More On Tax Planningfrom The Advisor's Professional Library
- Charitable Giving Charitable giving can reduce your clients’ tax liabilities. However, the general and verification rules for the deduction of charitable gifts must be understood in order to take full tax advantage of such gifts.
- IRAs: Eligibility The eligibility rules for contributing to traditional and Roth IRAs are complicated. Learn how to effectively use them in retirement plans.
Giving to others usually suggests that donors feel they have enough for their own needs. But as bonuses, raises, and jobs themselves have disappeared and portfolios have shrunk drastically, many clients (and advisors) are facing a painful decision. Unless they reduce their support of other family members and beloved charities, they may put their own long-term financial security at risk.
Saying no to loved ones and favorite causes is always difficult. If you or your clients are dreading the sadness and disappointment of others who may have relied on you, here are some suggested ways to deliver the message.
Q: I just advised my client not to count on being able to make his usual big contribution to a foundation that helps inner-city schoolchildren. He's afraid that forgoing his annual donation will force the organization (which he helped start) to cut back on staff and services. But his work income and investment portfolio both took a major hit this year, and his wife feels they shouldn't part with money they may need later for retirement. To give, or not to give?
A: Although it may be unwise for this client to continue giving at his previous level, I think it's important for him not to reduce his contribution to zero. Economic considerations aside, there's a sound emotional reason for this advice. When people give time, energy, and support to a cause they believe in, it improves their self-esteem. Here, they feel, they are helping to make a difference, no matter what else is going on in their life.
Sarah Ban Breathnach, best-selling author of Simple Abundance, told me how important this outlook has been to her. When she was an impoverished writer having to ask her husband for grocery money every week, she decided to walk her own talk by living the principles of simple abundance "on a cellular level." The day she decided to tithe 10% of her grocery money to her church was the day she went from living in "poverty consciousness" to experiencing true abundance. "I feel that if I can give away 10% of what I have, I must have more than enough," she told me.
While you're helping your client determine an amount he can reasonably afford, you might suggest that he enhance his contribution by volunteering as a tutor or giving in some other way that suits his talents. I'd also encourage him to spread the word about his foundation to friends, colleagues, and his extended family. He may be able to find new sources of funding--and allow others to experience positive feelings of abundance, too.
Q: My clients never started a college fund for their twins because the grandparents (on the mom's side) promised to foot the bill. Now the two boys are high school juniors, and expect cost to be no object when they go to college. However, the market collapse has left Grandpa and Grandma in no condition to pay $300,000 for Ivy League schools. They feel terrible about not having put the college money somewhere safe. The parents also feel guilty for having defaulted on their responsibility to pay for their kids' education. Though far from wealthy, they have too much income to qualify for need-based scholarships and grants. Who should break the news to the twins--and how?
A: I would suggest that you host a meeting for the grandparents as well as the twins and their parents. The professional neutrality of your office will help prevent emotional meltdowns and encourage a more rational discussion of the alternatives.
At this family gathering, the older folks can honestly tell the boys that the college funding everyone counted on is no longer available. If they are so inclined, they can apologize to the kids for the lack of vision that contributed to this situation (although top investment professionals were equally blindsided by the widespread market crash). More importantly, everyone can brainstorm how to plan for college in the new circumstances. The sons need to accept the possibility that unless they get merit scholarships, Ivy League schools may be out of the question.
Washington Post columnist Michelle Singletary, who was raised by a frugal grandmother, once told me that children value higher education more when they pay for at least part of it themselves. Though I came from a background where parents were expected to foot the entire bill, I've come to see the wisdom of her perspective.
The boys will be upset, of course. It may be necessary to bring in a family therapist to help them deal with their anger, as well as the feelings of shame and inadequacy that the parents and grandparents may be struggling with. But if everyone works together to process their disappointment and begin planning possible solutions, the sons may learn to value their education more highly, and the family may come out of this financial calamity stronger than before.
Q: My client often sends $500 or $1,000 to her younger sister, who is chronically in financial straits. With only a high school diploma, the woman has never had a good job. When both sisters recently received a modest inheritance from an aunt, my client banked most of hers. Her sister used her inheritance to buy a couple of exotic pets, pay off old bills, and cover living expenses for several months of doing nothing. I hate to see my hard-working client write out a check whenever her sister asks for help, especially since she should be fully funding her own Roth IRA instead. Is there a tactful way to persuade her to shut down her private family bank?
A: This is a very difficult situation. An older sibling's obligation to support a struggling younger sister or brother is often deeply ingrained. In many cultures, it's an obligation that takes precedence over one's own comfort.
I believe in the familiar flight attendant instruction, "Put on your own oxygen mask before putting one on your child." In other words, unless your client takes care of her own financial security first, she may not be in a position to help her sister--or anyone else--in the future. Encourage her to assist in some nonfinancial way that doesn't imperil her own future well-being.
When a similar question came up recently at a conference where I was speaking, I asked attendees how they had handled this kind of situation. One of them offered a brilliant solution: that the client urge her sister to phone her advisor and ask whether the client really had enough money to give her. This resourceful audience member went on to say that when her own clients followed this advice, the needy family members never called and the requests for money stopped.
Q: An elderly couple recently consulted me after losing millions in a notorious Ponzi scheme. They'd always planned to leave a sizable estate to their children, but this is no longer in the cards. The problem is that the kids (now in their 40s) have internalized the message that they will be wealthy one day. They've built bigger houses than they can afford, drive expensive cars, and raise their own children on "nothing but the best." I foresee a lot of anger and resentment when they learn that they can't expect much of an inheritance after all. The parents would like me to give them the news. Should I?
A: This scenario is an unfortunate commentary on the values of many people in our society, who not only expected endless growth in income and home prices to finance their spending, but also trusted their parents to help them and bail them out well into adulthood.
Should you be the one to lower the boom on the kids? Personally, I have found that lone bearers of bad tidings are the ones most likely to get shot. However, you might consider lending your presence at a meeting of the whole family. It wouldn't be a bad idea to invite a therapist or family mediator to join you at such a potentially explosive gathering.
The ideal way to deliver this message would, in fact, be a series of meetings. I would recommend three, at least. This will allow ample time for everyone's feelings to surface as reality slowly sinks in, and for collective brainstorming to eventually occur.
No one likes to have downsizing forced on them. It may feel humiliating, like a failure. Yet even though the process will in no way be easy, on the other side of this painful experience may lie a much more sensible life (and lifestyle) for your clients' children.
Last month's column, "Betrayal of Trust," discussed how people can heal and move on to a more positive future once their trust is shattered. Many of the situations we've just addressed also involve breaches of trust: the twins whose parents and grandparents can't afford to send them to expensive colleges will feel betrayed, as will the sister who's used to being rescued by her older sibling. To move forward, it's crucial to openly acknowledge the facts and to admit and apologize for one's part in creating the problem. By facing the challenge together and helping to devise new solutions, it's possible to restore damaged relationships to more normal functioning. In some cases, a forced cutback in giving may well allow the younger generation to build "muscles" of their own in a way that ultimately enhances their feelings of self-worth and leads them to take charge of shaping a better future.
Olivia Mellan, a speaker, coach, and business consultant, is the author with Sherry Christie of The Client Connection: How Advisors Can Build Bridges That Last, available through the Investment Advisor Bookstore at www.invest-store.com/investmentadvisor. She also offers money psychology teleclasses for financial advisors and for the general public. E-mail Olivia at email@example.com.