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The Challenge of Generational Wealth and How to Succeed Picture Approved by the Norman Rockwell Family Agency

Stephen C. Lewis

Imagine you have entered a Dickens’ novel and traveled 20 or 30 years into your future. You get to see the lives of your children, grandchildren, your business, and the impact of your charitable giving. What does success look like in your story?


My research shows that if families transfer wealth without providing knowledge and values, it is more likely to be destructive than productive.

From 2007 to 2061, nearly $60 trillion in US wealth will be exchanged.(1) Of the amount being transferred to heirs, history suggests 70% will be lost by the second generation and 90% will be lost by the third.(2) Why is the failure rate of transferring wealth so high, and what can be done to avoid the pitfalls? At times, I am amazed at how trusting we are as a collective group. Consider the trust we have as we enter a jumbo jet for a 3,500-mile flight across the ocean. Why do the 500-plus passengers trust the pilots to control the over 50,000 lbs. of thrust at 570 miles per hour? I believe it is because we have faith in their knowledge of how to fly and believe they value both our lives and theirs. I am sure that the airline or the FAA would never give control over such an enormous amount of power to those who haven’t demonstrated they have the knowledge and experience to handle it. I think of this example every time one of my clients asks for advice on how much of the family wealth or company to leave to their heirs.

No man can become rich without himself enriching others.

—Andrew Carnegie

THE BIG QUESTION My team and I have worked with hundreds of ultra high net worth (UHNW) individuals over the years, and there is a consistent question at the top of our clients’ minds:

“What is the right amount to leave my kids and grandkids without messing up their lives?”

The exact answer is different for each family, but there is a reliable formula that can be used to avoid the historical pitfalls and create the highest probability of generational success. In the pages to follow, I will take you through the process, point out the pitfalls, and explain why our clients are moving beyond financial success and into perpetual significance. (1) Boston College Center on Wealth and Philanthropy (CWP) (2) The Williams Group Wealth Consultancy MUSIC TO MY HEIRS


THE SECRET FORMULA Formulas are great! They help create a recipe for a favorite dish or the instruction manual for assembling a new toy. Most people like them because they remove a level of uncertainty that could greatly affect the desired outcome. When focusing on answering the Big Question, we must consider the first variable in the formula, which is Generation 1. For this paper, let’s assume Generation 1 is you. Whether you are self-made or the recipient of wealth from above, it is your responsibility to steward the money from this point forward. It is unlikely that we can determine the right amount to provide to Generations 2, 3, and beyond until we understand the needs of Generation 1. So, the formula begins with an understanding of where your money can go. The good news is there are very few places. Everything you have, for the most part, will end up in one of four places. You will use it up in your lifetime, you will give it to someone you care about, you will give it to charity, or the government will take it. Pretty simple. EVERYTHING YOU HAVE WILL END UP IN FOUR PLACES

You will use it in your lifetime

Give it to someone you care about

Give it to charity

The government will take it

In order for you to determine how much money you can give away, we must first understand the amount you need today to sustain your living expenses, grown with inflation, for your lifetime. At Bernstein, we refer to this amount as “core.” In determining core, we assume you may live beyond what mortality tables suggest, high inflation may drive up your spending needs, and deep bear markets may depress your portfolio value, at least temporarily. We use our proprietary Wealth Forecasting SystemSM (WFS) (see below) to run all the specific variables for a client to determine the amount of assets that is their core. THE CORE OF YOUR RELATIONSHIP—TAILORED WEALTH PLANNING Personalized Investor Profile Financial Goals Liquid Assets Illiquid Assets Income Requirements Risk Tolerance Legacy/Philanthropic Time Horizon

Scenarios Scenarios

Bernstein Wealth Forecasting System

Liquidity Events Spending Rate Asset Allocation Giving Strategies

Hypothetical Range of Future Wealth

Great Market Pattern (10% of probable outcomes are above this result)

10,000 Simulated Observations Based on Bernstein’s Proprietary Capital-Market Research

Typical Market Pattern (50% of probable outcomes are above this result) Hostile Market Pattern (90% of probable outcomes are above this result)

The Bernstein Wealth Forecasting System is based upon our proprietary analysis of historical capital-market data over many decades. We look at variables such as past returns, volatility, valuations, and correlations to forecast a vast range of possible outcomes relating to asset classes, not Bernstein portfolios. There is no assurance that any specific outcome suggested by the model will actually come to pass. See Notes on Wealth Forecasting System on page 16. Source: Bernstein 2

We understand that everyone has different needs and desires. Many clients are taking care of their parents; some have children or grandchildren with special needs. Our clients live in different states or countries with changing tax requirements. In addition, the global markets are filled with unknowns and their future will likely not reflect the past. We are able to factor all of those variables into the identification of a client’s core number.


