discusses Kids and Teens With Their Parents

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1 WORTH KNOWING CONVERSATIONS ABOUT WEALTH Introducing the next generation to the responsibilities and complexities of affluence Most affluent individuals know that creating, accumulating and preserving wealth can take enormous focus and energy. If they ve faced the complex issues involved in transferring wealth, they ll also recognize the importance of ensuring that beneficiaries receive a solid financial education. According to the 2014 U.S. Trust Insights on Wealth and Worth survey only 38% of parents strongly agree that their children will be able to handle family money. Children of wealthy families, after all, may step into the management of a family business, receive trust benefits at a young age, oversee the continuation of a multigenerational trust or take on a significant role in perpetuating the family s charitable legacy. Yet, even with a widespread conviction that financial know-how is essential, many parents nevertheless worry that their sons and daughters are ill-prepared to handle wealth or will be adversely affected by it. This suggests that while they do indeed know they should have the talk about money and responsibility many wealthy families procrastinate. If you recognize yourself in this group, we hope that Conversations About Wealth will help you begin the process. We ve highlighted the main concerns parents have about their children and wealth, as well as age-appropriate discussion topics, and we encourage you to remember two simple points. First, children of almost any age can start to grasp the unique responsibilities and concerns that wealth brings. Second, by doing so, they should be better able to value and preserve the wealth you have created. In other words, your children s financial education can begin today. Investment products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value See last page for important information.

2 WORTH KNOWING CONVERSATIONS ABOUT WEALTH FIVE IMPORTANT CONCERNS After many decades spent assisting clients with wealth-related issues, we ve come to recognize five major concerns wealthy families have regarding children and wealth. What follows is a sampling of the advice and guidelines we provide. 1. How and when do we talk to our children about our wealth? Determining when your children are ready to learn about the family business, investments, a trust they may receive, philanthropic efforts and finance in general is a very real challenge. Families tend to want to wait until their children are mature enough to understand the implications of the family s wealth without its having a negative impact on the child s motivation and personal independence. However, you will find that your children, at most ages, already have ideas about your wealth. They are much more aware than you may have considered. And, as they become adults, a certain amount of knowledge can help them with their own financial plans. What is important is that you provide the information that makes you comfortable and that addresses issues relevant to your children s stages of life. Sharing your goals and family values around money is just as important as sharing the details. For younger children, show them a thoughtful response to their requests; talk to them about how saving and thinking ahead helped you have some of the comforts you have today. Talk about hard work, creative ideas and dedication to demonstrate how wealth is acquired. Let teenagers and college students know about the advisors who work with you, including those in the family business, and the roles they play. This will help your children start to recognize the complexities of your financial situation. Ask them about their own financial concerns and use this as an opportunity to talk about the family s financial situation and their place in it. If you haven t already done so, introduce them to the family s philanthropic endeavors. At these ages, it is important for you to talk to them about privacy and confidentiality. There are numerous electronic resources available to your children. Let them know that the family s personal information does not belong in any of them. For older children, consider a series of family meetings, with all children present, to discuss particular aspects of the family s wealth. Cover the structure of your estate plan, philanthropic entities, education funding for grandchildren and other issues to help your children become successful stewards of the family s wealth. Keep in mind that it is important to communicate the same information to each of your children so that they all feel equally included. For more suggestions on age-appropriate wealth education, please see the following section, Financial Education for Different Ages. 2. How do we avoid creating a sense of entitlement among our children? You can talk about money, including spending, saving, investing and giving, at any age with your children. Of course, the earlier you start, the better you will be able to manage your children s expectations and help them build strong values and a strong work ethic. For children under 20, your actions will speak volumes. Talk to them about spending choices and staying within a spending allowance. If they ask for a special purchase, ask them for something in return a contribution to the purchase or maintenance costs, completion of a specific chore or a change in behavior. Stick to your decisions. Giving in or changing the rules will undermine your efforts. For older children, sit them down and let them know what financial commitment you are willing to make to them as adults. For example, perhaps you will cover college, as well as graduate and professional degrees. However, you won t support professional students or those who are not working toward independence. Or, you may help with a home down payment, but they must be able to cover the costs of maintaining the home and all other expenses. You may even want to specify directly what you expect in return for your support. For example, you will cover education costs for your grandchildren and the annual family gathering. In return, you expect your children to otherwise stand on their own and not look to you to bail them out of unsound financial decisions. The point is to be very clear with your children about your decisions, why you made them and any expectations you have of them as a result. If you set expectations early, it will benefit both you and your children. 2

