College Funding – Part I. Do We Need a Crisis to Act? Lots of Options, But Start Planning and Implementing Now! [Estate Planning Series]

The Looming College Funding Crisis. I am doing a seminar on College Funding tonight and getting ready for it gave me a great chance to review all the alternatives and the growing problem facing lots of families with children.  The cost of a four year college education has become a very significant number.  Tuition and fees are currently:

  Private College   $116,000

  Public University    $  30,500

  2 Yrs JC & 2 Yrs Priv .    $  66,900

But that doesn’t include room and board, books, transportation, which probably adds another $8,000 to $10,000 a year.

What About 2027? The costs above are what you face if you have a child in or entering college right now. But what about if you have a newborn or young child?  In 18 years from now, the projections for college costs (tuition and fees only) are even more grim:

Private College   $332,000

Public University    $  87,200

2 Yrs JC & 2 Yrs Priv.     $191,200

Collegfaltion.  Those are some pretty big numbers and the problem is compounded by the fact that college tuition and fees are rising on average at 6 percent per year, faster than general inflation.  While there are a number of programs and sources of funding available, parents and families that plan for this important and expensive event are far and away ahead of those that do not, and it may well be the difference between a child going to their college of choice and having to go to a second best choice.

What can parents do to avoid this crisis? Start planning and implement a program now. Through taking into account what is important, you can focus and work on it over time and prevent it from ever becoming a big problem.  It’s really pretty simple; determine the goal, a reasonable course of action, and then start. Regardless of how many years before a child is ready to start college, planning for that event can help improve the options and reduce the burden. Estate planning is about preserving your wealth and planning for your family.  A college funding plan should be an integral part of your estate plan and your financial plan.   [To Be Continued]

So Did You Do Any Glamping This Summer?

Glamping. I usually write on planning and protection matters for the business owner and his or her family, but an article by E. Kinney Zalesne caught my eye and then I realized it is really about letting someone else do all the planning. It seems there is a new vacation trend developing called “glamping”, which is short for glamorous camping.  I have to say a few years ago I wouldn’t have gotten the point.  In fact it was kind of interesting to look at the comments to the article. Most were negative, either upset it was going to destroy the national parks or nature, others suggesting there wasn’t really any new phenomenon at all, it was just people losing their homes and buying tents. It seems opinions are never in short supply.

The Critics. A few years back, when I looked critically on the RV trend, which was counter to my rugged backpacking mentality, I would have had a very different opinion of glamping. In fact I still hold a kind of purest attitude to the outdoors and nature, but I have come to be a bit more open and glamping as I understand it is a kind of the camping experience with frills.  Instead of doing absolutely everything yourselves (something that our modern “time starved” existence doesn’t easily allow), there is a company that does the planning, outfits the camp, provides the food and even throws in some frills like showers, air mattresses or box springs and then cleans up and returns the site to nature when you are gone.  Well that doesn't sound so bad.

Can the Rock Concert be the Genesis? The concept is not really that new, just the focus. Adventure groups have been around for years providing experiences like river rafting, hiking trips, rock climbing, hunting and photo safaris and the like. Trekking in Europe and East has been around for a very long time as well.  Hiking all day through the Himalayas to arrive at a fully set up campsite with a hot meal and everything arranged, always sounded pretty appealing.  In fact the “outdoor concert” may in fact be the precursor to glamping [wiseGEEK].  In glamping the focus is not so much on the adventure, but the comfort of the guest. The “show” is nature, the great outdoors.  While the purest will probably always be critical of turning nature into a “show”, experiencing the beauty of the outdoors with a little less of the hassle is not necessarily a bad thing and letting someone else take over the planning and logistics responsibilities is definitely a good thing. In fact I do that for a living for other people who need to protect their wealth.  Now if I could just remember where I packed away my hiking boots.

Advanced Health Care Directives - Misunderstood and Underused [Estate Planning Series]

What is a Health Care Directive or a Living Will?  It’s a written direction that specifies “the kind of care you’d want at the end of life if you couldn’t speak for yourself.”  That seems like something that every single American would want to have and in fact almost all 50 States have made the form and procedure very simple and inexpensive.  Yet it is estimated that less than one-third of Americans have Health Care Directives. [See a thoughtfully written article by Melinda Beck entitled Preparing for the Final Hours, which appeared the Wall Street Journal on August 18, 2009.] 