Your Wealth

(after spending and taxes)

Surplus Capital (growth-oriented management)

Core Capital

(preservation-oriented management)


Source: Bernstein

Once we have a handle on core, the model then identifies any assets above core as “surplus.” Surplus is capital you could spend on large, optional purchases (such as a country home) or give to friends, family, or charity. This is usually the point when our clients ask, “What if your core calculation is wrong?” It is a fair question because there are so many variables and the calculation can only give us a range of expectations. However, we can have an extremely high level of confidence in the amount, even in the worst-case scenario, and we can always add a little buffer. What will most likely be wrong is assuming all the assets will always be needed. In addition, core is a diminishing number. It is rare for a 95-year-old person to need the same amount of resources to make it through their life as a 59-year-old person.



You have three things you can pass to your heirs: Wealth Knowledge Values



Asset Allocation Asset Location Volatility Liquidity Taxes

Decide the Best Vehicle to Get It There Invest the Assets for the Appropriate Time Frame



Decide How Much and Where It Should Go



Decide When to Get It There


Annual Exclusion Gift Outright Gift Grantor Retained Annuity Trust (GRAT) Donor Advised Fund (DAF) Charitable Lead Trust (CLT) Charitable Remainder Trust (CRT) Roth IRA 529 Plan People I Care About

Kids Grandkids Parents Others

Over Time


When I Die

Government Usually only the required amount

All of the Above

YES, BUT HOW MUCH SHOULD GO TO THE KIDS? A client once asked this question in a way that I will never forget: “What is the amount that would give my kids a leg up, but not two legs up on a couch?” Another client was afraid of their children getting “Affluenza.” All joking aside, Sudden Wealth Syndrome (SWS)(3) is a real danger with real adverse effects. The solution is in the statement, “wealth transferred without providing knowledge and values is more likely to be destructive than productive.” You have three things you can pass to your heirs: your wealth, your knowledge, and your values. Think of your wealth like a handmade Stradivarius violin, your knowledge as the bow, and your values like the case. To make music for generations, all three must be cared for and present.

THE SOLUTION The amount of wealth you provide should be equal to the amount of knowledge and family values transferred.

(3) SWS is a term coined by psychologist Stephen Goldbart of the Money, Meaning & Choices Institute. MUSIC TO MY HEIRS


Transferring knowledge and values is often more challenging than transferring wealth.

THE CHALLENGE A giant tidal wave is coming and you are in its path. A recent study by the Center on Wealth and Philanthropy (CWP) at Boston College estimates that nearly $60 trillion in US wealth will be exchanged from 2007 to 2061. That does not include the more than $20 trillion projected to go to charity. This is good news, right? That should make the lives of our kids, grandkids, great grandkids and so on, better. But as with any force of nature, it is rarely that easy. You might assume that a large amount of the wealth in America today has been passed down through wealthy families. That is rarer than many think. Of the wealth that is passed down to heirs, studies have shown that over 70% is lost by the second generation and 90% by the third.(4) Put another

Shirtsleeves to shirtsleeves in three generations.

way, there is a 70% failure rate in passing wealth to the next generation. You may know the famous proverb, “Shirtsleeves to shirtsleeves in three generations.” The question is, “Why?” The assumption would be that it must have been incorrect advice from trusted professionals, poor tax planning, or a financial crash in the markets. However, studies have shown that these factors account for less than 3% of lost family wealth. Instead, the largest contributing factor to generational loss of wealth (60%) is lack of communication and trust among family members, followed by unprepared heirs (25%).(5)

(4) The Williams Group Wealth Consultancy (5) Sullivan, Missy, “Lost Inheritance,” The Wall Street Journal (March 8, 2013): 6



There appear to be three pitfalls particularly destructive to family wealth over time. We will group them into Reading, “Right”ing and Arithmetic.

Pitfall #1: Reading—Transferring Intellectual Capital When we read about a family’s history, we learn a lot about the intellectual capital acquired over time and used to build wealth. A professional golfer was once asked which he would choose to pass on to his son, either his wealth or his knowledge and talent for the game. He said, “The latter, without question. I would know that he would

Formal education will make you a living; self-education will make you a fortune.

