Managing Your Wealth
BEVERLY HILLS COURIER | MARCH 2, 2012 MYW 3
The Giving Dilemma By Amir Mossanen, Wealth Advisor, Wells Fargo Private Bank igh-net-worth families have the extraordinary opportunity of gifting $5,120,000 per person through the end of 2012 as part of the tax code’s lifetime gift exemption (For 2011 the amount was $5,000,000; the gift tax applicable exclusion amount is adjusted for inflation after 2011. The inflation adjusted amount for 2012 is $5,120,000.) The tax rate is 35 percent for 2012, however, the gift tax applicable exclusion amount drops to $1,000,000 with a 55 percent tax rate after 2012 unless Congress takes further action. Still many are not taking advantage of the opportunity. We have seen many parents worried that if their children knew they were recipients of fortunes, they would lose their motivation to work, spend beyond their means and become dependent on family support. Studies have shown that approximately 70 percent of wealth is lost within one generation of inheriting it. ( 1), and 90 percent is lost by the end of the third generation (2). It is not surprising that faced with these kinds of odds, parents are conflicted when it comes to making transfers of wealth to their children. What we suggest to clients at Wells Fargo Private Bank is to actively prepare your children for both the responsibilities and the opportunities inheriting wealth offers. While this preparation may take several years, and a combination of tailored education and practical hands-on experience, here are some basic steps
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that all families can follow: 1. Talk to your children about both money and wealth. Money and wealth should not be a taboo subject at home. As an alternative to lecturing your children, try asking them questions and helping them figure out the answer for themselves. Here are some questions we have found useful: 1. What do you think is the purpose of money? 2. What would you do if you won the lottery? 3. What do you know about how I earn my living? What sacrifices do you think I had to make along the way to get us here? 4. How would you have done things differently if you were in my shoes? 5. What sacrifices are you not willing to make to create your own wealth? 6. What do you think are some of the challenges you’ll face in preserving your standard of living? 7. How would you like me to support you? Avoid asking questions that may appear loaded, closed or appear to put your child into a corner. Instead, try to help them expand their vision, and understand the implications of the choices they make. 2. Help your children define their dreams. Dreams are what motivate us. For those who created wealth on their own, it might have been the dream for a better life that drove them to work hard, take some risks and create wealth. Parents need to understand that their children will not have had the same experience growing up and are therefore
unlikely to have the same motivations. Working hard toward realizing one’s own dreams can lead to motivated and productive individuals. Parents can help their children identify what they need to learn, how they need to behave, and with whom they need to partner to help make their dreams come true. 3. Make deals together. Making deals teaches members of a family to compromise, work together and understand the importance of integrity. For example, consider allowing your 10year-old to research where he would like to spend the family vacation, and present it to you in a comprehensive and detailed way in exchange for paying for the vacation. In this case, your child can learn useful life skills and how to effectively gather information, present ideas and make informed choices, while taking a load off your plate. You can build on this format to bring children into family business, philanthropy or asset management. The best deals are ones where there is a clear and visible link between what is being asked, and what is being given. 4. Build in some safeguards. Gifting does not necessarily mean handing over control. If structured properly, parents may retain much of the control by transferring entity interest to their children's trust while remaining as the managers of the entity. A second safeguard would be to appoint a suitable trustee to manage assets until such a time that the child is deemed capable of taking over as trustee. Ultimately, gifting is about more than passing assets from one genera-
tion to the next; it is about giving future generations the opportunity to lead productive, meaningful and enriching lives. Preparing your children to make the most of the opportunity you are presenting is going to require a team effort, commitment and patience. Fortunately, this is not an endeavor you have to undertake alone. Wells Fargo has been working with high-net-worth families for generations and has developed educational programs, processes and tools to help your family have a lasting legacy, and help achieve your multi-generational goals. (1) Preiser, Vic. Williams, Roy. Preparing Heirs: Five Steps to a Successful Transition of Family Wealth and Values. 2010. (2) Voorhees, Tim. Why Most Families Lose Their Wealth by the Third Generation, Wealthcounsel.com.
Wells Fargo Private Bank provides products and ser vices through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo & Company and its affiliates do not provide legal advice. Consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends of the specific facts of your own situation at the time your taxes are prepared. This information is for educational purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Wells Fargo Bank, N.A., Member FDIC