Where is the disconnect and why aren’t Americans using this very basic planning tool? Ms. Beck gives some insight. “Many people don’t understand the options or the consequences, or they are baffled by the legalities. . .”  People think the Living Will or Advanced Directive is about dying and for the young that often doesn’t seem real and as we get older we often don’t want to think about that, we certainly don’t want to talk to our parents or loved ones about dying. The Advanced Directive is much more about care and how we live our last days than it is about dying.

There are many options we have and they are very personal to each of us. 

· How we are cared for if we become sick? Do we

o   want to be put on a ventilator

o   receive cardiopulmonary resuscitation

o   artificially receive food or water

o   can life supporting measures be started and then stopped, if they are not doing any good

o   want pain medication even if it will put us to sleep

o   want pain medication even if it will hasten our death

· Do we want to die at home

These are all very important and personal decisions and we often fail to take into account how our families will handle our illness or death. It is a loving and compassionate gesture to our families to let them know what our wishes are. It removes a huge burden from our family if we give specific directions. It helps remove disputes between family members about what to do.

Health decisions can be made alone without an estate plan, but they are an important part of estate planning and the health care documents are put together right along with the wills, trusts and other estate documents.  The health package often includes the Health Care Directive, HIPPA Waivers and I generally include a separate Medical Power of Attorney which, while it overlaps with the Health Care Directive, provides more detail about specific medical powers. 

In the estate planning process, much of the focus is often about property. Who we want to receive our property and when, how to avoid taxes, what to give to charities, etc.  However, I often come away believing that the discussion and decisions about medical care, dignity and making those tough decisions so that our families don’t have to is the more important part of the plan. Everyone older than 18 should make their wishes know in this very important area.

Breaking Through the Bottom – A 17th Century Samurai Warrior Had A Lot To Say About the Importance of Following Through [Business Planning Series]

17th Century Wisdom.  I recently reread The Book of Five Rings written by Miyamoto Musashi, a Samurai warrior who lived in 17^th century Japan. For the Samurai, losing was not an option and Musashi defeated 60 opponents by the time he was 30.   

Breaking Through The Bottom.  The book is filled with lots of valuable insight that can be applied to life in the 21^st century. One of his techniques he called “Breaking through the Bottom.”  You can not stop at physically defeating an opponent, because he may regain his physical strength and return to fight again.  So “you must renew your spirit and attack your opponent again to ensure that he is completely defeated, with no fighting spirit or ability left.”  This he called “Breaking Through the Bottom.”

The Long Term Goal.  Breaking through the bottom demonstrated a deep understanding of the long term goal, which was not to win the battle, but to win the war.  The goal of the battle was not just to win in the present moment; it was to permanently eliminate the risk of that opponent.  That meant vanquishing or mentally defeating the opponent; removing the ability of that risk to harm you again.

Complete Domination.  Without that complete domination the opponent could recover and come back to challenge again and the stakes in the second battle were no less serious than in the first.  Death was just as possible in the second encounter, but the risk being faced for a second time, was completely avoidable. The risk was being faced a second time for one reason; it had not been eliminated the first time.  The lesson was clear; the opponent had to be completely vanquished, both physically and mentally. The follow through had to be just that, “follow through” to the true end. 

How often to we stop short; not follow through?  Every obstacle we face in business or in life is an opponent to be defeated. Many of the challenges that we face are faced more than once, and can become a defining element of a person’s life.  Why do we keep fighting the same battles over and over again?  One of the reasons is a failure to follow through; we don’t finish; we don’t break through the bottom and completely defeat the opponent.

An Employee Example.  Let’s say we are a pretty successful business, but we don’t have a very clear compensation program in place for our employees.  There just hasn’t been enough time (sound familiar?).  A really valuable employee becomes upset and threatens to leave. We respond to that challenge by offering more money. We are reactive and we win (or think we win) that battle. The employee stays.