—Jim Rohn

never starve.” So why aren’t wealthy parents spending time educating their children on how to build wealth? In many cases, they believe the universities are better at teaching the skills necessary to build wealth than they would be. For instance, look at the size of their endowments. In reality, university MBA programs by no means possess a secret formula for how to build wealth, and they are constantly tapping the practical knowledge of those who have. Many of our UHNW clients didn’t get a master’s degree or even graduate from a university. Neither did Bill Gates, Michael Dell, Larry Ellison, Mark Zuckerberg, Steve Jobs, Henry Ford, John D. Rockefeller, Milton Hershey, or Walt Disney. This is not to say that schools are not great resources for our heirs. They most certainly are. However, a similar effort should be put into transferring the intellectual capital that built the family wealth. How about the first generation’s track record in passing on the skill of managing wealth? This transfer is no more successful, likely because of the difference between the skills it took to build the wealth and the skills it takes to manage it. These are often very different skill sets. In addition, when I interview our clients about their relationship with money growing up, most say it was rarely discussed. Many of our clients have not discussed investments and managing wealth with their children because they are not comfortable with their own level of knowledge, which is why they have hired professionals.

Pitfall #2: “Right”ing—Avoiding Entitlement How does Generation 1 avoid a sense of entitlement for the generations to come, especially when those generations likely were not around during the wealth creation? Let me share the story of a European immigrant couple who arrived in the US in the 1920s. Without a dollar to spare and no formal education, they worked any job for most of every day just to survive. Their life was filled with the grit of struggle. They eventually take the risk to start their own business. Over time and with hard work, it grows and they become wealthy. Along the way they have four children who work alongside them on the weekends and witness their parents’ sacrifice. Thanks to the family’s success, all four go to the local high school and on to college, unlike their parents. As their families grow, the business is sold for a large sum of money and the grandchildren hear stories about what once was. Thanks to the family’s success, the grandchildren now go to the best schools and colleges and never get the opportunity to work in the family business, or in any business on the weekends. As a matter of fact, their parents work to remove as much of the grit and struggle from their lives because they love them. Imagine what awaits the great grandchildren.


Nature teaches us that in order to thrive, we must struggle. You’ve likely heard the story about a man who tried to help a butterfly out of its cocoon by slitting the cocoon open. The butterfly that emerged had small, unformed wings and died soon after. It needed to struggle out of the cocoon to force fluid into its wings to stretch and open them so that

Nature teaches us that in order to thrive, we must struggle.

the butterfly could thrive. By removing the struggle, the man had instead doomed the creature. We see this happen too often with wealthy parents and their children. They remove the grit of the world, clear the paths for their journey, and prepare them for a life with their parents, not without them. The children then adopt an entitlement mentality. They feel they are entitled to the family wealth and are unprepared for a life without it. Grit comes in many forms in life. For some it is the struggle to overcome, and for others it is the struggle to wait for what is to come. Over the years, researchers have searched for a common trait that would give a child the best chance for future success and fulfillment in life. Some thought that education was the best path to success, but we have clearly seen that some of the most successful people in history lacked formal or advanced education. A predictor of future success began to surface in the late 1960s when Stanford University professors Walter Mischel and Ebbe B. Ebbesen conducted the now famous Stanford Marshmallow Experiment. The children in the experiment, usually around age four or five, were given a choice. They could receive one marshmallow, cookie, or pretzel now, or two if they waited to eat the treat until the researcher returned. The children were left alone for approximately 15 minutes. The researchers returned to find some children with an empty plate and others with their marshmallow untouched. Well, some did actually touch and even sit on their marshmallow, but just did not eat it. The true impact of the experiment came over the next 40 years as they followed each child year by year. The results where eye opening. The children who could delay gratification and simply wait tended to have better life outcomes as measured by SAT scores, educational achievement, body mass index (BMI), and stress coping skills. This appeared to be the first evidence of a predictive and measurable trait. Now, you may be thinking that this ability to postpone gratification is one of the qualities currently lacking in your heir. Can this critical skill be taught? The University of Rochester set out in 2012 to better answer that question and understand how a child’s environment could affect their desire to delay gratification. In other words, can you influence a delay in gratification? In the University of Rochester experiment, an additional test was done prior to the classic Marshmallow Experiment. The children were put into two contrasting environments. In the first group, the researcher provided a few older crayons and promised to return shortly with a new and larger box. After two and a half minutes, the researcher returned and apologized saying there were no new crayons. In the second group, the setup was the same, but the researcher returned with the new crayons. The children in the second group, who had received the new crayons as promised, waited four times longer to eat their marshmallow than those in the first group, or did not eat their marshmallow at all.



