Lee Eisenberg  Free Press 2006

[ii] A Whole New Mind, by Daniel Pink  Riverhead Books 2006 Pg. 60

[iii] A Whole New Mind, by Daniel Pink  Riverhead Books 2006

Year End Financial & Tax Planning Tips

A take-off on the old adage “significant savings can often be had to those who ‘don’t wait’” states the case with year-end tax planning.  A few smart moves prior to Dec. 31st can make a significant difference in your April tax bill.  The key for most of us will be to defer income and accelerate deductions.

Continue reading “Year End Financial & Tax Planning Tips”

Can Articulating Your Values Enhance Family Cohesion?

“What’s important about money to you?” [i] The response to this critical question invites a higher level exploration beyond those tangible possessions which can provide transitory satisfaction. Study after study shows that lasting happiness and fulfillment can more often be attained by understanding our deeper emotions, e.g. our values and priorities. Yet as important as it is, this critical question all too often goes unasked and even less often, gets answered.

What frequently gets lost is the role money plays as a means to an end rather than an end in and of itself. The things we really care about, what gives us a sense of fulfillment, are the real payoffs that money can help us secure. These define our core values, the things that motivate us and give our lives meaning. Articulating values communicate those things important to us that can help us gain more happiness ourselves, bring spouses and families closer, and can serve as important role models for our heirs. It can also lay the groundwork for a family mission statement that can help establish a family’s identity.

If we think of articulating our values as a process, then defining what is a value could serve as a good starting point. Values are the qualities and principals that are most intrinsically dear and desirable to us. As such, they are given particular significance by the specific words we may use to describe them. They are those life intangibles that give us a deeper, more sustainable emotional “high” beyond fleeting pleasures of the moment. The attainment of our values is what gives our lives true, lasting meaning and contentment as life’s emotional payoff.

When we talk about family values, we refer to “… a traditional set of social standards defined by the family and a history of customs that provide the emotional and physical basis for raising a family. Our social values are often times reinforced by our spiritual or religious beliefs and traditions.” [ii] In short, family values consist of those important ideas that are passed down from generation to generation that help us define how we want to live our family lives.

In his book Values-Based Financial Planning: The Art of Creating an Inspiring Financial Strategy, Bill Bachrach suggests a Five Step Process to starting a values conversation between partners:

  1. “Your partner asks you a simple question: ‘What’s important about money to you?’
  2. Your job is easy; just answer truthfully and as honestly from the heart as you can. Take as much time as you need, and give the first answer that comes to mind without overanalyzing.
  3. Your partner records your answer toward the bottom of a sheet of paper (or use the worksheet provided in Bachrach’s book, an example of which appears in Appendix 1) that serves as a Values Hierarchy or “Staircase”.
  4. Then your partner builds on your answer by asking another question, substituting your value for the word money: “What’s important about [your last answer] to you?
  5. Again you respond with your first thought, your partner records it, and then he or she asks you the question again “What’s important about [the value you just said] to you? And so on up the staircase.”[iii]

Money, like values, has meaning that differs from person to person. For some it can offer security. For others, freedom and independence, and likely something very different to others. Having the patience to “drill down” with this process can help us access our deepest levels of emotions. Responses such as independence, accomplishment, making a difference, providing for family, inner peace, spiritual attainment, and self-worth can serve as statements of value that provide powerful inspiration. While your core values may be completely different from these, it is important to keep in mind that there are no wrong answers; your answer is always the right one for you.

The benefit this exercise offers is often found in the “drill down” phase. As Abraham Maslow postulated in his “Hierarchy of Needs”, the image 1starting level relates to essential biological and safety needs such as food, water, shelter, protection from danger, disease, and fear. Once those are satisfied, Maslow believed that attention could then focus on higher psychological, social and emotional needs such as love, belonging, esteem from self and others, knowledge, and aesthetics such as beauty. As those are fulfilled, the highest “self-actualization” needs such as realizing one’s potential and enjoying “peak” experiences, become more achievable.

With Maslow’s Hierarchy as context, we often find three similar levels of response to the “What’s important about money” conversation:

Level 1 – Lower Self: Many will start with the more obvious answers about the “lower self” as Bachrach calls it. Responses that include tangible goods are simpler, less threatening and easier to access. They often relate to more immediate, physical benefits and obtaining tangibles.