We Don’t Break Through the Bottom.  But we stop there; we don’t reach down deep enough to the real problem, a failure to plan for employee retention. We don’t do anything to prevent the problem from arising again.  We haven’t broken through the bottom and it is only a matter of time before another employee or the same one will be back in front of us again ready to leave – again.  Breaking through the bottom in this example means uncovering the core of the problem, the real problem underlying the reason our employee wanted to leave in the first place.  That is the spirit of the opponent that we must defeat.

Planning to Break Through the Bottom. I spend a lot of my time in the planning area, both business and wealth and estate planning.  The planning is aimed at breaking through the bottom of the challenges facing a business or family. It is hard to get a business owner or family to focus on the challenges and risks they face until something actually goes wrong. 

So a lot of my work is initiated when something goes wrong. I get a call to help someone fix the immediate problem (i.e., the key employee threatening to leave).  Fixing that problem for that employee is like physically defeating the opponent.  It keeps the business in the game and moving forward, but unless the owner is willing to strike through the problem completely and eliminate the spirit of the problem, it is almost certain it will have to be faced again.

The true cost of facing the same problems multiple times is huge and often means the difference between a truly successful business or wealth strategy and everything else.  Success and moving forward is so much easier when you don’t keep fighting the same battles.

Can the American Economy Recover Without Small Business? [Business Planning Series]

Small business is absolutely essential to the current economic recovery. Most people would agree, but many might find it surprising how significant a part of the American economy it really is. A “small business concern” is defined in Section 3(a) of the Small Business Act as “one that is independently owned and operated and not dominant in its field of operation.” Most businesses are then by this definition small.  It is estimated that there are 27.2 million small businesses in the United States and that they hire about half the country’s private sector workforce and represent 99.7 percent of all employer firms (as reported by SCORE). Those are some really significant numbers.  So then why has the government been ignoring small business?

The Mixed Mindset of Government on Small Business.  Holding such a central place in the American economy and needed job growth, it would seem logical that the recovery and health of small business is essential to any recovery. Yet it is “big public business” that has drawn most of the attention in the current economy and that is not that surprising either. If a really large public business fails, then the impact on the economy is dramatic and felt immediately, so government turns its attention to “bailing out”.  In fact that is where most of the attention has been focused. On the other side, the failure of a small business is less noticeable to the economy and the government has certainly not been stepping in there in the same way it has with big business.

Just as Deadly.  The loss of small businesses is much slower and harder to see, but it is just as deadly as the loss of an essential big business. In fact because it is harder to detect and see it is perhaps even more dangerous. It is often the silent killer that is the most deadly (i.e. hypertension).  I have often thought that if smoking a cigarette killed someone in a week, that no one would smoke.  It is the fact that it takes 20 plus years and then is not often that obvious as the culprit that makes smoking seem trivial and a small risk.

The Business Cigarette.  I would argue that the death of small businesses is something like that. One business failure is not that noticeable and the fact that it takes a long time and the failure of a lot of small businesses before the patient (i.e. the American Economy) dies.  Small changes that are pervasive and consistent exert great impacts on larger systems.  Letting small businesses fend for themselves and die is the business cigarette of today’s economy.  It’s not that the current political efforts are not focusing on small business, but the efforts are diffused, slow in developing and inconsistent.  The political system is complex and has a lot of moving parts.  Recent actions or suggestions would certainly indicate that the significance of small business is not clearly understood, expecially by the House of Representatives where legislation often originates.

Planning. My practice focuses on planning for families, small businesses and their owners. The actions of government in support of the economy are going to result in huge changes in the tax and regulatory structure within which small businesses operate and because this is such an important topic, I will be highlighting over the next several months many of the proposed and actual changes that impact the small business and its owner. The Thursday posts will highlight this changing landscape and other business topics of current importance.

