August 1990
Vol 13 No 10

WE NEED AN ^'INDUSTRIAL STRENGTH^' FAMILY . . .

Recently, Peter Fortunato and T presented a weekend seminar called 'DYNASTY^'. It dealt with multi-generational family cooperation involving the creation and the preservation of wealth. It was as much a learning experience as a teaching experience as the group collectively explored this topic. I came away from it with the sound conviction that the cooperative family group is the true secret weapon in everyone^'s quest for success. And I discovered something else. Where mother nature hasn't blessed a person with a natural family, one can be assembled from among one's close associates. In this month^'s letter I^'d like to explore the ramifications of both the natural and ^'financial^' fancily as each pertains to estate building and estate planning.

First, let^'s deal with the ^'natural^' family. Mom, Pop, Grandma and Grandpa, Kids, Grandchildren, Brothers and Sisters. For now, we'll exclude in-laws – although these can be powerful allies in a cooperating family group. We'll take it from the ^'top^' down, starting with the oldest generation and moving toward the youngest. I think we^'ll find plenty of role-models along the way.

About 10 years or so ago, a small item in the Honolulu paper mentioned the passing away of the matriarch of a large Chinese family. It was common knowledge that she had been an extremely wealthy woman who^'d owned vast real estate holdings, yet there weren^'t any public notices concerning the probate and distribution of her estate or the change in the structure of any of her business holdings. She^'d long ago established a Trust with interesting connotations. Under it^'s provisions, the oldest living member of the extended family – which included in-laws, out-laws, cousins, nieces and nephews, aunts and uncles numbering well over 300 people – would automatically become the Trustee as soon as his/her predecessor died. The youngest living member of the family became the sole Beneficiary until another child was added to the family. All members of the family worked for the Trust and were rewarded accordingly. As the Trust prospered, so did they in proportion to their contribution. Thus, family holdings were preserved intact through multiple generations within the family group.

Here in the United States, there are plenty of Astors, Vanderbilts, Morgans, Mellons, Fords, Kennedys, Rockefellers, DuPonts who have learned to pass on both wealth and the skills/attitudes to manage it from generation to generation. And right now we^'re growing millionaires at a record pace who need to start concerning themselves about their own estate needs albeit decades in the future because a movement is afoot to use tax laws to reduce the amount of wealth that can be transferred from one generation to another. At the end of 1989, the $2,000,000 tax free transfer to Grandchildren disappeared. It is a very real possibility that the $600,000 gift tax exclusion and the $10,000 per person annual tax-free gift could be severely reduced IN THIS SESSION OF CONGRESS.

Before you dismiss this event as not being applicable to your situation, take a moment to think of it in terms of your parents, yourself and your children. Perhaps it will affect the taxes on your parent^'s estates – and hence deprive you of the seed corn needed to build your own estate. Or, look at it at a point in the future at which your own real estate activities might have matured. If you^'re 40 years old, you might have as much as 50 more years during which your holdings will compound (and, at the rate life expectancy is growing, this is a very real possibility). The $100,000 house you^'re living in would be worth $1,800,000. if it compounded at 6% over that time. If you're able to increase today^'s TOTAL ASSETS; and if you^'re able to compound at a higher yield, the figure representing your taxable estate might be 10 times higher.

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FAMILY PLANNING INVOLVES A LOT MORE THAN JUST MATHEMATICS . . .

Recently Malcom Forbes passed away leaving an empire worth over a Billion in the hands of his family. It consisted of a thriving business with a subscriber base representing over $600 Billion in assets held by his readership. His estate also owned 10 luxury residences worth several millions of dollars each. His Faberge Egg collection is the largest privately owned assembly anywhere. His art objects are worth a fortune. In short, he left a complex and extremely valuable assemblage of assets which required a variety of skills and abilities to manage. So he divided his estate among members of his family most competent to manage each type. His son was left in control of his magazine.

In like manner, you should be bringing members of your family into the act. It isn^'t prudent or fair to expect an inexperienced spouse and adult offspring to suddenly be confronted with the awesome responsibilities of a leveraged estate. A single mistake in judgement or the wrong financial adviser could wipe out decades of your sacrifice and planning. Doesn^'t it make a lot more sense to involve every member of the family from the earliest possible time in the cooperative building of your family^'s fortunes? This way, like Malcom Forbes, you^'ll be able to leave someone in charge who will continue the work of expanding the empire in just the same way as his father, B.C. Forbes did with him.