The ability to wait is a real challenge for generations to come because so many of the things in our world now are built around immediate gratification. Today, we can download a movie without getting out of our seats, Amazon will deliver most things the next day and Visa will cover both until we have the money.

The ability to wait is a real challenge for generations to come because so many of the things in our world now are built around immediate gratification.

The lesson to learn is that creating an environment for our heirs where small delays in gratification are a positive part of their experience will be critical to their future ability to be good stewards of family wealth for the generations to come. Perhaps the most famous example of inherited wealth lost is the Vanderbilt family. Cornelius, the patriarch, built a fortune on railroads and shipping during the mid-1800s. Adjusted for the size of the economy, he would be the second-richest American ever, worth over $200 billion.(6) Yet his children— especially his grandchildren—lived lavishly, building huge mansions in New York City, Newport, R.I., and elsewhere, and did little to preserve the fortune. By the 1970s, the family held a reunion with 120 members attending, and there wasn’t a millionaire among them.(7) Even more recently, an article titled, “Fall of the House of Busch” in Bloomberg Businessweek outlined how it took four generations to build Anheuser-Busch and only one for it to come apart. The first generation’s best intentions are met with third-generational changes.

Pitfall #3: Arithmetic—The Compounding Effect Just when we thought compounding was our friend, the example of the Vanderbilt family demonstrates that as the next generation arrives, it is usually larger than the one before. Now compound that by a generation, then another. This creates several issues for the wealth. First, it must keep up with more and more demand on the resources while also dealing with inflation. Second, families have a tendency to break the money up so each person can do what they want. The smaller amounts no longer benefit from consistent professional services, lower combined expenses, and the investment and diversification opportunities that existed when the pot was large. This is why many individuals envy the returns of the large endowments, but due to their lack of asset size, they cannot access the same opportunities for a reasonable fee, or at all. Therefore, they take on more risk, for less return at a higher price. Then, the growth of the family outpaces the growth of assets until it is all gone.

AVOIDING THE PITFALLS Let’s start with Reading. The problem of avoiding discussions about wealth, if not fixed, will be inherited for generations. Communication is the solution. My team and I have built an educational curriculum for our clients using both internal and external tools to address this issue. We host annual family meetings with the right balance of education and fun that empowers the next generation. They are being

(6) (7) Michael Klepper and Robert Gunther in their book The Wealthy 100. 10

introduced to the family’s advisors and being educated by those advisors. We understand that children have different levels of interest and ability. They learn differently than their parents and have different dreams. Over time, we include daughters-in-law and sons-in-law who have different financial backgrounds and great influence on the third generation. We also provide a forum for the matriarch and patriarch to share family history and what they have learned about wealth creation in a way that feels more like an interview and less like a lesson. When done right, the time spent with the professionals, in addition to their university professors, will provide the future generations with the necessary tools and knowledge to be prudent stewards of the family wealth. Providing this information on how to build wealth and how to manage wealth is critical. Next is “Right”ing, where a family must be willing to allow the next generation to benefit from struggle. Wealthy parents must reward delayed gratification, leave in some grit and stop opening the cocoon if they want their heirs to thrive. Andrew Carnegie shares this philosophy in his book The Advantages of Poverty. It is important that we allow them to fail and learn from their mistakes and that we share our failures. If they believe you have never failed, they will panic when they fail. Julie Lythcott-Haims, the former Dean of Freshmen and Undergraduate Advising at Stanford University, gives us even more direction in her book How to Raise an Adult. In her TED Talk, she references the Harvard Grant Study, which is the longest-running longitudinal study in history. One of the study’s key findings is that doing chores, starting at a young age, is a significant indicator of future professional success. More

