Deficit Reduction by Default

Last week, while many of us were eating turkey, our country's elected representatives were busy disagreeing on the shared bounty (tax money) resulting in a complete failure of the "Super Committee" to reach a meaningful deficit reduction plan. (Raise your hand if you are surprised!)

The 12-member panel, made up of six Republicans and six Democrats, basically took hard-line positions on partisan issues, including the pledge not to raise taxes or reduce the social entitlement programs, and never moved far enough to reach agreement. This is yet another epic failure by our elected officials to act in the best interests of our country. As a result, Fitch Ratings followed the lead of Moody’s Investors Services and lowered its outlook on the US government’s triple-A rating to negative. This is a precursor to a likely downgrade – a step Standard & Poor’s took this past summer.

As financial advisors, we counsel our clients to protect their credit rating at all costs – it is their most significant asset which doesn’t appear on their balance sheet. Yet, our Congress apparently sees it as “no big deal” if the credit score of the US government is lowered, despite the impact on all of us.

What now? The original Congressional deal specified that there would be across-the-board government spending cuts adding up to $1 trillion, beginning in 2013. Those would eliminate $3.54 billion from the Federal Department of Education, including $134 million in student aid and $136 million in adult education. Payroll taxes would revert from 4.2% this year to 6.2% in January. The Economist reports that overall, the U.S. military would have to cut up to $1 trillion--almost a fifth of the total--from its spending plans. That would leave the U.S. with its smallest ground force since 1940, the fewest ships since 1915 and the smallest air force in its history. These cuts pose a threat to our national security.

The automatic cuts were described as "a pistol that Congress pointed at its own head in order to frighten itself into cutting the deficit." (Apparently, they needed a larger gun!) The hard decisions weren’t made. Apparently, failure to agree and across-the-board cuts was more politically palatable than helping to put our country’s fiscal house in order. For now, we can only watch, hope, and take an active role in our democracy as next year’s elections roll around.

Family Legacy Conversations

(The content of this newsletter was, in part, adapted from an article from Eric Winder, Ph. D. which appeared in The NAPFA Advisor, August 2011 issue).

As many of you know, one of my great passions is teaching. Our teenage children are somewhat less enthusiastic about this passion than they will be when they are older I'm sure (this thought reassures me anyway). Nonetheless, they continue to participate in our iMoney classes now buoyed by the thought of getting paid for assisting Kimberly and me during class. One of the great lessons I learned at business school was 'people do what you give them the incentive to do'; so, our solution of paying them to learn and participate in teaching about all things financial seems to be working for the moment.

A greater challenge with our children is the topic of this letter. Kimberly and I continue to evolve our conversations on the family’s estate planning with our children and our parents with age-appropriate provisions taken into consideration. I encourage you to do the same. There are many resources available to help guide these conversations as well; so, know that you don't have to go it alone. With the holiday season coming up and varied gatherings of friends and family, many of us will have the opportunity to at least begin.

Consider this scenario:

A 35-year-old man recently learned the facts of his father's estate plan. For years, he had enjoyed a positive, loving relationship with his father. As his father battled numerous physical ailments, the two consulted on many life decisions. The son knew his father didn't have much time left and knew the financial plans for the estate had recently been drawn. Still, it hit him like a ton of bricks when he learned that his father decided to leave all of his estate to his younger sister. The son's rage was not based on the money and other assets. It was not a large estate, and the young man was quite accomplished and was not wanting for money. He knew his younger sister was in greater need. The son was upset at being left out of the process. In fact, the father did not inform either of his children in advance of his decision. He did not want to deal with their emotional reactions. The son began to wonder if his father and sister worked behind the scenes along with the financial advisor to develop the estate plan. What was once a fairly close sibling relationship is now filled with accusations, bitterness, and threats of litigation.

Why do we avoid what is one of the most important conversations we could possibly have with our family? Most families avoid talking about issues of inheritance. Tough questions about the future, asset distribution, and who gets prized possessions should be planned and discussed before documents are drawn up. However, raising these sensitive topics can naturally be unsettling for families.

Unaddressed, these issues often have negative long-term consequences. Studies show that when families fail to discuss what's important, their wealth and value system is usually dissipated over time. Family squabbles, little or no direct communication, secrets, ruined family relationships, and litigation all contribute to a bleak picture for asset preservation and relationships.

TRADITIONAL ESTATE PLANNING

Historically, inheritance decisions were based on a general theme: oldest sons got the farm, and oldest daughters received the dowry. In the 21st century, it's more complicated. Parents have many important decisions to make about asset transfer. How much money is enough? How should family heirlooms be distributed? What role does the principle of ‘fairness’ play? What about the principle of equal distribution? What about philanthropy? How well-prepared are heirs to manage assets once they receive them?

What can be done now to train the next generation to be good stewards of assets and values? These are weighty decisions, and the vast majority of people do not discuss them with the people who will be most affected by the results. While most of us know that their family dynamics play a vital role in estate plan development, the temptation may be to avoid dealing with such issues. Family issues that are ignored will usually become more problematic with time. These might include:

• Multiple 'chiefs' in charge of the estate
• Income disparities between children
• A special needs child
• An estranged child
• Disapproval of lifestyle of heirs
• Parental care-taking
• Oral promises
• Unstated expectations
• Conflict between siblings
• Conflicting values between generations
• Alliances between one parent and one or more children

Tools to help:

Five basic operating principles, as defined in the acronym VOICE, can guide families through the process of having a family legacy conversation. I also offer a seminar called "Tying up Life's Loose Ends" which provides tools and techniques to get beyond the legal documents and onto the relationship and value issues between family members. Just email Kimberly or me if you think you or a group you belong to might benefit from this seminar on ethical wills. The VOICE model though, lightly described below, will get you started…

• "V" stands for values and vision. These families take time to ask big questions and clearly define their core values and long-term vision. "Who are we as a family?" "How can our money be used to advance our values?" Numerous tools can be used in this process, such as an ethical will or a family mission (or vision) statement.
• "0" refers to family openness. Successful families do not keep secrets. They explain their intentions and the principles involved in all aspects of estate planning. While the final decision belongs to the testator, he or she is open to input from others. For example, testators may open up the books and share financial details with heirs at appropriate ages. Access to financial information can relieve anxiety for heirs and help them prepare for their future.
• "I" stands for inclusiveness. These families find ways to include all family members and make sure they each participate in the process. They don't leave out an estranged offspring. They know doing so only increases the chances of family conflict and potential litigation.
• "C" is for calm and connected family leadership. The family leader needs to find ways to calmly connect with all family members. Only then is he or she "a relationship master" who listens deeply and makes an effort to understand all points of view and minimize conflict.
• "E" stands for emotional neutrality. Successful families find ways to work together. Problems are viewed from a perspective of shared responsibility, rather than blame. A level playing field is created so that no one person has an advantage.

Families need not have a lot of money or a large estate to benefit from these grounding conversations and explorations. And you need not have a perfect track record (who does?!). The key though is to begin.