A Family Mission Statement Can Keep Family Goals First

When rich families squabble over the family legacy, it becomes headline news. Witness the recent battle over the ownership of the Wall Street Journal between members of the Bancroft family. When approached by media titan Rupert Murdoch, various family members fought over whether to preserve the family legacy at the legendary daily business paper or take the money and run. Money eventually won.

For most average Americans, such stories are an illustration not only of how money doesn’t buy happiness, but how it breeds dissention and distance between people who could be enjoying their wealth and moving in concert. With all that money, how can people be so unhappy and contentious?

Families with substantial assets – or the promise of substantial assets as a business grows – might consider creating a family mission statement. While the end product should produce a document built from discussion, argument and consensus, it’s not so much about the piece of paper as the process. When a family sits down to discuss what is really important to them, it’s an opportunity to take the machine apart and see how it works. Many families start the process as a way to build consensus about long-term financial, business, estate and philanthropic goals, but to their surprise, money can take a back seat. Families discover particular strengths, weaknesses and unexpected courses of action within their ranks. The process might identify future leaders of the family.

Trained financial advisors, such as Certified Financial Planner ™ professionals, can explain and guide the process. Some planners may be trained to facilitate such discussion based on the size and goals of the family involved.

The general creation of a family financial mission statement should have four key touchpoints: estate issues, philanthropy, business direction and family dynamics.

Here are some questions that should be asked of everyone in preparing the family’s financial mission statement. They should focus on relationship issues first, and then move into business and money matters.

• What’s most important about our family?

• What do you think our goals should be?

• When do you feel most connected to the rest of us?

• How should we relate to one another?

• What are our strengths as a family?

• Where do you think we’ll be as individuals in 5, 10 and 15 years?

• In order, what are the five things you value most in life?

• How should we behave toward each other?

• How should we resolve our disputes?

• How important is the family business to you?

• What should we be doing differently with our family money as well as our assets inside the business?

• What’s the best way for us to be building our wealth?

• What do you think the role of our family should be in helping the community?

• What should we be doing individually and as a family with regard to philanthropy?

Structurally, the written mission statement can be whatever you agree it should be – a few paragraphs or a page or two. And it needn’t be set in stone – a family should have a meeting every year or two to revise or approve its mission. The family mission statement helps your family establish its identity and the variety of voices within. It can help set goals and diffuse tensions later. It can also be used to moderate discussions that inevitably happen after major changes within the family – death, divorce or happily, an increase in the number of heirs and participants.

As for the age of the participants, it can start in very basic form with younger children and the process can mature as they age. It’s actually a good idea to bring young members into a customized version of the process for youngsters so they can comfortably adjust to working as adults with the older members of the family.

For a handy resource on writing a family mission statement, go to this site: http://www.nightingale.com/mission_select.aspx?from=homepage&element=missiontitle

November 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Hillebrand Financial Planning, LLC, a local member of FPA.

Will Your Kid’s Inheritance Make Her a Monster? Not If You Plan Carefully

The airwaves are full of cautionary tales of young people with too much money too soon – wretched excess is in, and responsibility seems, well, pretty boring. And your last name doesn’t have to be “Hilton” for you to worry.

Inheritances, trust funds and other benefits from hard-earned family fortunes of any size can affect the children of wealthy individuals in incredibly positive and negative ways.

Most financial experts, such as Certified Financial Planner™ professionals, will tell you the best scenarios involve early planning, solid parenting and complete family involvement from the start. Here are some suggestions on how to raise a responsible heir:

Get advice early: If you have created a successful business or amassed a fortune working for a fast-growing employer, it makes sense to sit down with tax, legal and financial advisors to talk not only about the No. 1 goal of protecting those assets, but passing them intelligently to the next generation. Because these conversations should go beyond sensible money and tax management to how these assets will affect your family’s entire life, one of the first questions you should ask is, “How do I train my kids to inherit this money?” Also, it’s critical that you include the unthinkable in your discussion – how your surviving spouse or designated guardians will continue this stewardship if you die. You need to make sure your plan is effective particularly if you’re not there to carry it out.

Start basic money training early: In most households, kids start learning about money and what it does around age 4 or 5, even if it’s only centered on how to buy a popsicle. Obviously, your kid might have some idea already that his parents have money, so you have to strike a balance between the reality of your fortunate situation and the responsibility training all kids need no matter what their circumstances. You don’t need to lie about what you have, but when kids are this young, you’re not anywhere near discussing what they may inherit when they’re older. It’s not their money anyway. Your job should be to introduce your kids to chores and a modest allowance to cover essentials, treats and savings that you’ll agree upon. Then watch closely to see how your kid is learning these skills. This is the bedrock of how they’ll be handling money the rest of their lives.

Lead by example: If a kid grows up in a house where parents spend indiscriminately and settle disputes with the kids with money and toys, chances are the kids will repeat those patterns as teens and adults. If a kid grows up in a house where parents set money priorities for themselves, participate in charity and community service and expect children to do the same, that’s a powerful lesson about wise choices in time and money for a lifetime.

Do a family mission statement each year: This may get an eye roll from some family members. But a once-a-year meeting to discuss what’s important in family life is a great mechanism not only to find out how the entire family is doing with regard to personal values and goals, but a great way to work in a purposeful wealth message that expands over time. When children are young, they should be allowed a vote in how family money is spent for particular luxuries like vacations, and as they get older, parents can elect to expand their vote in other areas, such as general investment policies for the family holdings.