3 CONVERSATIONS ABOUT WEALTH WORTH KNOWING 3. How do we talk about trusts with our children? Trusts are used for many reasons, including wealth transfer and asset protection. From a wealth transfer perspective, trusts are used to hold gifts, own life insurance, leverage transfers to younger generations and benefit charity. From an asset protection standpoint, trusts can protect the individual beneficiaries of a trust from themselves and poor financial decisions, as well as from failed marriages and creditors. No matter the reason for the trust, if your children are or will be beneficiaries, they should be educated as to why the trust was created and what their potential benefits will be under the trust. This will help them have appropriate expectations from the trust and assist them in making their own long-term financial plans. These conversations can take place well in advance of any trust distributions. Many trusts, especially those set up when parents or children are young, instruct the trustee to distribute portions of the trust to the beneficiaries at certain ages perhaps one-third at 25, half at 30 and the balance at 35. The idea is that the beneficiaries will receive their shares in stages so that if they make unsound decisions with the early portions, they will learn from their mistakes and have better use of the latter portions. This plan is sound if the amounts involved in the trusts are reasonable amounts to distribute and put directly in the hands of your children. More and more families today are creating trusts for children that last until much later ages, and even for their children s lifetimes. The children are given broad access for various needs, including health-related costs, education, maintaining a certain level of lifestyle, buying a home, starting a business and so forth. However, the children are given limited control and do not own the trust assets personally. Instead, the trust is the owner, protecting the assets from creditors, failed marriages and the financial immaturity of the beneficiaries. 4. What should they know about the family business? Family businesses are unique, shaped and driven by the personalities, values, knowledge and relationships of the family members involved, as well as business considerations. The interests of different family members, versus the interests of the business, create a dynamic that requires both understanding and ongoing communication. Ideally, your children should learn about the business from the ground up literally. But, that is not always possible. Instead, include your children in conversations about your business from an early age. Encourage them to ask you questions. As they get older, you can introduce them to more of the operational aspects of the business. You may find that some but not all of your children will want to join the family business. Other children will find that their talents and interests fall elsewhere. But even when children are doing other things, they should be part of at least an annual family meeting to talk about the company and how it affects everyone in the family. All of your children should be exposed to discussions about the future of the business. Will it be sold when you retire? Are there employee managers in place to take over? Have your children been groomed to successfully take over the company? They need to understand the financial impact of these decisions on them individually. For the children involved in the business, they will need to know what will happen to them if you sell the company or after your death. Will they be in a position to take over an operating company? Will they need to buy out other shareholders, such as siblings not involved in the company? Has the family considered the liquidity needs for this and for payment of estate tax? For the children not involved in the company, how do you ensure equitable treatment for them in your estate? Are there other assets that will be available for their inheritance after estate taxes have been paid? Should life insurance be used for this purpose? Does the family need to have a buy-sell or redemption agreement in place for these shareholders? To reduce the stress and uncertainty, share this information with all members of the family. 3

4 WORTH KNOWING CONVERSATIONS ABOUT WEALTH The best way to protect a family business as it moves from generation to generation is with clear, business-like communication with family members and the business s management. Set up a plan, communicate it, and then review it from time to time to make sure it remains viable. 5. How do we use our family foundation to create a charitable legacy that our children will continue? Many high net worth families use their family foundations to give back to their communities, support a specific cause or improve lives around the globe. Most foundations are set up so they can support a wide range of charities, giving your family a reason to come together for a common purpose. Including children in your charitable activities as they are growing up will give them an appreciation of what they have and how little it takes to make a difference. As they get older, let them attend annual meetings of the foundation where grant requests or distributions are being discussed. Let them see how decisions are made and the research that goes into each grant. This will help them learn to make reasoned decisions about their charitable dollars and reduce the emotional pull of charitable organizations. At some point, start allowing your children to participate in the grantmaking process. Let them know early what percentage or dollar amount of that year s grants will be available for them to direct, but let them know what strings are attached. They will need to make their case for the grants during the foundation board meeting. This will give them ownership in the foundation s activities while helping them learn research and presentation skills. Some families continue to use a single foundation from generation to generation. Descendants work together on each year s grants, or they allocate a portion of the grant funds to each family group. Other families will see the foundation divided along family lines, with each child having a proportionate share of the original foundation that his or her family will then operate independently of the other family members. If you plan to leave a significant portion of your estate to your foundation, discuss this with your children; don t let it be a surprise. Discuss this during a family meeting with all children present so they can understand how the charitable bequest fits into your overall wealth transfer plan and the potential impact that it will have on your children. Many children of wealthy families embrace the charitable values of their parents but welcome information as to their role in family philanthropy. FINANCIAL EDUCATION FOR DIFFERENT AGES Educating the next generation includes sharing the family s financial values as well as its resources. So, when and how do you begin? If you have children over age five, the time is now. The how is more challenging and wide-ranging. Some methods will be more subtle than others, but repetition and visibility of financial matters will pay off over the long run with your children. Our recommendations for age-appropriate financial education break down into the following categories. Young Children At this age, children are just learning about money. They know it takes money to buy the things they want. Their parents have the money and they do not. They are unaware of how money is acquired, and they have no ownership. It is at this age that you can educate by demonstration. HERE ARE SOME IDEAS: For small cash purchases, let them hand the money to the cashier. It s simple, but it will show them that money is exchanged for goods. Give them a piggy bank. Give them their allowance and provide it in component pieces. For instance, if their allowance is three dollars, give them three one-dollar bills; one to spend now, one to save and one to donate to charity. Let the child put the charity portion in the collection plate or the Salvation Army kettle, for example. Take your child with you to deliver holiday gifts and food baskets to the less fortunate. 4