A Second Marriage - A Blended Family - Is There a Time Bomb Ticking in your Closet? (Estate Planning Series)

Divorce Rate Hits 50 Percent (Even Greater In California). The current statistics indicate that over 50 percent of all marriages end in divorce. In Southern California it is estimated that the divorce rate is between 60 to 75 percent.  Those are really staggering statistics and when you add to that the statistic that between 80 percent of men and 75 percent of women remarry within 3 years; it is no wonder that the “blended family” is becoming a very common occurrence.  What is a blended family?  It’s a family where at least one of the partners (husband or wife) has been married before and has children from that earlier marriage or relationship.

The Children.  Blended families present special challenges when it comes to estate and child care planning and the first place conflict might arise is with children.  In general, there is often conflict between step-parents and step-children, that’s not surprising. Add to that one parent’s desire to benefit their biological children more than their step children, and it is easy to see why many parents want to avoid even talking about what to do if one of the parents dies.

The Step-Mad^TM. What is a Step-Mad?  It’s just a term I have coined for a Step-Mom or Dad.  The problem with blended families is not just a children and young family’s problem. There are lots of later in life second marriages, often after the death of the prior spouse and often after the children are fully grown.  The kids may want Mom or Dad to be happy, but that only goes so far and after Mom or Dad dies, the Step-Mad is often an irritant and someone the deceased parents children have not lasting relationship with.  Protecting the Step-Mad from the children may be the most loving thing their second partner can do.

The Ostrich Syndrome^TM. I often see blended families caught in the “Ostrich Syndrome”, a term I use to describe the belief (or hope) that if you just bury your head in the sand and don’t look at the problem, everything will be alright.  I often have this image of an ostrich standing right in the middle of a railroad track, head buried deep in the sand, with a freight train barreling down.  Now we all know that just because you don’t see the train, doesn’t mean you’re not going to get hit.

The Time Bomb and How to Diffuse It.  Families are about more than you and me!  They are really about an “us”.  If you had a time-bomb ticking away in your closet, chance are you would not ignore it; you would diffuse it.  Now diffusing a time bomb is not easy or without some danger. But taking action to neutralize the problem is a lot safer for the “us” than doing nothing.  Hard as it may be to address, dealing with blended family issues calmly and rationally now is the only real solution. 

The Process. In my practice I follow a process with my blended family clients who have identified this as a sensitive area.  We start by getting in a “safe place”.  A safe place is a neutral environment with a neutral moderator, in this case your planning attorney and you agree to some very specific rules about not criticizing or arguing with your partner regardless of what they might say. The safe place is a place where you can be honest without fear and without a lot of emotion.  When you are in a safe place, you then go through a list of questions and answers to understand how each of you feels about support of children, property distribution and timing, care and a list of other concerns. The goal is to develop a plan and to come up with a result that both feel comfortable with. It can often involve some rather creative solutions that can really work and diffuse the situation with very little pain. The key is to start the process.

You Are the Successor Trustee - You Just Got the Call - Now What?

What You Need to Know. I just completed a Workshop on what the Successor Trustee has to know when they take over as the Trustee.  It's really a very interesting subject to those who are faced with that responsibility; it's also very surprising that so few Successor Trustees are prepared for the job.

The Revocable Family (or Living) Trust is a basic estate planning tool.  With the typical estate plan, a Husband and Wife sets up a Trust and acts as the first Trustees.  The Trustees don't own the property in the Trust, but they control it, manage it and distribute it when required.  When all that happens or what is supposed to happen is spelled out in the Trust document.  While the Husband and Wife are the first Trustees, the Trust is intended to be a longterm arrangement and to last through the lives of the Husband and Wife. So there is one or more Sucessor Trustees named in the Trust document.  Those are really important folks. They are the people that are going to take over for the Husband and Wife and make sure that the family is taken care of and that the wishes of Husband and Wife are carried out.

Trust Document - The Operating Manual. It is really important that the Successor Trustee understand what they are going to need to do.  The Trust Document is the operating manual. Most of what can be done, what is supposed to be done, and what will be done, is spelled out right there in one place.  Understanding the manual is the first step in understanding the job.  Which is why I include these workshops on a pretty regular basis in my workshop schedule.  If you have an interest or want to be put on the list for future workshops, go to our Web Site and sign up now.

Reaction vs. Action – Do you want to depend on luck or planning?