Involve the kids in investment and planning: If a child is inheriting wealth at a certain age, it is entirely fair to bring them into the process of the care and feeding of that wealth at a significantly earlier age, possibly in their early teens. Before that, it might be fun for them to buy a particular stock or mutual fund that they can own jointly with you so they can see how investments perform. Eventually, you can migrate their attention to their potential inheritance, how that money is currently invested and what efforts are taken to protect its principal are essential if they are going to take over responsible management of those funds someday. Kids need to understand that wealth needs to be tended to in order to grow – you might even consider bringing them to meetings with your money managers so they can learn about the process over time.

Raise the suggestion that wealth should stay invested. Wealthy relatives need to tread carefully here, because if a young person gets money, they’re going to understandably want to have some fun with it. But it’s important to teach the message that a significant part of the inheritance should stay responsibly invested so the child can address a personal goal (advanced education, starting a business or their own philanthropy) or have wealth to pass on to their families.

Get them some independent training: The wealth management industry – including financial planners – are directing training resources toward younger clients who may come into considerable fortunes at a later date. It’s to their benefit – they want to keep that business. But if you are already working with investment experts whom you trust, why not ask them about training your kids can receive when you’re not around? As adults, they are going to eventually handle decisions on their own – it might be wise to continue their learning in an adult environment where they can take the lead in a discussion.

November 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Hillebrand Financial Planning, LLC, a local member of FPA.

Afraid of the AMT? Now’s the Time to Get Some Help

Unless Congress acts, the number of taxpayers hit by the Alternative Minimum Tax (AMT) in 2007 will jump to about 23 million from about 4 million in 2006. The AMT is an alternative, separate tax calculation created in 1969 to make sure the wealthiest Americans paid a fair amount of taxes. The AMT is applied to particular taxpayers’ regular taxable income when particular activities and deductions add up.

Basically, Uncle Sam wanted to keep taxpayers from writing off their tax responsibilities forever.

But why is the AMT spreading lower and lower on the tax rolls to the middle class? There are two reasons. First, since its introduction in 1969, elements of the AMT have not been adjusted for inflation while the regular income tax has. According to the Tax Policy Center of the Urban Institute, this means that if an individual’s income tax just keeps up with the annual rate of inflation, his or her income tax would remain constant in real terms while the potential AMT liability would continue to increase. Second, it’s also important to note that since its inception, the government has dropped the top tax rate from 70 percent at the start to 35 percent in this decade while the AMT rate has risen by several percentage points. The intersection of AMT and regular tax over the past 40 years is as much as story of changing tax brackets as it is the adjustment of the exemption amount.

The approaching election year might finally force some permanent change on the AMT situation, but until then, it makes sense to consult a qualified tax advisor or a Certified Financial Planner™ professional on your risk factors for the AMT. It’s too complicated to fully explain here, so advice is essential. There are many reasons people get pushed into the AMT zone. Here are some key facts and situations related to the AMT:

Who should check for the AMT? If your income is above $75,000 and you write off personal exemptions, state income taxes, property taxes and home equity loan interest, it’s best to see if you’re at risk. And if you’re simply earning over $100,000, you definitely should check for AMT eligibility no matter what your deduction status. Form 6251 requires you to add back some deductions and income exclusions to your regular taxable income in the process of computing AMT. Among them: Your personal- and dependent exemptions, or your standard deduction if you don’t itemize. You will also lose your state local and foreign income and property tax write-offs and potentially your home equity loan interest if you don’t use your home equity line for home improvements. Once computed, if the AMT is higher than your regular tax liability you pay the additional amount (in addition to regular taxes). The hit could be surprising.

Watch those stock options: If you’re thinking of exercising incentive stock options, keep an eye on the spread between the market value at the time of exercise and the exercise price. Although not immediately subject to regular tax, the spread is subject to AMT. Based on advice particular to your situation, you might want to keep those options still and not exercise them until early 2008 to gain some tax flexibility.

If you own a business, get advice: If you own a business, rental properties or hold an interest in a partnership or an S corporation, certain business depreciation deductions might be a critical trigger for the AMT lens.

Tax-free bonds can be a trigger: The AMT counts as income interest earned from municipal bonds designated as private activity bonds, so there goes that tax edge. Many tax-exempt money market funds and high-yield tax-exempt municipal bond funds may hold relatively large percentages of these bonds.

Know your AMT exemptions: For 2007, if Congress does not extend the act increasing the exemption (the so-called AMT “patch” legislation), the AMT exemption will be decreased to $33,750 for an individual, $45,000 if married filing jointly or if that person is a qualifying widow or widower and $22,500 if married filing separately. These exemptions were higher in 2006 after Congress came to the rescue. As of this year, the exemption for Hurricane Katrina victims is scheduled to expire as well as the additional exemption for taxpayers who provide housing for a person displaced by Hurricane Katrina.

More bad news: The following credits won’t be allowed against the AMT unless Congress rides to the rescue: Child and dependent care expenses, credit for the elderly or the disabled, education credits, residential energy credits and the mortgage interest credit. Also, if you live in the District of Columbia, its first-time homebuyer credit will no longer be allowed against the AMT.

The key is to work with your advisors to determine if you are a likely target and include the AMT as part of the planning process. Often, it is more something to be aware of than to be avoided. Because the AMT is so complicated (and may complicate financial decisions), the IRS provides an AMT Assistant for Individuals—an electronic version of the AMT worksheet in the 1040 instructions—go to: http://www.irs.gov/businesses/small/article/0,,id=150703,00.html

November 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Hillebrand Financial Planning, LLC, a local member of FPA.