Don’t educate your children to be rich. Educate them to be happy, so when they grow up they will know the value of things, not the price. —Victor Hugo

specifically, chores that benefit the whole family. We believe the best training ground to address “Right”ing lies within the philanthropic goals of the family. We have a structure using a family foundation, donor advised fund, and/or direct gifts to allow the next generation to understand the value of a dollar and the positive impact it can have in the world. We will give that generation the ability to manage charitable assets as if they were their personal assets, conduct due diligence on organizations the family would like to support, and measure the results of their decisions. This becomes a positive chore and challenge that they can embrace. Philanthropy is the best way to put a family’s values into action and monitor the next generation’s development. Finally, the Arithmetic. Our experience is that the best way to attack the arithmetic problem is with structure and governance. Family wealth should be handled as if it is a business. Learn from the Rockefellers and DuPonts. It requires vision, leadership, and organization. If the wealth is going to last for generations, it is critical to hire fiduciary advisors with both decades of experience and a relentless desire to understand the future. Governance provides safety for all heirs. Finally, but importantly, where possible, wealth should be held together in larger buckets for the family. We also understand that the definition of family now is very different than that of the past. Over 60% of wealthy families today are blended families,(8) and the idea that all family members can become good stewards of wealth is unrealistic. In those cases, a professional fiduciary may be necessary for some or all of the decisions. Your professional advisors should be talking to each other, and the next generation should be developing their own relationship with those advisors. It rarely works if they don’t.

(8) Cumberland Trust



THE SUM If you have worked hard to build your wealth and want to make your money meaningful for generations, you can do it. The key is to allow your wealth to be fuel for your heirs’ passion, not a substitute for it. Most UHNW individuals worry more about those they love being harmed by the money than they do about having enough for themselves. Considerable wealth is a double-edged sword. It brings security and opportunity as well as burden and complexity. Do the hard work by combining an equal amount of your family’s knowledge and values with the amount of wealth, and you will bridge the gap from success to significance.

In appreciation for the leader of my family band.

Paul S. Lewis Sr. (1938–2014)


Stephen C. Lewis Principal and Financial Advisor Stephen C. Lewis has a global clientele who seek his unique expertise in the intersection between third-generational wealth, philanthropy, and investment design. He is recognized as a leading expert in guiding families through the complexities of multigenerational wealth. Supported by the vast resources of AB Bernstein, Stephen has enabled his clients to maximize their

About Bernstein Bernstein Private Wealth Management is an investment firm that has focused solely on research and investment management since 1967. Our clients are individuals and families, business owners, foundations, and other financial guardians. Bernstein offers a full range of investment services in all the world’s major markets, with centralized portfolio management so that all our clients benefit from our best investing ideas.

success. By understanding their relationship with money, he helps

We emphasize planning, portfolio customization, and tax

them make their wealth meaningful.

management so our clients can meet their investment goals

Stephen joined Bernstein in 2002 as a Financial Advisor and

without undue risk or tax burden.

helped launch Bernstein’s private client practice in Houston.

As discretionary money managers, we are bound by fiduciary

He was appointed Principal in 2008 and co-founded the firm’s

responsibility to our clients; our mission is to help them limit

Nonprofit Advisory Group in 2011.

risk and reach their goals across market cycles.

He earned a BA in human relations from Texas Christian University and studied finance at the University of Chicago’s Graduate School of Business. Texas Monthly magazine has selected him as a Five-Star Best in Client Satisfaction Wealth

Contact Information 1000 Louisiana Street Suite 3600


Houston, TX 77002

Stephen is on the board of trustees of Star of Hope, and an

advisor to Crime Stoppers of Houston and Life Without Limbs.

Tel: 832.366.2070

In addition, Stephen volunteers as an auctioneer at events for numerous charitable causes, including the American Heart Association, UNICEF, The Children’s Assessment Center, and the Susan G. Komen Breast Cancer Foundation.