Reaction or Action?  My last Blog Post talked about the renewed interest in planning brought about by the recession and in particular something called “Scenario Planning”.  I also discussed the difference between reacting to events and planning to take action.  The first is defensive and the second involves being on the offense.  I believe we all tend to be more reactive than we should. What does it mean to be reactive? By that word I mean we wait for something to “happen” and then we “react” to it. If we take that approach we often feel like we are at the mercy of things outside of our control and two things are often true. First we do not have much input on what “happens” and second, we do not have a plan of how to deal with the event, so we are forced to react as best we can.  No planning means being reactive, since we really don’t have other alternatives.

The Difference a Plan Can Make. Planning ahead can make a big difference. Planning involves trying to shape events to reach a certain outcome. By planning ahead, we have thought out possible combinations of events and we have developed a strategy to deal with them.  But there is an even bigger benefit to this preplanning.  By anticipating possible events that might affect us, we often see weaknesses in our approach or structure and once identified we often can take corrective action to eliminate a risk before it ever affects us. 

The Risk Audit – What’s In Your Wallet?  For example, as a first step in business planning, I often suggest a risk audit. A risk audit is a process that involves evaluating 7 key areas of potential business risk to determine exposure and possible corrective action.  Once identified, planning then allows the business owner to align business risk with the owner’s risk tolerance and to develop corrective actions to eliminate or reduce that risk. Risk will never be completely eliminated, but it can be managed and some risk is rather easy to plan around, but that often requires attention and taking action.  It does not usually occur in a reactive environment.

An Example. Let’s look at an example.  Say we have a business called Busco.  Our review determines that Busco has 15 medium size trucks on the road everyday making deliveries - a potential risk.  Now we evaluate possible scenarios, one of which involves one of Busco’s drivers being negligent, getting in an accident and seriously injuring a young high income professional with small children. The lifetime earning potential of such a person is quite significant and that is what the negligence of Busco’s driver caused.  We need only to look at recent jury awards to see that the damages could be in excess of $8 to $10 Million.  What would such a damage award do to the Busco business?  If Busco is only carrying $1 Million in auto liability insurance, then it is quite possible that the injured party might go after Busco to collect the balance of the judgment.  Could Busco afford to pay $7 to $9 Million out of its assets or cash flow? Would that put Busco out of business?

Just by identifying this possible problem, we can take action to reduce the risk or reduce the potential impact of this risk on the business. We could implement a driver safety program, more carefully screen and test drivers, buy more auto insurance or adjust and tier insurance policies, increase deductibles or self-insured retentions all to reach an acceptable premium and exposure level.  We could also restructure our business to compartmentalize the risk, remove valuable property from the business, or take a number of other actions.  The point is that we can take charge of this risk through planning and we can take actions to reduce the risk. If we do nothing and trust in luck to protect us, we have given up our ability to shape the risk and if it hits we will have no choice but to be reactive – that is really very little choice at all.

Planning and Taking Action.  “Planning” is a proactive process and allows us to evaluate “actions” we can take to reduce the risk. A company that plans has far more possibilities and opportunities than one that does not plan.  Planning makes the company stronger and better able to weather all kinds of events.  The preplanning by the New York Board of Trade (see last blog post), most probably saved that business from extinction when the World Trade Towers were destroyed. In such a difficult business environment it is no wonder that businesses are turning back to planning.

The question for every business owner should be “Do you want to be lucky and hope nothing bad ever happens or do you want to take charge and plan your future? “

Economy Brings New Focus on Planning

Scenario Planning. An interesting recent article in the Wall Street Journal concludes that the pendulum is swinging back on “Scenario Planning”, which is basically “preparing responses to imagined changes in conditions”. [See Wall Street Journal Article "Pendulum Is Swinging Back on ‘Scenario Planning’", Cari Tuna.  Developed by the US Military in the 1950s and applied by many businesses as a learning tool to enable them to develop various contingency plans, it began to be applied by many businesses in the private sector.