Level 2 – Thoughtful Self: Pushing a little further may generate more thoughtful responses that pertain more to others than to self, such as making a difference, providing for family, social consciousness, or having a positive impact on community. The tone is less about immediate gratification with tangibles and more about doing for or giving to others.

Level 3: Higher Self: At this level responses can take on a more expansive tone and focus on areas with greater potential internal/emotional payoffs. These can be aspirations like becoming the best person I can be, inner peace and contentment, spiritual fulfillment, enlightenment, etc. This is considered the level of pure emotion where there is a noticeable lack of tangibles and emphasis on real life purpose.

    Sample Values Ladder

Values ladder

Keep in mind that most of us do not speak of our values very often. So responses can bounce around from one level to the next as part of this spontaneous process. People can also become anxious or even a little defensive as they drill deeper. This is perfectly natural. Bachrach suggests some important guidelines to help make this values conversation as effective as possible:

  1. Choose a Good Partner: Someone who is genuinely interested in your responses and who can help support your completing the exercise. Two key guidelines that to consider:
    • Stick to the inquiry format of “What’s important about __________ to you?”
    • Don’t interject or offer suggestions. Especially for spouses who may be tempted to even complete each other’s sentences, this may be particularly challenging but try to refrain.
  2. Stay Focused: As we drill down, people may become more anxious and may be tempted to stray by perhaps discussing their responses before the exercise is completed. Focus is tough enough, so for best results try to stay on task.
  3. Be Spontaneous: The first response is usually the most genuine and it may take time. Keep in mind that the exercise is not timed and this subject matter is not often top of mind. Patience is key. In fact, clients have spoken of instances when answers were hard to come by. By moving at a more leisurely pace they felt more satisfied with the experience.
  4. Stick to the Format: Best results occur when clients stay dedicated to the format. Strictly staying with the questioning format of “What’s important about money to you?, then following up by substituting the last value given with “What’s important about _______ to you?” is your best assurance of gaining a sincere, meaningful result. Try not to vary the words or the order they are said.
    • Even seemingly minor changes such as “Why is money important?”, “What does money mean to you?” will likely not get the same meaningful results.
    • The farther you delve into this, the more clarity you will get about your financial motivations. The end result can be a more powerfully inspired experience that can make a significant difference in your life.
  5. Fixing a “Stuck”: Participants may find they encounter a “block” as they move toward deeper Level 3. When this occurs, it may be helpful to picture yourself already in the position of having achieved that particular value and ask “Once I know that I have _______, what is important about having attained this that is resonating with me?” Some also find it helpful to step back, take a break, then revisit the exercise again from where you left off.
  6. Knowing When You’re Done: It is critical to not try to “leapfrog” ahead or force the highest value, as that could produce less than true results. The process itself, while taking some effort and introspection, contributes much to the crescendo of values at the end in revealing how each relates to the final output. Think of this as an unfolding of what matters to you, in a sense a story of you in the making. As participants near the end, they typically find their values start sounding redundant or repetitive. As that occurs, the interviewer may rephrase the questions to be “Is there anything more important to you than ___________ (being the most recently stated value).”

Values are the less obvious, often intangible reasons that motivate us. They are the emotional payoffs that guide our choices and actions. Articulating them can not only help us gain a better understanding of ourselves; discussing them can bring partners and families closer as well. They provide a framework around which we can create more meaningful financial goals. Perhaps more importantly, sharing our values can provide effective modeling and meaningful inspiration as they are handed down to our heirs.

Living your values is often even more of a challenge than defining them, as it takes concerted effort, discipline and commitment. Bachrach’s “Value Ladder” (see Appendix 1) offers a convenient format for exploring your values. “Life Enhancer Worksheet” (see Appendix 2) provides a valuable structure to implement changes to help assure your lifestyle is consistent with what is most important so you can enjoy a “Life Well Lived.”

Appendix 1

Sample Values Ladder Template

Values Template

Appendix 2

Sample Life Enhancer Worksheet

Life enhancer

This information is not considered a recommendation to buy or sell any investment or insurance and is being provided for information purposes only and is not a complete description, nor is it a recommendation. We strongly recommend an advanced tax and estate planning expert be contacted for further information since Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.  Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN)/Member SIPC. Kauffman Wealth Management is a separate entity from WFAFN.

