• About Charity
   
• As We Grow Older
   
• When Our Children Inherit: Should It Be Outright Or In Trust?

About Charity

We find that clients often derive their greatest satisfaction through charitable pursuits. They also want to instill in their children their own sense of stewardship. While some use family foundations in these pursuits, others partner with a community foundation.

The Community Foundation Serving Richmond and Central Virginia is an excellent resource. It is flexile and inexpensive and, perhaps most important, its staff knows well the constantly changing needs of our region. Using The Community Foundation as a vehicle for a family charitable venture avoids the burdensome private foundation tax restrictions and the expense of creating and maintaining a separate legal entity.

Through a donor-advised fund, a donor can devote tax deductible contributions to specific charitable purposes (both inside and outside the Central Virginia region). Children can be involved as advisors, either immediately or later. A scholarship fund, for example, can be tailored for a specific population or field of study or educational institution, something that is impractical for a private family foundation.

The Community Foundation is overseen by a rotating board of unpaid trustees who are community leaders. Its highly professional staff does not solicit contributions but stands ready to serve donors and their families. They are always helpful, but never pushy.

While some investment firms, such as Vanguard and Fidelity, sponsor tax qualified funds that can serve some of the functions of The Community Foundation, they lack knowledge of local charitable needs and a staff and board available to interact locally with donors.

A donor advised fund or other fund within The Community Foundation can be anonymous or not as the donor chooses. Often funds are established in honor of persons who have meant much to a donor, such as parents, teachers, or mentors.

For donors who already have family foundations, The Community Foundation can be affiliated to increase the tax benefits and to reduce costs and time required of family members while retaining the separate existence of the family foundation and allowing it to pursue a separate investment strategy under its own board.

For more information about The Community Foundation, go to www.tcfrichmond.org,  or call Robert Thalhimer at (804)-330-5992.

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As We Grow Older

All of us face at some time reduced capacity. This was recently brought vividly to mind by news of Brooke Astor, 104-year-old New York City philanthropist and socialite. We cannot know when this might begin for us or how rapidly it might progress. But we know that with advancing age, the prospect increases. We do our families and ourselves a terrible disservice not to plan for it. Some simple steps, taken when we have full capacity and thus the ability to make good judgments, can be invaluable to a family.

The first consideration should be, Who can and should make judgments for me if I cannot make them for myself?

Often a spouse seems the best choice. If it is, we know our spouse may be unable to act or to continue to act for the same reasons we may need help. This may suggest a child (or children) as the backup, or sometimes primary, choice.
When a child is to be designated, we must ask these questions:

• Does she or he have the necessary financial experience and judgment?
   
• Does she or he have the time, considering other family or work responsibilities?
   
• If there are two or more children, will feelings be hurt by selecting just one? Can the responsibility be shared among children (all or some)?
   
• Would you (and/or the child or children) prefer to have an independent professional involved, perhaps to act with a child or children (or with a spouse)?

Circumstances will suggest different answers in different families and at different times. In other words, there is no one right answer.

What authority needs to be granted?

Usually, a combination of three legal instruments will be needed:

• A general durable power of attorney authorizes the selected person or persons to act in financial matters for you, with a duty to consider first your needs and expressed preferences. (“Durable” means the authority does not end if you are incapacitated). It can authorize gifts, limited according to your intent as to beneficiaries and amounts. It can also authorize placing financial assets in a revocable living trust you create, usually with yourself as initial trustee.
   
• An Advanced Medical Directive authorizing one or more persons to make health-care decisions for you, in consultation with your doctors, if you cannot make them yourself. The Directive usually includes a so-called “living will” in which you express your desires in the event of an irreversible terminal condition. Here again, a spouse will often be first choice, with children as backup.
   
• A revocable living trust, containing directions to the trustee(s) to manage and use trust assets for you during your life and thereafter for your chosen beneficiaries.

The combination of a revocable trust and power of attorney facilitates the most efficient management of your financial affairs during an incapacity and at death. Often the same person or persons serve as agent(s) under the power of attorney and as trustee(s), but not always. Sometimes an institution (bank or trust company) is included in the trusteeship. Sometimes an individual nonfamily advisor may serve. Here again, your particular circumstances will influence your decision—there is no one solution.