An Example. The New York Board of Trade was one of those businesses. It used scenario planning to determine that it was facing an unacceptable risk by having just a single trading floor. That was the first step, but wouldn’t have mattered much had they not then acted to lessen the identified risk. They did act and built a second trading floor outside of their World Trade Center headquarters in the 1990s. This forward planning and action saved the futures exchange and enabled it to survive and continue operating after the tragic September 11 loss of the World Trade Towers.

Human Nature. After a stark example of what can happen, there is a heightened concern about such risks and we are motivated to take action. That was the case after the September 11 attacks and it appears that scenario planning was adopted by some estimates by 70% of all businesses. Human nature being what it is, such planning has fallen off as September 11 has started to fade from our immediate memories. Now another startling event has appeared. With the recession, interest in scenario planning appears to be growing again.

The Me Too Phenomenon. What I call the “Me Too Phenomenon” is our tendency to follow, to be reactive. We wait until something startles us out of our routine and then we jump up and say “Me Too”. We react to something that has already happened. I would argue that such reactions are often if not always too late and a waste of effort and resources. Many financial and investment advisors I have talked to point out that investors, if left on their own, tend to react to changing market conditions. When the market booms they jump in and are buying, when the market plummets, they jump out and are selling. Such reaction though is often too late. By the time you can see something happening, most of the move has often occurred. Warren Buffett, a rather successful market strategist, often takes the opposite approach. He plans ahead and acts very deliberately. He often takes the opposite path of the reactive crowd and is buying when everyone else is selling and selling when everyone else is buying. Planning and action are very different than failing to plan and reacting.

Winning is Determined in the Planning Beforehand.  It is no accident that the ancient Chinese military strategist, Sun Tzu, starts off his classic treatise on The Strategy of Warfare, with a chapter "On Assessments." Sun Tzu suggests that the outcome, whether you win or lose, is determined “beforehand in the temple rehearsal of the battle.” In other words, it is the planning beforehand that determines the outcome. Winning is not about reacting but acting and acting is based on a sound plan. It is assessing every aspect of the coming situation that assures victory or success.

I view this as such an important theme that I will pick it up later this week in follow up Blog posts.

Michael Jackson – What Can Happen Without a Liquidity Plan

Liquidity is a term that is often used in Estate Planning to describe the need for cash or fairly liquid assets at or shortly after death.  Wealth is often tied up in assets that are not liquid and an important consideration in most estate planning involves trying to provide for enough liquidity so that valuable assets do not have to be sold under forced conditions.  It is beginning to appear that Michael Jackson’s estate is extremely complicated and that there may not have been much planning done to provide for liquidity or reduce estate taxes or organize the orderly disposition of the estate on the death of Michael Jackson. Michael Jackson’s Estate Sale, Forbes, Zack O’Malley Greenburg.  

 

Most of us probably don’t expect to die suddenly, but we should all plan for it and the benefits of planning are not just for the extremely wealthy.  Michael Jackson is estimated to have sold 750 million records during his life. The profits on that would be huge, but by all reports the profits are gone a victim of a very extravagant life style.  With personal debt approaching a Half a Billion Dollars, the upcoming concert tour was intended to chip away at this massive debt. 

It’s not that Michael’s estate will be without any assets.  According to Greenburg, “his 50% interest in a music publishing catalog that includes 250 Beatles songs and hundreds of thousands of other works” may be worth as much as $750 Million, but that is if it could be sold in an orderly sale.  If sold quickly, it might actually be worth less than outstanding personal debt and it is way too soon to estimate how much of Jackson’s estate will be needed to pay estate taxes. 

Without the necessary liquidity to hold off creditors, control over how much is left is probably more in the hands of the Federal taxing authorities and creditors than the administrator of the Jackson Estate and everyone on the sidelines has an interest in walking in and grabbing the catalogue at a bargain price.  Some of the possible players are Sony (who Jackson sold a 50% interest in the catalogue to) as well as Beatle Paul McCartney.

Most people with estate plans have thought through and planned for a liquidity shortfall on death. Such planning can save the children significant amounts of value. It can provide for a more orderly disposition of the estate and liquidation of the outstanding debt. It can provide that all of this happens in private and the primary beneficiaries are the children.  It is starting to appear that none of those benefits of planning will be enjoyed by the three Jackson children.