Written By

Mitchell E. Kauffman, Managing Director

Certified Financial Planner™

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN).  Kauffman Wealth Management is a separate entity from WFAFN.

 

[i] Values-Based Financial Planning: The Art of Creating an Inspiring Financial Strategy, by Bill Bachrach, Aim High Publishing 2000, Pg. 4

[ii] Defining Your Family’s Values by Susie Duffy, M.F.T., Parent IQ http://www.parentiq.com/news/DefiningYourFamilyValues.asp

[iii] Values-Based Financial Planning: The Art of Creating an Inspiring Financial Strategy, by Bill Bachrach, Aim High Publishing 2000, Pg. 5-6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How Prepared Are You for an Emergency?

“There’s no harm in hoping for the best as long as you’re prepared for the worst.”  Especially considering that disaster can strike without notice, this Stephen King quote offers sage advice.

We plan many aspects of our lives, from finances to marriage to children.  Surprisingly, for many, disaster planning ends up being a low priority; in fact only 1 in 4 feel concerned about a disaster[1] and, sadly, 64% of Americans do NOT have a plan in place.

 Are you and your family adequately prepared?   Even if you believe you are, it is important to periodically consider what to do in an emergency before it happens. Please consider these important steps to preparedness.

Have a Plan: FEMA[2] recommends 10 essential actions to develop a plan:

  • Learn the threats in your area
  • Identify meeting places
  • Have an out-of-state contact
  • Know your evacuation routes
  • Know the location of utility shut-offs
  • Know the emergency policies of schools and adult day care centers
  • Identify safe spots in each room to take cover
  • Have a supply of extra medications
  • Make special provision for those who need extra support
  • Practice annual disaster drills with your family

Although we may have thoughts of these in our minds, writing them down and practicing them can help assure your household members know what to do in an emergency. Disaster often comes without warning; preparedness helps keep people calmer and better able to react. 

Keep Emergency Supplies: Ten of the essentials are:

  1. Water for 3-10 days, 1 gallon per person per day
  2. Food for 3-10 days. Don’t forget to include your pets
  3. First aid kit with instructions
  4. Flashlights and extra batteries
  5. Radio and extra batteries
  6. Medications: Keep both prescription and some non-prescription, e.g. Advil.
  7. Cash and important documents
  8. Clothing and sturdy shoes
  9. Tools including a fire extinguisher
  10. Sanitation and hygiene supplies

Keeping morale up is as important.  So it is a good idea to have activities available like board games, a deck of cards and other non-electrical entertainment.

Stay informed: Power failures often occur during emergencies.  To assure you are connecting with broadcasted emergency information:

  1. Keep at least one battery-powered radio in your household. When power is restored check websites such as local law enforcement and National Weather Services for updates.
  2. Keep in mind that a car radio may be the most accessible means to hear emergency broadcasts, but be cognizant of the battery level.
  3. Reach out to your neighbors and community to encourage them to plan with you so you can work together in the face of disaster.

Get involved: Similar to helping your family and loved ones prepare, your local neighbors and community may also need support.  Consider setting up neighborhood networks to help:

  1. Care for children and the elderly
  2. Care for people with mobility problems and disabilities
  3. Rescue household pets
  4. Activate phone trees
  5. Turn off utilities when a neighbor is absent

Personally you might consider:

  1. Taking Community Emergency Response Team (CERT) training. You can contact your local Fire department for details.
  2. Learning First Aid & CPR
  3. Becoming a HAM Radio operator
  4. Learning about the resources already in your neighborhood

Monitor and review: Consider revisiting the plan on an annual basis to:

  1. Update the roster for those who may have developed mobility issues.
  2. Assure freshness and adequacy of supplies.

For more information on neighborhood preparedness download the ESP AWARE Plan for communities at www.espfocus.org. 

Links are being provided for information purposes only. Wells Fargo Advisors Financial Network LLC (WFAFN) is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. WFAFN is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Any opinions of Mitchell Kauffman are not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation.

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

[1] Forbes “American Neither Worried Nor Prepared In Case of Disaster: SUNYIT–Zogby Analytics Poll. 5/16/13

[2]  FEMA: Federal Emergency Management Agency, www.fema.gov.

How Prepared Are Your Heirs?