Don^'t expect instant response from those who have thus far been excluded from your financial affairs. Give them time to adjust to the idea that they have a vested interest in ^'learning the business^'. In some families, the wife is a pretty good financial manager. Bookkeeping, Accounting, Tax Planning, Financial Controls are something even the most withdrawn person can master in the privacy of your home. If not a wife, then one of the next generation. If not them, then active or retired parents. This is ^'head work' rather than physical effort. Very few physical limitations would prevent a family member doing these chores.

Let me hasten to add that a husband might well be the appropriate person to do the above in many instances when the wife is the real estate pro. In. residential sales, women have surpassed men for about the past 50 years. They make excellent property managers. The up-coming generation is routinely acquiring computer skills which can be pressed into service. Everyone in the family can at least learn HOW to maintain things whether or not they actually perform the work. Thus, they can SUPERVISE hired labor. Kids can maintain lawns, deliver late notices, place ads, sit in 'open houses^' to show any prospective tenants. Teenagers can install roofs, paint, do simple repairs. As one generation gives way to the next, the degree of responsibility and compensation can also gradually transfer.

The generation that^'s most under-employed is the early retiree group. Yet this is the most affluent demographic sector and it^'s growing by leaps and bounds. When you^'re scouting for cash, try this group. You may only get advice, but that may be worth more. Whether or not Grandpa knows anything about real estate, he^'s developed a keen sense of smell when it comes to a bad deal in the making. Don't lightly dismiss his unwillingness to provide money for a ^'sure thing'. He's also got CONTACTS among his own set who can make things happen, open doors, solve local POLITICAL problems at the zoning/permit level. I recently was confronting a grim eviction problem with some illegal squatters in a ranch property in California – litigation heaven. My agent called a friend who called the mom of the local marshal, who 'asked^' the people leave (in lieu of facing vagrancy charges). Nothing in the California code includes mothers of sheriffs, but it saved months of effort.

While the older generation has the wisdom and network built up over the years (whether accompanied by cash or not), the middle generation has the power, income, talent. That^'s where the current operational control of assets should reside – and where training in the vocational and business arts must be initiated for the next generation. If you really hate your spouse and kids, keep them in the dark about your financial affairs. When you die or become incapacitated, they^'ll become victims of a harsh world and pay a price.

HEY, WHAT ABOUT US SINGLES?

Single, Divorced, Estranged, Separated – all the people in these categories share a common dilemma. WHO DO YOU TRUST? Others in the same position are those with families who either don^'t have the intelligence and aptitudes to become active players, or who don^'t have the proper ATTITUDES about preservation of capital and investment for the future. Certainly one would be reluctant to reveal financial secrets to a chemically dependent (that includes alcohol) spouse or offspring. One might be reluctant to include as a signatory on a bank account an in-law who was constantly over-charging personal credit cards. What would be an appropriate strategy for people in this category?

One of my older friends found himself in his late 60's with an heir apparent who was a drug addict – in constant trouble with the law. No spouse. Large land and ^'paper^' holdings which required management. He turned to a local Trust Company, establishing a Living Trust with himself as Trustee and the Trust Officer as Successor Trustee. He let the Trust Officer make all PRELIMINARY decisions, subject to his revocation. He evaluated the judgement of the Trust Officer until he was certain of his ethics, integrity and business acumen; then he gave him full control, subject to monthly reports. This was an expensive route, but it provided for CONTINUITY in the event of accident or disability which would have precluded reasonable communication of his objectives. The successor BENEFICIARY was another IRREVOCABLE TRUST set up for his errant daughter to provide for her needs without giving her the power to dissipate the capital.