5 CONVERSATIONS ABOUT WEALTH WORTH KNOWING Preteens This age group wants more control, and you can help them move in that direction. Talk to your children about savings and budgeting. If they have something on their wish list, offer to match them dollar for dollar for its purchase price. They can accumulate their share from an allowance or through chores for which they are paid. By having to contribute, they will appreciate the purchase that much more. Continue with the savings and sharing philosophy for their allowance. The dollars involved will become a little bigger and your children will see that their savings and charitable dollars can have an impact. Introduce the idea of earning interest on invested funds. The child can open a savings account at a financial institution, or you can be the bank and provide the interest payments to be added to savings. Ask your child to think about charity. What areas interest her the environment, education, health? Then guide her to some basic reading about organizations that help in those areas. Is there a family business? Can your child perform some job at the company, even if it s just sweeping up, washing windows or taking out the trash? This can allow the child to earn a little money and begin to get a sense of how the family s money has been acquired. Take your child with you to the food pantry to fill sacks or stock the shelves. Demonstrate that giving of yourself and your energies is just as important as giving your financial resources. Teenagers You already know that the teen years are challenging for both parents and children. By this time your children will be aware that your financial situation is more comfortable than that of many families, even if they do not know the magnitude. They also will have discovered a wide range of electronic resources to find out more about your family and their friends. They will go online to see what your home is worth, research the family company and Google everyone they know. With these resources comes additional risk. Not only is this a time for you to be sharing more with your child, it is a time to have serious discussions about privacy and confidentiality. Not all things are meant to be shared on social networking sites, through blogs or tweets. You will need to help them understand where to draw the line. This is also a time to begin including your child in more of the family financial discussions. Planning a vacation? Let your child do some research and create a vacation budget. Is a new car on your teen s wish list? Have her do the research about the car s safety, fuel efficiency, emissions and resale value. Let her budget for the costs of car ownership, including insurance, registration, gas and maintenance. Can your child work for the family business in a capacity that reports to someone else in the company? This will allow your teen to stand on his own feet and be accountable to someone else. Your teen can open a Roth IRA with his earnings, allowing him to learn the power of tax-deferred growth. College is on the horizon. Have your teen work out a college budget, from tuition to housing to transportation. Let her see what the total cost is going to be and work with you to determine a reasonable living allowance. Talk to her about how you plan to fund the costs and what steps you have taken to save for it. If your child is a beneficiary of a Uniform Gifts to Minors Account (UGMA) or Uniform Transfers to Minors Account (UTMA), now is a good time to discuss how those funds will be used. Perhaps you plan to use them to cover college expenses first; perhaps you plan to let your child have access to the funds to see how he or she will handle the money. Does your family have a private foundation or donor-advised fund? If so, have your child sit in on the meetings to learn about the entity and the charities it supports. Consider allowing your child to direct a portion of the annual charitable distributions based upon research she does about the selected organization. 5