Thirty Trillion Dollars! That staggering amount is what studies predict will be transferring from Baby Boomers to their heirs in the coming years (i). Yet nearly 70 percent of family wealth transference and business succession plans fail, with the vast majority (actually 60 percent) of failures attributable to poor family communication and heir preparation (ii). This begs the question “How can Baby Boomer’s parents better prepare their heirs to be successful stewards of the savings that they have spent their lifetimes accumulating?

Tackling this daunting challenge may best be done by first having an objective appreciation of our heir’s cultural differences, then identifying what skills they need to succeed, followed by an objective diagnosis of where they may fall short. Then we can more effectively provide them guidance and with the resources they may need.

The reality is, Baby Boomers have accumulated a level of assets that is significantly greater than that of their parents, and will likely far exceed what the next generation may be able to accumulate. Boomer’s good fortune stems from an extended period of economic growth and stability occurring during their peak earning years (their aggregate net worth has quadrupled since the last 1980’s). This combined with the considerable appreciation of non-financial assets such as real estate (iii), has provided a near perfect good storm. When contrasted to the challenges many Gen Xers (born 1965-85) and Millennials (1985-2004) have experienced, especially since the Great Recession of 08-09, the resulting asset gap becomes more understandable.

As the graph below shows, the median household net worth for today’s 35 to 44 year olds is approximately $47,000, compared with $102,000 for those of a similar age in 1989 (adjusted for inflation). No small wonder it has been said that this younger generation may be the first in our country’s history to hold a more pessimistic view of their future opportunities compared to their predecessors. Combine that with the entitlement that many exude, it’s not surprising that cultural perspectives may vary.


graph 1

 

Graph 2

A young person’s ability to successfully launch themselves in several crucial life areas has traditionally served as a competency gauge, giving the impression of becoming one’s “own person,” grown-up and responsible. Knowing the functional and cultural differences between generations can provide valuable insight:

1. Career Success: Boomers value hard work almost to an extreme. Common with this “live to work” philosophy were 50 to 60 work weeks and a consequence that family and health, at times, ranked a distant second. They found an abundance of opportunity, with consistent reward and advancement for their hard work ethic. This fostered a perception that floundering careers were more by choice and personal inadequacy. Work was seen as an adventure, a place to prove one’s self and worth.

a. By contrast, and particularly in this post-“Great Recession” environment, Gen X and Millennials face fewer opportunities and greater challenges to launch their careers of choice, let alone excel in them. Perhaps more than any other since the Depression, many may be found in lower level “bridge” jobs, if not completely unemployed. Combine this with their cultural bias toward balanced lives, work may be more often seen as a contract and means to an end. As such, it can be demoted to lower priority compared with their personal enjoyment and fulfillment. They may be more readily perceived as “slackers” and feeling entitled to more than may be deserved.

2. Financial Self Sufficiency: Boomers grew up facing clear expectations that they become self-sufficient upon finishing school. Self-sufficiency meant that they could start and support their own separate household with little or no assistance from their parents.

a. Many Gen Xers and Millennials by comparison face considerable financial burden from substantial debts such as school loans. Combining this with fewer career opportunities that an uncertain economy brings, and we see many needing parental support and even living at home much longer. This combined with their cultural bias to do things “their own way,” it is easy to see how Boomers may feel critical and perhaps intolerant of their children’s lack of financial success.

3. Family Success: Although Boomer’s were known to postpone their family launch until later in life, their being able to build a traditional family has been seen as a measure of responsibility and achieving adulthood.

a. Younger generations, by contrast, have more cultural flexibility than ever. While some may choose a traditional family structure, others may consider what best meets their unique needs. Some may be attracted to non-traditional options such as remaining single, co-habitation, etc. Bottom line, an heir’s progress toward their eventual family environment may not be the same gauge of competency that it once was.

4. Life Resiliency: The old adage of “making lemonade out of lemons” has rarely been seen as a more important skill than today with all of its challenges. Boomer optimism and “can do” philosophy-despite-the-hurdles have been legendary traits of this generation. So they may find themselves less sympathetic to discouragement and pessimism that their heirs may express.

a. Gen Xers and Millennials have seen an increase of cynicism, disaffection, and bleakness among their ranks, which is no small wonder considering the challenges we as a society face. The fact is, many of today’s young people see the economy’s anemic recovery as more than just a temporary setback. Rather, the dour environment may very well be costing them the future they once took for granted. The resulting malaise they feel may be met with intolerance by Boomer’s, whose “just hunker down” mentality worked for them so well during their life challenges.