Notes on Wealth Forecasting System 1. Purpose and Description of Wealth Forecasting SystemSM Bernstein’s Wealth Forecasting SystemSM is designed to assist investors in making their long-term investment decisions as to their allocation of investments among categories of financial assets. Our planning tool consists of a four-step process: (1) Client-Profile Input: the client’s asset allocation, income, expenses, cash withdrawals, tax rate, risk-tolerance level, goals, and other factors; (2) Client Scenarios: in effect, questions the client would like our guidance on, which may touch on issues such as when to retire, what his/her cash-flow stream is likely to be, whether his/her portfolio can beat inflation long-term, and how different asset allocations might impact his/her long-term security; (3) The Capital Markets Engine: our proprietary model that uses our research and historical data to create a vast range of hypothetical market returns, which takes into account the linkages within and among the capital markets, as well as their unpredictability; and finally (4) A Probability Distribution of Outcomes: based on the assets invested pursuant to the stated asset allocation, 90% of the estimated ranges of probable returns and asset values the client could experience are represented within the range established by the 5th and 95th percentiles on “box-and-whiskers” graphs. However, outcomes outside this range are expected to occur 10% of the time; thus, the range does not guarantee results or establish the boundaries for all outcomes. Estimated market returns on bonds are derived taking into account yield and other criteria. An important assumption is that stocks will, over time, outperform long bonds by a reasonable amount, although this is in no way a certainty. Moreover, actual future results may not meet Bernstein’s estimates of the range of market returns, as these results are subject to a variety of economic, market, and other variables. Accordingly, the analysis should not be construed as a promise of actual future results, the actual range of future results, or the actual probability that these results will be realized. Of course, no investment strategy or allocation can eliminate risk or guarantee returns. 2. Retirement Vehicles Each retirement plan is modeled as one of the following vehicles: traditional IRA, 401(k), 403(b), Keogh, or Roth IRA/401(k). One of the significant differences among these vehicle types is the date at which mandatory distributions commence. For traditional IRA vehicles, mandatory distributions are assumed to commence during the year in which the investor reaches the age of 701/2. For 401(k), 403(b), and Keogh vehicles, mandatory distributions are assumed to commence at the later of (i) the year in which the investor reaches the age of 701/2 or (ii) the year in which the investor retires. In the case of a married couple, these dates are based on the date of birth of the older spouse. The minimum mandatory withdrawal is estimated using the Minimum Distribution Incidental Benefit tables, as published on For Roth IRA/401(k) vehicles, there are no mandatory distributions. Distributions from a Roth IRA/401(k) that exceed principal will be taxed and/or penalized if the distributed assets are less than five years old and the contributor is less than 591/2 years old. All Roth 401(k) plans will be rolled into a Roth IRA plan when the investor turns 591/2 years old to avoid minimum distribution requirements. 3. Rebalancing Another important planning assumption is how the asset allocation varies over time. We attempt to model how the portfolio would actually be managed. Cash flows and cash generated from portfolio turnover are used to maintain the selected asset allocation between cash, bonds, stocks, REITs, and hedge funds over the period of the analysis. Where this is not sufficient, an optimization program is run to trade off the mismatch between the actual allocation and targets against the cost of trading to rebalance. In general, the portfolio is expected to be maintained reasonably close to the target allocation. In addition, in later years, there may be contention between the total relationship’s allocation and those of the separate portfolios. For example, suppose an investor (in the top marginal federal tax bracket) begins with an asset mix consisting entirely of municipal bonds in his/her personal portfolio and entirely of stocks in his/her retirement portfolio. If personal assets are spent, the mix between stocks and bonds will diverge from targets. We put primary weight on maintaining the overall allocation near target, which may result in an allocation to taxable bonds in the retirement portfolio as the personal assets decrease in value relative to the retirement portfolio’s value. 4. Expenses and Spending Plans (Withdrawals) All results are generally shown after applicable taxes and after anticipated withdrawals and/or additions, unless otherwise noted. Liquidations may result in realized gains or losses, which will have capital gains tax implications. 14

5. Modeled Asset Classes The following assets or indexes were used in this analysis to represent the various model classes:

Asset Class

Modeled as…

Annual Turnover Rate

Cash Equivalents

3-month Treasury bills

Intermediate-Term Diversified Municipals

AA-rated diversified municipal bonds of 7-year maturity


Intermediate-Term Taxables

Taxable bonds of 7-year maturity


Global Intermediate-Term Taxable Bonds—Hedged

7-year 50% sovereign and 50% investment-grade corporate debt of developed countries


