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After the taxes are filed, start thinking about…

For many of us, income tax time is off the radar for another year. For others, the pain of dealing with taxes has been postponed a few months through the magic of an extension.

Nonetheless, it’s payday someday. Assuming that the immediate pressure of income tax filing has been relieved, for the time being anyway, what’s left to do?

There’s plenty to do and now’s the time to get it done. One of the few benefits of wrestling with our income taxes every year is coming face to face with our financial situation. Now, while it’s fresh on your mind, is a good time to think about financial planning. And, not just the dollars, but also the human side of financial planning.

I enjoyed a really good luncheon meeting last week with the Mississippi Financial Planning Association here in Jackson. Our speaker was Joe M. Goodman with the Nashville office of Adams and Reese, LLP. Mr. Goodman, both an attorney and CPA, is an excellent speaker and didn’t quote the Internal Revenue Code a single time. His talk, titled “Protecting and Preserving Your Family Wealth,” was practical, insightful and timely. This column relies heavily on Mr. Goodman’s ideas and remarks.

Once we have ascended the steps of Maslow’s hierarchy of needs ladder to the point we are no longer concerned about survival and security, we’re faced with what to do with our accumulated wealth. After setting aside sufficient funds for retirement, most of us want to leave something for our children and, perhaps, some charity that is near to our hearts. How and when we can most meaningfully distribute the inheritance is an often ignored subject.

But, before getting around to distributing an inheritance to our children, we have to face the most difficult decision of all. How much is enough? Should we target to replace 80% of our income with retirement funds? 70%? What about the prospect of nursing home care? What is the likelihood of an expensive final illness and how should we plan for that? With these great unknowns facing us it’s easy to throw up our hands and accumulate as much as we can and dispose of what’s left through our will.

Increased longevity is a financial disaster for children of well-to-do parents. With people living longer and longer, we set the stage for 70-year-old children waiting impatiently for their 95-year-old parents to check out so they can, at long last, get the inheritance they’ve been expecting all their lives. Some of those funds would really have been useful back when the kids, or grandkids, were starting out in life, or starting businesses. Now, perhaps the great-grandkids can enjoy some of the family wealth before they start drawing Social Security themselves.

Meanwhile, Mom and Dad have accumulated enough to not just live in a nursing home but to buy their own nursing home.

Surely there’s a better way.

The question of how much is enough could fill volumes. Here’s Joe’s shortcut. Decide how much income you need right now to support your standard of living and divide that number by 5%. That’s the capital you would need to retire today and it should give you a pretty good idea of whether you’re on track or not. If you don’t have that much money accumulated and are not likely to do so, then you won’t have to address distributing excess wealth to your children. You won’t have any.

Should you find yourself with more wealth than needed to fund your retirement and provide for reasonable contingencies, start distributing sooner rather than later. Don’t get trapped into thinking you have to provide equal amounts for each beneficiary.

Consider subsidizing a youngster who wishes to pursue a traditionally low-earning occupation, such as a teacher or social worker. Remove the fear in that person’s mind that he or she will be a failure if they choose not to pursue a career earning a big salary. The other kids who do choose high-income professions can fend for themselves.

Goodman’s talk covered a lot more than the traditional, technical aspects of wealth accumulation and distribution plus some juicy tidbits on raising advantaged children. I gleaned the following points from his talk and thought them worth passing on:

• If your children attend elite private schools, make opportunities for them to interact in the real world that includes non-rich people.

• Involve children in charitable giving decisions early and let them have meaningful input into how the funds are allocated.

• Don’t create so many mandatory family traditions that kids don’t have latitude to develop their own family lives. Ignore your in-laws at your peril.

• Teaching children does not include controlling their lives and protecting them from the consequences of their bad decisions.

Goodman provided the most simple, direct, but extremely effective, method for addressing family financial and business issues I have ever seen. Basically, put every conceivable issue (problem) inside a circle and eliminate those that don’t apply. What’s left are the issues that need attention.

Every financially successful family needs to address issues of life insurance, wills, retirement plans and healthcare. However, some families need to address dysfunctional family members, potential divorce and stepfamilies. If these apply, deal with them. If not, line through them and move on.

In the business circle, we find all the customary issues of valuation, profitability and strategic planning. Additionally, some family businesses need to address intergenerational relationships, lawsuits and going concern analysis.

My goal is to describe the planning tool and not to be comprehensive in listing every conceivable issue that should be considered. Every situation is unique. The important thing is to initiate a planning process and don’t stop until all relevant, both traditional and unique, have been addressed.

Thought for the Moment

Truth keeps the hand cleaner than soap. — African Proverb

Joe D. Jones, CPA (retired), is publisher of the Mississippi Business Journal. Contact him at cpajones@msbusiness.com.

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