In short, assessing our heir’s competency by these traditional measures may not give us a comprehensive gauge of success. A more objective view may be had by focusing instead on our heir’s actual skill level in several key areas. The expectation is not to develop professional level expertise; rather that heirs demonstrate their willingness to assume responsibility to address these for themselves and their family unit.

How Prepared Are Your Heirs-KS Edited3

1. Budgeting: Managing cash flow and living within one’s means

2. Debt Management: Systemic reduction of education loans, credit cards, mortgages, etc.

3. Savings and Investing: Allocating budget surplus toward future goals

4. Adversity Protection: Assuring loved ones will be financially secure if tragedy strikes (life, disability, liability and medical insurance)

5. Managing Employee Benefits: Optimizing employer programs for protection and savings

6. Estate Planning: Assuring that affairs will be properly handled in case of death or disability

7. Income Tax: Proactively managing affairs to help minimize tax liability

Many heirs have found it helpful to first consider an introspective assessment of their current skill level and areas where they may appreciate further assistance. The attached Financial Scorecard has proven itself a helpful tool in this regard. Where couples are involved, having each complete their own assessment, then comparing their responses can spark candid conversations that can in turn help address varying perceptions. The result may bring the couple closer and ensure everyone is on the same page.

Certainly every generation experiences their own challenges that seem daunting at the time. The eventual success that Gen Xers and Millennials may eventually enjoy will be a function of the encouragement their Boomer parents can offer by creating a supportive, directive, yet non-blaming environment. They likely will have to do more with less compared to those who preceded them which, while difficult, could very well offer a similar character-building opportunity that WWII gave to our “Greatest Generation.” Since many Gen Xers and Millennials will one day be inheritors of considerable wealth, much can be gained by teaming with their Boomer parents in a constructive manner.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Mitchell Kauffman and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss. You should discuss any tax or legal matters with the appropriate professional.

Written By

Mitchell E. Kauffman, MBA, MSFP

Certified Financial Planner™

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwealthservices.com or call (866) 467-8981. Kauffman Wealth Services is an independent Registered Investment Advisor and serves clients from two office locations: 140 South Lake Avenue, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108.   Securities offered through Raymond James Financial Services, Inc., member, FINRA/SIPC.

______________________

i Great Wealth Transfer Will Be $30 Trillion‐Yes, That’s Trillion With A T by Cam Marston, CNBC On‐Line July 22, 2014, http://www.cnbc.com/2014/07/22/great-wealth-transfer-will-be-30-trillionyes-thats-trillion-with-a-t.html
ii Preparing Heirs by Roy Williams and Vic Preisser, Robert D. Reed Publishers 2003, Pg. 36
iii The Long and the Short of Baby Boomer Balance Sheets by Benjamin Mandel and Livia Wu, J.P. Morgan Investment Insights Oct. 2015

pic 3

How to Create Your Effective Family Financial Plan

Many of us spend our lifetime accumulating our wealth.  But did you know that often times heirs don’t spend their inheritance—our wealth—responsibly?  In fact, nearly 70 percent of family wealth transference and business succession plans fail.  This is according to Victor Preisser and Roy Williams in their book Preparing Heirs: Five Steps to Successful Transition of Family Wealth and Values.  Surprisingly, only 3 percent of these failures can be attributed to errors in financial planning, legal issues or taxes.  Rather, the vast majority (actually 60 percent) of failures were attributable to poor family trust, communication and heir preparation.  This suggests that with better preparation, many of these failures could have been successes. 

While preparation can take many forms, my 35+ years as an independent advisor has shown that developing a Family Plan can go a long way in giving clients confidence, knowing their family and heirs are ready to manage the funds.  Key ingredients are good communication and family engagement in a collaborative process which I will outline below.  The role parents or elders play in creating a conducive environment for constructive family discussions cannot be overstated.  To do so, it works best if the parents are well prepared beforehand.