US Diversified Stocks

S&P 500 Index


US Value Stocks

S&P/Barra Value Index


US Growth Stocks

S&P/Barra Growth Index


US Small-/Mid-Cap Stocks

Russell 2500 Index


Developed International Stocks

MSCI EAFE Unhedged Index


Emerging-Market Stocks

MSCI Emerging Markets Index



6. Volatility Volatility is a measure of dispersion of expected returns around the average. The greater the volatility, the more likely it is that returns in any one period will be substantially above or below the expected result. The volatility for each asset class used in this analysis is listed in the Capital-Market Projections section at the end of these Notes. In general, two-thirds of the returns will be within one standard deviation. For example, assuming that stocks are expected to return 8.0% on a compounded basis and the volatility of returns on stocks is 17.0%, in any one year it is likely that two-thirds of the projected returns will be between (8.9)% and 28.8%. With intermediate government bonds, if the expected compound return is assumed to be 5.0% and the volatility is assumed to be 6.0%, two-thirds of the outcomes will typically be between (1.1)% and 11.5%. Bernstein’s forecast of volatility is based on historical data and incorporates Bernstein’s judgment that the volatility of fixed income assets is different for different time periods. 7. Technical Assumptions Bernstein’s Wealth Forecasting System is based on a number of technical assumptions regarding the future behavior of financial markets. Bernstein’s Capital Markets Engine is the module responsible for creating simulations of returns in the capital markets. These simulations are based on inputs that summarize the current condition of the capital markets as of March 31, 2016. Therefore, the first 12-month period of simulated returns represents the period from March 31, 2016, through March 31, 2017, and not necessarily the calendar year of 2016. A description of these technical assumptions is available on request. 8. Tax Implications Before making any asset allocation decisions, an investor should review with his/her tax advisor the tax liabilities incurred by the different investment alternatives presented herein, including any capital gains that would be incurred as a result of liquidating all or part of his/her portfolio, retirement-plan distributions, investments in municipal or taxable bonds, etc. Bernstein does not provide tax, legal, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. 9. Tax Rates Bernstein’s Wealth Forecasting System has used various assumptions for the income-tax rates of investors in the examples included in this guide. See the assumptions in each example (including footnotes) for details. The federal income-tax rate is Bernstein’s estimate of either the top marginal tax bracket or an “average” rate calculated based upon the marginal rate schedule. For 2014 and beyond, the maximum federal tax rate on investment income is 43.4% and the maximum federal long-term capital-gains tax rate is 23.8%. Federal tax rates are blended with applicable state tax rates by including, among other things, federal deductions for state income and capital-gains taxes. The state tax rate generally represents Bernstein’s estimate of the top marginal rate, if applicable. MUSIC TO MY HEIRS


10. Core Capital Analysis The term “core capital” means the amount of money necessary to cover anticipated lifetime net spending. All non-core-capital assets are termed “surplus capital.” Bernstein estimates core capital by inputting information supplied by the client, including expected future income and spending, into our Wealth Forecasting System, which simulates a vast range of potential market returns over the client’s anticipated life span. From these simulations we develop an estimate of the core capital the client will require to maintain his/her spending level over time. Variations in actual income, spending, applicable tax rates, life span, and market returns may substantially impact the likelihood that a core capital estimate will be sufficient to provide for future expenses. Accordingly, the estimate should not be construed as a promise of actual future results, the actual range of future results, or the actual probability that the results will be realized. 11. Mortality In our mortality-adjusted analyses, the life span of an individual varies in each of our 10,000 trials in accordance with mortality tables. To reflect that high-net-worth individuals live longer than average, we subtract three years from each individual’s age (e.g., a 65-year-old would be modeled as a 62-year-old). Mortality simulations are based on the Society of Actuaries Retirement Plan Experience Committee Mortality Tables RP-2000. 12. Endowment The endowment is modeled as a nontaxable permanent fund bestowed upon an institution to be used to support a specific purpose in perpetuity. The endowment may receive an initial donation and periodic funding from either the personal portfolio modeled in the system or an external source. Annual distributions from the endowment may be structured in a number of different ways, including: (1) an annuity or fixed dollar amount, which may be increased annually by inflation or by a fixed percentage; (2) a unitrust, or annual payout of a percentage of endowment assets, based on a single year or the average over several years; (3) a linear distribution of endowment assets, determined each year by dividing the endowment assets by the remaining number of years; or (4) the greater of the previous year’s distribution or any of the above methods. These distribution policies can be varied in any given year. 13. Private Foundation The private foundation is modeled as a charitable trust or not-for-profit corporation, which can be either a private operating foundation or a private nonoperating foundation. The foundation may receive an initial donation and periodic funding from either the personal portfolio modeled in the system or an external source. Annual distributions from the foundation may be structured in a number of different ways, so long as the foundation distributes the minimum amount required under federal regulations, including: (1) only the minimum amount; (2) an annuity or fixed dollar amount, which may be increased annually by inflation or by a fixed percentage; (3) a unitrust, or annual payout of a percentage of foundation assets, based on a single year or the average over multiple years; (4) a linear distribution of foundation assets, determined each year by dividing the foundation assets by the remaining number of years; or (5) the greater of the previous year’s distribution or any of the above methods. These distribution policies can be varied in any given year. For nonoperating foundations, the system calculates the excise tax on net investment income. 14. Charitable Remainder Trust The charitable remainder trust (CRT) is modeled as a tax-planning or an estate-planning vehicle, which makes an annual payout to the recipient(s) specified by the grantor, and at the end of its term (which may be the recipient’s lifetime), transfers any remaining assets, as a tax-free gift, to a charitable organization. Depending on the payout’s structure, the CRT can be modeled as either a charitable remainder unitrust (CRUT) or a charitable remainder annuity trust (CRAT). The CRUT’s payout is equal to a fixed percentage of the portfolio’s beginning-year value, whereas the CRAT’s payout consists of a fixed dollar amount. In the inception year of the CRT, its grantor receives an income-tax deduction typically equal to the present value of the charitable donation, subject to the applicable adjusted gross income (AGI) limits on charitable deductions and phaseout of itemized deductions, as well as the rules regarding reduction to basis of gifts to private foundations. Unused charitable deductions are carried forward up to five years. Although the CRT does not pay taxes on its income or capital gains, its payouts are included in the recipient’s AGI using the following four accounting tiers: Tier 1—Ordinary Income (Taxable Interest/Dividends); Tier 2—Realized Long-Term Capital Gains; Tier 3— Other Income (Tax-Exempt Interest); and Tier 4—Principal. CRTs are required to pay out all current and previously retained Tier 1 income first, all current and previously retained Tier 2 income second, all current and previously retained Tier 3 income third, and Tier 4 income last.


