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Financially Empowering Your Adult Children

By | 2016, Money Moxie, Newsletter | No Comments

With life expectancy increasing each year, saving for retirement is becoming more important. You’ve worked hard your entire life, sacrificed to take care of others, and now, as you’re nearing retirement or are in retirement, it’s your time to live out your retirement dreams!

Sounds great, right? But then you realize the amount you’ve planned to live on each month is not enough because you are helping your adult child out each month financially. You could be helping them out with their mortgage, car loan, student loan, or the emergencies that come up each month; and you realize your retirement dreams will either have to wait or be downsized.

According to Consumer Credit, 31 percent of parents financially support an adult child on a monthly basis.1 If you find yourself in this situation, it’s time to set yourself free of the financial burden and empower your children to stand on their own feet.

Here are some ideas to empower your child:

Set boundaries
Let your child know you love and support them and want them to be able to take care of themselves without relying on you.

Have a candid conversation about your retirement plans and how your independence is impacted because of the money required to support them.

Explain that if something major does come up, you will be there for them. Define what those issues are and are not. For instance, compare medical emergencies to their kids’ need for new clothes. One you cannot plan for and the other you can.

For more information, the book, Boundaries: When to Say Yes, How to Say No to Take Control of Your Life by Henry Cloud is a great resource.

Create a game plan
Whether your adult child has just graduated from college or has a family of their own, it is critical to come up with a plan that will enable you to live your retirement dreams and allow your child to achieve financial independence.
Create a timeline long enough that your child will be able to get their finances under control.

Help them create a budget that will enable them to live on their current income. If expenses are higher than take-home pay, sit down and work through it by looking at their needs versus wants.

Budgeting is a great way to know how much money can be spent on items such as groceries, gas, clothing, etc. Once money is used up for the month, they will have to wait until the next month to purchase certain items.

Use personal growing experiences
Transparency can demonstrate to your child where you are financially and why it is important for your child to prosper without relying on you.

Use examples from your past where you wish you would have made better financial choices. Be sure to include what you learned and how the experience changed you. Your children will see that they too can make it out of a tough financial situation.

Financial conversations can be difficult. Yet, they are crucial to both your financial freedom and your child’s financial success!

1. http://www.consumercredit.com/financial-education/infographics/the-cost-of-supporting-adult-children-or-elders.aspx

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The Family Bank

By | 2016, Money Moxie, Newsletter | No Comments

Many clients have wondered how to give money to adult children without creating dependence. Financial dependence can be an “addiction that is as serious as dependence on alcohol or drugs.”

This becomes even more problematic when you start looking to give assets to grandchildren and successive generations. One simple yet sophisticated tool to create a financial pool that can be self-perpetuating is a family bank.

The main purpose of the family bank is to use assets to improve the human and intellectual capital of each successive generation.

Rather than just gifting assets away, you create a “bank” where the children or grandchildren can apply for a loan through a formal process. There is a board of trustees, formed of family members, that reviews the application and approves or denies the loan. The loan is then repaid over time at an interest rate that is slightly lower than the prevailing interest rates. The repayment of the loan replenishes the family bank for future family members to use.

The benefit of using a family bank is that it promotes a sense of accountability as the recipient has to first prove the merits of their request and second return the capital based on the returns they receive from their endeavors.

Frequently, family banks are used to help pay for college, provide mortgages, or provide seed capital for a start-up business.
Again, the goal should be to improve the human and intellectual capital of each family member. It should be more than just a son asking his mom for $20. It should not be a gift that has no purpose and no expectation of repayment.

To set up a family bank you can use a legal document like a trust or a Limited Liability Company (LLC) to dictate how the family bank is operated.

As you work with an attorney to create these documents, be sure to include a mission statement. The purpose of the mission statement is to explain your intent and goals to help guide future generations in the administration of the family bank.

Once the governing documents are created, you can open an investment account that is titled in the name of the trust, LLC, or family limited partnership. It can be invested according to the restrictions in the documents.

If it is planned and implemented correctly, a family bank “can be a powerful mechanism to put wealth to good use for the benefit and development of the family.” If you have questions about how to set up a family bank, please contact one of our private wealth managers.

*Smedley Financial and its employees do not provide tax advice; therefore it is important to coordinate with your tax advisor regarding your specific situation.

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How Much Money Should You Give Your Children as an Inheritance?

By | 2016, Money Moxie, Newsletter | No Comments

“Part of the reason for believing that my wealth should be given back to society, and not, in any substantial percentage, be passed on to my children, is that I don’t think it would be good for them. They really need to get out and work and contribute to society. I think that’s an important element of a fulfilling life.” –Bill Gates, richest person in the world.1

Bill Gates touches on a defining question with which many parents struggle: How do we provide financial security for our children while ensuring they will achieve it on their own? How do we ensure a financial inheritance will help and not hinder their life’s journey? Too many times we see the rising generation become entitled and trapped by the very assets that are supposed to give them freedom. One unfortunate fact is that 70 percent of “rich” families lose their wealth by the 2nd generation and 90 percent by the 3rd generation.2

This same fact applies to most families; most assets that are accumulated by the 1st generation are squandered by the 3rd generation.

So, what can be done to pass on assets to children successfully and how much should you give?

Communicate with your children
The number one rule is communicate, communicate, communicate. The “we’re not going to talk about it” mentality often breeds mistrust and misinformation. If you don’t involve your children in the process, you are robbing them of financial training as well as ownership. You need your children to be involved in the process so that it becomes their future and not just what mom and dad “want.” That being said, financial discussions can be a very touchy subject and each family dynamic is unique. As you start into the process, remind everyone to work to keep the process open and honest.

Define a purpose
“If you don’t know where you are going, any road will take you there.”3 Successful families don’t just pass on assets, they pass on their legacy. Together, with your children, you should define the meaning and purpose of your money. Often this takes the shape of family stories that share values. These values direct how the money is used to benefit the family and society. Based on this you can then take some time to translate your values and legacy into goals.

Define an amount
When you have goals established, then you can assign monetary values, which will help determine the appropriate amount to pass on as an inheritance. For example, if you value the freedom to give back to the community, you could establish a base level of income for your children that will give them the freedom to pursue careers that may not be very lucrative, but have a high impact on the community. Other examples can be funds for education, a down payment on a primary residence, a family cabin to promote family togetherness, a medical emergency fund, a business opportunity fund, or a security fund.

The intent would be to provide a measure of freedom without dramatically changing the child’s lifestyle. Any amount that goes beyond providing a measure of freedom is discretionary and is not needed. Excess money can also lead to a shadow side of freedom – dependence or freedom without self-discipline.

There is a large difference between passing on assets and passing on a legacy. If you involve your children in the process and base your inheritance decisions on a purpose, you can leave the right amount of money to your children while creating a rewarding experience for both.

  1. http://www.forbes.com/sites/luisakroll/2016/03/01/forbes-2016-worlds-billionaires-meet-the-richest-people-on-the-planet/#71fac38041cb
  2. http://time.com/money/3925308/rich-families-lose-wealth/
  3. Alice in Wonderland

Smedley Financial and its employees do not provide legal advice. It is important to coordinate with your legal advisor regarding your situation.

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