For many clients, articulating their feelings may not come easy.  Perhaps a good first step is to explore why parents may anticipate awkwardness and discomfort—real or imaginary—with money talks.  Top challenges may include:

  • Do We Have Enough for Ourselves?  Clients may question whether they can meet their own needs before figuring out how much to give to heirs and charities.
  • Avoiding Mortality Discussions: It is human nature to not want to think about our own mortality, which can serve as a basis for avoiding related discussions. 
  • How Can We Be ‘Fair and Equal’: Some may dread a discussion between, say, competitive children about who gets how much and when.  All too often, “fair” can translate into “equal” in good parenting parlance which may or may not best serve the family’s needs, especially when  children may have unequal financial circumstances. 
  • Painful Reminders: Traditional bread winners may already be struggling with middle age, coming to terms with their life’s meaning and regrets about what may have been sacrificed as a
  • spouse, parent and/or loved one to achieve financial success.  So there may be hesitation that bringing up family finances could also spark painful emotions that clients see as best left undisturbed.
  • Don’t Rock the Boat:  Parents may hesitate to initiate conversations that may spark controversy within the family and opt instead to avoid discussing delicate issues that could cause upset.  This is especially true given the money pressures the younger generations may feel from our challenging economy. 
  • It’s Not Our Business/We Don’t Want to Appear Greedy:  By the same token, adult children may hesitate to ask about family finances so as to not appear overly anxious, perhaps falsely assuming parents will take the initiative and/or that these matters are none of their business despite their inherent stake.  The end result is that important conversations may never take place.

As we consider the best ways to resolve these concerns, it can be helpful to better understand those issues that most worry parents concerning the effect of their wealth on their children.  According to a U.S. Trust survey of Affluent Americans:

PARENT’S WORRY ABOUT THEIR CHILDREN     % WHO ARE WORRIED [2]

Too much emphasis on material things………………………….60%
Naïve about the value of money…………………………………… 55%
Spend beyond their means…………………………………………..  52%
Have their initiative ruined by affluence………………………. 50%
Not do as well financially as parent would like………………49%
Not do as well financially as parent did………………………….44%
Hard time taking financial responsibility………………………  42%
Resented because of their affluence……………………………… 36%
Suffer from parent not being around……………………………. 35%
Date or marry someone who wants affluence………………. 34%
Limited exposure to non-affluent people………………………  33%
Feel they have big shoes to fill and will fail…………………… 18%

In short, increasing the success of wealth transference strategies requires much more than simply employing better taxation, preservation and governance of that wealth.  Since many concerns are grounded in the parent’s direct experience and the resulting perceptions, their resolution not only rests in better preparing heirs, but may require a “revision or updating” in those perceptions as well.  “The parental concerns address behaviors, knowledge, application of that knowledge, and what is often referred to as not-yet-acquired ‘common sense’ and ‘good judgement.’”  To be truly effective, that effort is best combined with an objective assessment of family skills that is more grounded in the here-and-now than being burdened by history.  That John could not handle money as a teenager, or Sally spent every penny as soon as she got it, could leave a lasting impression that is best re-evaluated in the present.

Challenging though these worries may seem, our clients have found that by having a framework, many worries can be successfully resolved.  The result can be a sense of confidence that the savings they have worked their lifetimes to accumulate will be handled as they wish—with a much lower chance of heirs being left hurt and disappointed. 

How We Do It

“Your Number” Lifestyle Adequacy: Before figuring out how much to give to others, clients find it invaluable to first understand how much they will need to support their own lifestyle. Following the thought process of Lee Eisenberg in his bestseller, The Number: A Completely Different Way to View the Rest of Your Life, we are able to calculate the required lump sum after allowing for Social Security, pension benefits, employment earnings, rental income and a multitude of other potential income sources (see our white paper: “Are Your Financial Goals Achievable? The Importance of Having ‘Your Number’” for more details).

Understanding Your Own Values and Priorities: Airlines recommend in case of emergency to have your own oxygen mask on before helping your companion. Similarly, it is important that family elders are clear and in agreement on their values and priorities before initiating those discussions with their families. Our clients have found it helpful to utilize the Values Based Financial Planning process advocated by Bill Bachrach in his book by the same name. Using that process, we are able to facilitate a deep, meaningful exploration of what is important to each client and why, which in turn provides a basis for dialogue and finding common ground. A discussion of philanthropic passions can provide a helpful means of conveying values to your heirs (see our white paper: “Can Articulating Your Values Enhance Family Cohesion?” for more detail).

