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Section Review

Teaching future generations to be mindful of money

Paul J. McCauley is first vice president and private wealth advisor for the Private Banking & Investment Group of Merrill Lynch in Boston.
Gary L. McGuirk is a first vice president and private wealth advisor for the Private Banking & Investment Group of Merrill Lynch in Boston and holds a law degree.
Steven A. Branson is an attorney in Dedham who provides financial and legal advice, along with ongoing implementation, to high net worth individuals to optimize their personal and business resources.

Any information presented about tax considerations affecting your financial transactions or arrangements is not intended as tax advice and cannot be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its financial advisors provide tax, accounting or legal advice. You should review any planned financial transactions or arrangement that may have tax, accounting or legal implications with your personal professional advisors.

Today’s parents will have many difficult conversations about life with their children. But the conversations can become more complex when parents try to raise an independent child who has a healthy understanding of the value of money.

Many clients turn to their financial and legal advisors for advice about how to teach their children the value of wealth. These clients, typically ultra-high-net-worth parents, are looking for direction on how to provide their children with the skills to be financially and socially responsible stewards of their wealth and of this world. As members of the financial and legal community, we need to be prepared to impart words of wisdom to our clients who are interested in communicating the value of a dollar to their children. Here are some ways you can help your clients help their children to be mindful of money.

Begin financial education early

The first step for clients is to take stock of their own values and family goals for their wealth. Introspective questions should be asked about the use of their wealth and how parents can best set a good example for the responsible use of the funds. As this process unfolds, a client is ready to begin the financial education of their children. This education can be as simple as discussing what money is about up to concepts as complex as the economy, investments, taxes and estate planning.

When family goals for wealth have been established along with clearly defined family values that surround money, the family can begin to implement age-appropriate money skills. These skills generally fall under three major categories: saving, spending and sharing. Each of them come with their own set of challenges but also present an opportunity to teach children the importance of establishing a healthy balance between saving, spending and sharing.

Encourage your clients to start lessons about money early on, especially in homes where money is plentiful and pervasive. This is important because children can come to their own conclusions about money and how it is earned, spent and used in general. A good way for your clients to prepare their children to manage money is through role playing and real-world practice. When their children are at a young age, have them collect tickets for helping with chores around the house. Let them use the tickets to buy toys and treats for themselves. When their children are older, encourage parents to introduce the use of real money. These efforts will help their children develop a work ethic and sense of responsibility.

Another way your client can instill the importance of money is to encourage saving. For example, children can participate in saving for their college fund by contributing a portion of their allowance and/or earnings in a Qualified Tuition Program. A child’s participation in this activity can bring about a discussion on how money compounds and grows. Additionally, your clients can match any funds their children save, which can demonstrate the value their parents place on education and saving.

The use of allowances can also be a valuable tool to teach children about limits on spending and value of working for a dollar. Asking a child to contribute to “wants” (as opposed to “needs”) from their allowances can offer a parent a good opportunity for lessons regarding saving, spending and recognizing value. We have seen clients that have implemented a model for allowances that asks children to save one-third for long-term purchases, spend one-third for discretionary items and share one-third with those less fortunate. This approach places value on all of the major money skills and forces children to make reasonable and thoughtful choices with these funds.


Demonstrate philanthropic habits as a family

Philanthropy can be an important part of your clients’ estates in three ways: as a means to teach their children about giving, as an effective estate-planning tool to remove an asset from their estate tax efficiently and as a means to enhance the philanthropic legacy of the family. Encourage your clients to include their children in discussions about the family’s philanthropic goals and the legacy the family hopes to create in their community and the world at large. If your client is looking to initiate a philanthropic strategy, here are three popular vehicles that offer significant tax incentives for parents and that make gifting a learning process for the family:

Donor-Advised Fund

A donor-advised fund is a charitable fund established at a public charity and is typically one of the simpler and less structured philanthropic vehicles.

Through the fund, your clients can make tax-deductible, irrevocable contributions to the charity, oftentimes a community foundation, which is managing the program. Donor-advised funds are a valuable way to involve family members in philanthropy as your client retains the right to recommend grants from the fund to the charities of their choice and can involve family members in grant-making decisions.

Gifts to a fund are immediately tax-deductible in the year they are made. This enables your clients to better manage their tax deduction by gifting to the fund in years when they may have extraordinary taxable events but make grants recommendations to the grantee charities as desired.

Family Foundations

Family foundations can be a powerful means of philanthropic giving, as they provide important tax advantages and can serve as a vehicle to offer your clients control over which charities receive distributions from their foundation and over how funds are invested. Your clients can work with their financial advisor to start their own private foundation so that their family maintains complete control over the foundation’s distributions — and as an added benefit — creates a family legacy.

Charitable Remainder Trust (CRT)

A CRT is structured so that your clients can make an irrevocable gift of stock, property or other assets to the trust, and your client and their beneficiaries retain the rights to receive a regular payment stream for life or for a designated period. At the end of the term, the remaining assets will go to the charities of your clients choosing. A CRT enables your clients to receive a current charitable tax deduction and can provide distinct tax advantages if they hold a concentrated stock position and/or highly appreciated assets.


Assign children roles in managing the family’s wealth

After your clients determine the right philanthropic vehicle, you can then encourage them to involve their children in family discussions about how the money will be distributed. Obviously, the ages of the children will impact how involved they can become. However, young children can be included by seeking suggestions from them about specific causes or charities that they would like to help and why. As children get older, your clients should invite their children to be a part of discussions with the family’s financial and legal advisors, who can help parents assign their children roles in the decision-making process. This will enable children to understand how they can help make a difference in the family’s gifting strategy. Advise your clients to offer clear structure and boundaries about what role their children can play in the decision-making process.

Additionally, many clients will allow their children, particularly young adults, the ability to make decisions about how monies are allocated in discretionary funds, thus empowering them to make decisions that impact their communities and interests. At the same time, they can encourage their children to make personal contributions of their allowance or earned money to the family’s philanthropic endeavor. This activity should accompany a discussion on how their child can personally make a difference in the world. Plus, it gives their children the opportunity to experience the true sense of giving first-hand.


Communicate estate planning desires to older children

The family is usually the centerpiece of an estate plan, so it is important they are involved in the estate-planning process in a constructive way. This will ensure that parents successfully transfer their wealth — and their values — to future generation beneficiaries.

There are many ways your client can transfer wealth to their children. While some choose to provide their heirs with cash, others choose to engage their family in projects that celebrate a specific passion or virtue. For example, your client may discover that their children want to be activists for a specific cause, thereby directing the parent’s philanthropic estate endeavors to focus on a family foundation set up to support that particular cause. Other clients might find that their children have the entrepreneurial spark and want to start their own business and that their parents estate plan can account for their children’s desires and ambitions.


Creating values to make the family’s wealth last

Raising children of wealth while instilling a sense of fiscal responsibility and purpose can be a difficult task for many parents. Our clients should celebrate the inclusion of their children in discussions about the family wealth so as to lay the foundation for a healthy and ongoing dialogue about money. The family’s financial and legal advisors are great resources to clients looking for opportunities to teach their children the value of wealth. Together, clients and their advisors can offer valuable lessons to future generations about the importance and value of their family’s wealth.

©2017 Massachusetts Bar Association