Bank On It

Establishing Your Financial Philosophy

 

There are many essential facets to estate planning. Certainly, it’s important to craft a will that delineates how the fruits of your years of hard work will be distributed to your loved ones, fairly and harmoniously. Formulating strategies that will maximize what you pass on, at the minimum tax cost, is also an important goal.

Still, estate planning is not all savvy tax advice on who gets what. Scott C. Fithian, author of “Values-Based Estate Planning: A Step-by-Step Approach to Wealth Transfer for Professional Advisors,” says, “It’s putting visions, values and goals before techniques, products and tools.”

What does Fithian mean by this? It’s planning your legacy. It’s having your children and grandchildren inherit more than just stocks and bonds or the family home – passing on beliefs and goals that you want them to cherish and strive for, such as appreciation of the value of a dollar, respect for family traditions, recognition of their heritage, and contributing to the community and the world at large.

Developing a financial philosophy (or, as Fithian calls it, a “mission statement”) is an effective way to identify your needs and desires and to translate them into your estate plan. This philosophy or mission statement is developed by considering several aspects of your financial life. For instance, it is important to determine what resources you will need to maintain financial independence during your lifetime, the appropriate legacies for your heirs, and your “social capital,” which can be defined as the amount you pay in taxes or the charitable donations that you make. It represents the part of your wealth that goes neither to you nor to your beneficiaries.

Spending time defining your thoughts and goals with respect to these three elements – financial independence, legacies and social capital – will allow you to set the foundation for your estate plan. But how exactly can you translate your mission statement into actions that will perpetuate your goals and values amongst your children?

Imparting Your Values

One of the most effective tools that you can employ is an incentive trust, which is often used to reward the desired behavior or to delay an inheritance to a time when it is most likely that your offspring will have the maturity to recognize the wisdom and truth of your value system. Thus, you can create a trust that calls for distributions only when a beneficiary has reached a certain age. Or, you can distribute the assets in increments.

Many individuals want to encourage a productive life and fear that a large inheritance will place a damper on ambition and create a sense of entitlement. These individuals may consider the use of an incentive trust to provide for the distribution of assets only if a child has earned income, in which payouts are often designed to match salaries earned (e.g., dollar for dollar). However, if not executed properly, an incentive trust can work against your beliefs and values and deter a beneficiary from choosing a meaningful and rewarding profession.

Careers such as teaching, social work and the ministry provide tremendous value to and positively impact the community, yet may not compensate well. To remove obstacles to entering into these professions or to promote contributing to the community, consideration could be made to provide for supplemental payments when a child enters a career that you favor.

If desired, the incentive trust can also be restrictive. For example, distributions can be tied to assumption of the family business or contributions to charity. The trust may even forbid distribution in the event of destructive behavior, e.g., alcohol or substance abuse.

A Final Consideration

When your financial philosophy is formed and the tools are in place to turn the various elements of your philosophy into reality, the last step is to ensure that you have someone who will see that your plan is put into action and carry out your personal desires. Whoever is selected, make sure that the individual brings experience, knowledge and objectivity to the plan and that you spend sufficient time with them so they truly understand your personal and financial philosophies.

The information in this article should not be construed as tax advice and it is recommended that you consult with your tax advisor.

Do you like what you read? Subscribe to Hawaii Business Magazine »