15. Charitable Lead Trust The charitable lead trust (CLT) is modeled as a portfolio that receives its initial funding from the grantor and transfers payments to one or more charitable recipients each year for a specified number of years or for the life or lives of certain individuals. The annual payments may be a fixed dollar amount (charitable lead annuity trust or CLAT) or a percentage of the trust’s assets as valued every year (charitable lead unitrust or CLUT). In the case of a CLAT, annuities may be fixed (the same amount each year), or increasing. The annual payment is generally made first from available cash and then from other trust assets in kind. In a non-grantor CLT, the trust itself is subject to income taxation, and generally pays income tax with respect to retained income and receives a charitable income-tax deduction with respect to certain income paid to the charitable recipient(s). Realized capital gains may be taxable to the trust or treated as a distribution to charitable recipient(s) (and therefore eligible for a charitable income-tax deduction), depending upon the provisions of the trust instrument and other factors. In a grantor CLT, the trust is a “grantor” trust for income-tax purposes, such that the grantor is personally taxed on all items of trust income. The grantor is entitled to a charitable income-tax deduction upon funding for the portion of the CLT then calculated to be payable to the charitable recipient(s) over its term (often the entire funding amount). This charitable income-tax deduction is subject to recapture rules if the grantor dies during the term of the CLT. For both the non-grantor and grantor CLT, when the CLT term ends, the remainder, if any, may be transferred as directed by the trust agreement, including to a non-modeled recipient, a taxable trust, or a beneficiary’s portfolio. The assets transferred from the CLT will have carryover cost basis. 16. Capital-Market Projections

Median 30-Year Growth Rate

Mean Annual Return

Mean Annual Income

One-Year Volatility

30-Year Annual Equivalent Volatility






Intermediate-Term Diversified Municipals






Intermediate-Term Taxables






Global Intermediate-Term Taxable Bonds—Hedged






US Diversified Stocks






US Value Stocks






US Growth Stocks






US Small-/Mid-Cap Stocks






Developed International Stocks






Emerging-Market Stocks












Cash Equivalents

Based on 10,000 simulated trials, each consisting of 30-year periods. Based on Bernstein’s estimates and the capital-market conditions as of March 31, 2016. Does not represent any past performance and is not a guarantee of any future specific risk levels or returns, or any specific range of risk levels or returns.


Music to My Heirs  

Imagine you have entered a Dickens’ novel and traveled 20 or 30 years into your future. You get to see the lives of your children, grandchi...

Music to My Heirs  

Imagine you have entered a Dickens’ novel and traveled 20 or 30 years into your future. You get to see the lives of your children, grandchi...