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Suppose a spouse is named to act. What about the inevitable prospect that the spouse’s advancing age will diminish his or her ability to serve? Naming children to sign on as additional decision-makers after a certain attained age of a spouse sometimes makes sense. This may also be desirable for trusteeship of your revocable trust.

Sometimes clients desire to condition the granting of authority under these instruments on a medical determination of their own incapacity. In living trusts, a successor trustee may be authorized to assume co-trusteeship by notice to you or to your spouse. This gives you the ability to say “no,” but avoids the need for third party or court involvement if you do not, or cannot, say “no.”

Once in place, these arrangements should be reviewed from time to time to make sure they continue to be practical as lives inevitably change with the passage of time.

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When Our Children Inherit: Should It Be Outright Or In Trust?

Most of us intend to leave our remaining savings to our children, after taking care of ourselves and our spouse through life. We face the decision, should a child inherit outright, free of all restrictions, or should some or all of the inheritance be protected by a trust and, if so, for how long?

Most agree that a trust as protection against inexperience makes sense until a child attains some maturity, but how much maturity draws differing judgments. As we grow older, our judgment as to an appropriate age for outright inheritance tends to grow older too. Moves from twenty-five to thirty to thirty-five are not unusual.

Sometimes estate and gift tax considerations suggest lifetime trusts for children to shield the inheritance from transfer tax at the child’s death. But even when taxes are not a concern, other considerations may make a lifetime trust the wisest choice, one a child may endorse if she or he considers certain realities of modern life.
Savings inherited outright are easily lost to one of four ever-present risks:

1. Uncontrolled Spending. If a child has not learned to be frugal before inheriting, this is the greatest risk. And frugality needs to be learned when young. Sometimes parents know of this problem, but choose to ignore it or to say, “If my child spends it, that’s his (her) problem.” Sometimes substance addiction is a threat. If it is, a parent must remember that recovery is day to day, and the child will always be subject to the possibility of relapse. Mental illness presents a similar concern.
    
2. Unwise Investment. There are countless investment sharks awaiting every child who receives an unrestricted inheritance. Every parent knows this. While making a fortune (small or large) usually involves concentrated risk, keeping inherited savings is best accomplished by minimizing risk through careful diversification and conservative choices of asset classes and allocations among them. Children must learn these concepts and develop the discipline to follow them. Many financial product salespersons stand ready to convince children they have just the products to “beat the market,” but few do and none consistently over time.
    
3. Creditor Claims. In our litigious society, everyone faces the risk of being sued for accidents, alleged professional errors, or unwise contracts—the ways to lose in litigation are countless. Insurance helps, but some risks are not insurable. A trust created for a child can be insulated from the claims of the child’s creditors.
    
4. Divorce. Perhaps the greatest modern danger to inherited savings is loss through divorce. Nearly half of all marriages end in divorce. The divorce laws of the states differ widely. While Virginia’s law is relatively sensible in shielding inherited or gifted savings that can be identified and traced from classification as “marital property” (and as such subject to being divided between spouses on divorce), the rule is subject to many dangerous qualifications. If the efforts of either spouse contribute to the growth of the savings during marriage, a portion will be “marital property.” If the savings are commingled with earnings during marriage, they may lose in whole or in part their protection as “separate property.” If transfers are made to joint ownership, a gift to the other spouse may be inferred. Perhaps most dangerous, if the couple moves to another state with different rules, the inherited savings may be reclassified as “marital property”—Vermont is a prime example. In Vermont, all inherited savings are classified as “marital property” subject to division on divorce. While premarital (or even post-marital) agreements can alter these results, young people entering a first marriage seldom sign them.

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Inherited savings can be protected from all four of these risks by a well-designed and wisely administered trust. If a parent feels a child is capable of wise management, the child can be a co-trustee or even sole trustee of her or his own trust. And trusts can be quite flexible and still protective. For example, a child’s trust can own a residence, art work or antiques for use by the child, or invest in a child’s business or professional practice. A child can also be given the right to specify who will benefit from the trust after the child’s death through a power of appointment. The key is careful design and capable trusteeship, which may be family or professional or a combination.

Finally, even when a parent wants a child to have inherited savings outright, a period of trust protection with a trustee as the child’s mentor on matters of investment and spending may be wise.

We use the term “savings” and not the more currently popular term “wealth” advisedly. The only “wealth” a family holds on to is that which it “saves”—from spending or unwise investment. Not losing capital is the hardest part.
 

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