6 WORTH KNOWING CONVERSATIONS ABOUT WEALTH College Students Your college student isn t going to have a lot of time for lectures (other than from professors), but her financial education should continue nonetheless. Start with a thorough discussion about debit and credit card usage. Discuss how her financial responsibility in college can affect her credit score, making it easier or more difficult to get credit later for the purchase of a home or to start a business. Make sure she understands online banking and how to monitor her account balances to avoid overdraft charges and interest expense on credit card balances. Identity theft is a big concern at this stage. Your college student will be using online resources and may inadvertently open doors for others to learn about his personal data. Educate him about sharing information, using secure online sources and other means of protecting electronic data. This is also a good time to begin introducing them to the broader picture of the family s wealth. You can share the types of investments or businesses that you have without disclosing the financial specifics of your wealth. In Their 20s Once college is over, your children will be moving into new financial territory. They will be starting careers, creating businesses or following social service or philanthropic pursuits. Because there is some financial startup time involved in each of these pursuits, they will need to understand budgeting balancing their income and expenses, accumulating an emergency fund and planning for large future purchases. Staying on top of their banking and investment accounts will help them be successful here. They may also be purchasing their first homes, perhaps looking at home mortgages, insurance and taxes for the first time. You should introduce your college graduate to your banker and tax advisor to learn about these issues. Sometimes it s easier to learn from a third party than from a family member. Another key learning experience for this age group in wealthy families is to gain an understanding of how trusts work and why they are used. An introduction to the mechanics of trusts and the protection they offer from creditors and failed marriages can come from your trust officer or your estate planning attorney. Introducing the idea of asset protection at this age is also important. Your child will begin to accumulate his or her own wealth and should understand how to protect it through insurance, titling, corporations and trusts. Prenuptial agreements and wills should be addressed as well. 30s and Beyond Your children in their thirties most likely will be settling down into their careers and with their families. They will be curious to know how the family s wealth can be used to benefit them now instead of many years from now as an inheritance. SOME OF THE THINGS THAT WILL BE ON THEIR MINDS INCLUDE: Buying their homes: Can the family s business or the senior generation offer preferred financing to them? Intrafamily loans and family gift programs present attractive wealth transfer opportunities. Grandchildren become a focus for both generations now. Will you, as a grandparent, offer to fund the grandchild s education, perhaps from preschool through college? Will you offer to match funds saved by your children and earned by your grandchildren? Will you use trusts, direct payments or other funding strategies? At this stage, what do you share of your own financial situation? Some families choose to begin periodic family meetings so they can start to share some of the planning that has been put in place for the senior generation, bring up issues for the children to consider for their own planning purposes and continue the family tradition of looking to the generations beyond. Family meetings take many forms. Some focus solely on the extended family s charitable pursuits. Others introduce the children to the parents business and investment holdings. Still others focus on wealth transfer strategies and have a multigenerational feel to them. 6

7 CONVERSATIONS ABOUT WEALTH WORTH KNOWING U.S. TRUST FINANCIAL EDUCATION PROGRAMS U.S. Trust offers a variety of financial education programs designed to help parents and their children address important financial education issues, as well as the softer side of wealth, such as values and philanthropy. Whether offered on a one-on-one basis or in small groups, each program can be tailored to meet the needs of your family. Following are brief descriptions of some of our programs. If you would like more information on any of our programs designed to promote Conversations About Wealth, please contact your U.S. Trust representative. Financial Empowerment This program, delivered online or face to face, is for young adults (in their 20s and 30s) of affluent families. It addresses many areas of financial education, including financial basics, philanthropy, trusts, protecting your wealth, dealing with various life events from a financial standpoint and starting or managing a family business. Raising Philanthropic Kids This program is an interactive workshop for parents, grandparents and other mentors who are seeking to inspire the next charitable generation. Strategies for introducing philanthropy to children ages 2 to 18 are discussed. Various exercises are conducted to aid adults in determining relevant philanthropic opportunities for their children based on their interests. MANAGING YOUR WORTH WITH U.S. TRUST Your wealth is not measured by numbers alone, but by the extraordinary opportunities and complex challenges that define your life. At U.S. Trust, we apply our deep insight and broad expertise to help you make the most of the things that matter most to you. We begin by listening to you, learning about your life, and we work with you to understand your priorities. Your advisor and your team of specialists then build a wealth plan that aligns with your personal values and family goals. When we serve as your fiduciary, whether we are managing your portfolio or administering a trust, our focus is on what best meets your objectives and expectations. Together, we develop personalized solutions that address the dimensions of your worth today and the legacy you re building for future generations. 7

8 This publication is designed to provide general information about ideas and strategies. It is for discussion purposes only since the availability and effectiveness of any strategy are dependent upon your individual facts and circumstances. It does not contain legal, tax, investment or insurance advice and cannot be relied upon for implementation and/or protection from penalties. Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy. This information is current as of the date noted, is solely for informational purposes, and does not purport to address the financial objectives, situation or specific needs of any individual reader. The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy or completeness. Opinions and estimates expressed herein are as of the date of the report and are subject to change without notice. Neither the information nor any opinion expressed represents a solicitation for the purchase or sale of any security. U.S. Trust operates through Bank of America, N.A. and other subsidiaries of Bank of America Corporation. Bank of America, N.A. and U.S. Trust Company of Delaware (collectively the Bank ) do not serve in a fiduciary capacity with respect to all products or services. Fiduciary standards or fiduciary duties do not apply, for example, when the Bank is offering or providing credit solutions, banking, custody or brokerage products/services or referrals to other affiliates of the Bank. Bank of America, N.A., Member FDIC Bank of America Corporation. All rights reserved. ARXYCMFL WP NSB 02/ % post-consumer content.