I^'m a firm believer in close personal friends. Take this test. Jot down the names of 5 people with whom you^'d leave signed blank checks on a bank account with $100,000 balance in it. Having trouble? If you find this difficult, reflect for a moment on the quality of your personal relationships. Husbands and wives routinely trust each other with assets far in excess of this amount. Why shouldn't you develop relationships based upon mutual trust and moral foundations; integrity and ethics rather than on superficial personality factors? As a real estate Broker and as a participant in many transactions, I've had to accept another person^'s word many times pertaining to a division of profits or fees. The vast majority of times this has proven successful. From time to time someone takes advantage of me and I suffer losses. But without the ability to trust, I wouldn^'t be able to do nearly as much business. Conversely, if you don^'t have trustworthy people with whom to do business, cultivating new associates from among the ethical population will give your business a tremendous boost once you find you can accept someone^'s word in lieu of taking the time to get an iron-clad contract.

It surely pays to cultivate honest and sincere personal friends. I was always concerned that my children would be left alone and unprotected in the event of a common disaster that might take the lives of myself and my wife. From the earliest days I found upright and responsible people who shared my values who agreed to become foster parents to my children if necessary to prevent them being lodged in an institution. Later on, I made a mutual pact with another real estate investor to the effect that I^'d look after the interests of his remaining family in return for his reciprocal concern for mine. This was over and above the various Trust arrangements and estate plans. I wanted a QUALIFIED adviser to be their personal ^'friend-in-need^' to help them make investment decisions.

The process of finding honest people with whom to associate starts with your setting high standards of honesty for yourself. If you thought it difficult to name 5 people with whom you^'d leave signed checks, turn it around. Name 5 who^'d leave checks WITH YOU! You'll never be successful in getting people to trust you until you start to trust them. That should make you a lot more selective when it comes to choosing personal and financial confidants. But it should do a lot to cure the isolation that single people feel when it comes to financial planning. Eventually, these mature relationships can form the basis for some extremely interesting and profitable transactions out of public view.

IF YOU CAN^'T PLAN YOUR OWN DEMISE, THEN PLAN TO BE IMMORTAL!

It^'s not as hard as you think. INCORPORATE! I recently had a chance to visit one of the retail outlets owned by Hughes Property Management, Inc. That^'s a company started by Howard Hughes. Although he died in March, 1976, his company Lives on, earning tremendous profits. Oh, you might know it by its ^'trade name', ^'THE SANDS^'. It^'s a casino on the strip in Las Vegas. It still employs lots of people, pays taxes, is still growing and competing while it adds to his estate for the benefit of his (apparently millions of) heirs. Because it^'s an operating business, it can offer a variety of methods by which heirs can benefit. They can become employees and managers, leasing specialists, casino operators, booking agents, accountants, lawyers, financial advisers. They can sit on the Board of Directors and/or serve as Officers with a basket full of fringe benefits. Or they can just be stockholders living off their dividends. It provides great flexibility.

In lieu of finding that trusted friend with whom to entrust the management of your financial affairs, consider an operating corporation as an alternative. Think for a moment of how a corporation really operates. Shareholders choose Directors (so you can pick a group of savvy people to make the broad policy decisions and to develop long term strategies for the deployment and investment of your assets). Directors hire Officers. Thus, the actual implementation of these policies will be taken care of in your absense. As the principal stockholder, you can control the Board with your vote, and thus the selection of officers too. Once you're satisfied, you can leave your proxy with an agent who will oversee your interests. This not only provides for future continuity of income for yourself and your heirs/or favorite charities. It also relieves you of any day-to-day management chores you don't like TODAY.

A couple of years ago I wrote an article entitled ^'RETIREMENT,INC.^' It was printed and re-printed for almost 7 months by the Sound Money Investor. I^'m still getting letters about it from the million+ readers who saw it. Basically, it said that all those who retire should form a corporation and use the framework it provides for meaningful work, recreation, estate planning, a source of dividend income outside the limitations set by Social Security. Studies have proven that lack of work is a major cause of retirement depression and early death. That^'s reason enough to get your parents to incorporate even if there weren^'t valid business reasons why this makes sense. But there are. Everything from fringe benefits to pay medical insurance costs, fantastic Defined Benefit Pension Plan tax shelters at their age, incorporated hobbies, and a sense of real self worth for them and for you. If you or they need to know more, it's covered in greater detail in my upcoming Corporations Seminar. (Below) And who better to run your corporation as both Officers and Directors than members of your own family who would guard your interests?

 

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Quotation not permitted.  Material may not be reproduced in whole or part in any form whatsoever.