Gaining an Objective Perspective on Heirs: Especially for Generation X’ers and Y’ers, many may have graduated with onerous education loans and credit card debt while at the same time may be challenged to find career jobs. Effectively managing their money, plus an eventual inheritance, will require familiarity, if not core competency, in these key areas:

• Budgeting & Managing Debt
• Savings & Investing
• Assuring Adequacy of Life, Disability & Medical Insurances
• Buying a First Home or Upgrading an Existing Home
• Optimizing Employer Benefits
• Planning an Estate Including Wills & Trusts
• Managing Income Taxes
• Managing Education Funding for Children

A first step may be to encourage heirs to objectively assess where they may need extra support using the enclosed questionnaire, “Are You Prepared to Succeed Financially?” By so doing they may increase their self-awareness and at the same time will help you gain a more current, perhaps objective picture of their financial prowess (see our white paper: “How Prepared Are Your Heirs?” for more details).

Getting Your Heirs the Support They Need: Our A-Z Financial Resource contains valuable, easy to understand articles on these core skills that can provide a solid base for awareness and learning.

Identify Your Interest Areas: Making philanthropic decisions together can provide a good basis for inviting important financial discussions and, as a result, can enhance trust and openness among your family members. As a starting point, you may want to consider organizations that have positively affected you and others with whom you feel close. These are often causes that “speak” to you and resonate at an emotional level.

Prioritize Opportune Gifting Assets: Potential tax treatments can be a key. Top gifting options may include assets with significant unrealized gains, those that may not generate adequate cash flow, and troublesome assets like some rental properties (see our white paper: “Are You Enjoying the Joys of Gifting?” for more details).

Compose Your Family Mission Statement: When created openly and with consensus, this sharing process can greatly facilitate family communication and serve to build trust among its members. There are typically three key parts that can be built by completing these sentences:

  • Values that influence my giving are…
  • I would like to (goal of your time, treasures and talents) help (further what purpose, interest or social issue) ….
  • Organizations (specify organizations or types of organizations) with which you would like to engage. Identify organizations offering best fit for your goals.

Identify Organizations Offering Best Fit for Your Goals: Before selecting an organization, it is important to understand how supporting it can help you achieve your mission and charitable objectives. Numerous services are available that gauge a non-profit’s effectiveness and results. You may want to tour their facilities, perhaps as a family group, and speak with staff and even perhaps the clientele it supports.

Implement and Monitor Your Plan: Philanthropy is an evolving process, not a single event. Family “traditionalists” may have very different views than Millennials. You may want to uphold your ancestor’s philanthropic legacy while remaining open to the ideas and experiences of new generations. It is important to revisit the statement annually.

creating_your_family_plan

In summary, we all want our remaining time and money to be spent with as much clarity as possible. It is difficult to address issues of money with our loved ones; it is human nature to want everything to just go on as it is and trust the future will somehow take care of itself. But by carefully and mindfully speaking to your family members about your wishes and theirs, an ease of living is created because the hard stuff is “on the table.” Everyone then can continue living their lives without secrets, doubts, and possible questions. This comfort and ease can permeate the family system, allowing for time together to be as rich as possible. Several appendices worksheets follow with recommendations that our clients have found invaluable in helping them facilitate a productive, inclusive Family Planning process.

This information is not considered a recommendation to buy or sell any investment or insurance and is being provided for information purposes only and is not a complete description, nor is it a recommendation.  We strongly recommend an advanced tax and estate planning expert be contacted for further information since Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete.  Prior to making a financial decision, please consult with your financial advisor about your individual situation.  

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent.  He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community. 

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.kauffmanwm.com or call (866) 467-8981.  Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

Can Annuities Benefit Your Situation?

Mention the word “annuity” at a social gathering and you are likely to get a wide range of reactions ranging from “expensive” and “loss of control,” to “lifesaving” and “sleep at night comfort.”  As with most things in life, the truth may not really be black and white but shades of gray between the extremes. For a growing number of those either in or planning for retirement, “… the life-time income guarantees offered by these insurance company products can add security to portfolios…” according to a Wall Street Journal report.¹  A surprising comment coming from a leading publication that prior to the 2007-2008 financial crisis had been a long-term critic of these programs.

Continue reading “Can Annuities Benefit Your Situation?”