Smart Money MD

In the asset management world, there is always some discussion on how you can maximize what you leave behind to your heirs. We all want to make sure that Uncle Sam gets the minimum amount of your hard-earned wealth upon your demise. Fair enough.

I think too much emphasis goes into squirreling away your money into various protected vehicles.  Cash value insurances. <shudder> Trust funds. Step-up basis. Sure, these opportunities are worth knowing about, but the main question about all of this is who in this world should benefit from your financial prowess? And how much is enough?

Leaving religion aside, one has to realize that you can’t really take any of this to the grave. Anyone other than yourself will get your wealth. Most people are going to give it to their kids, grandkids, relatives, and charity. I’ve seen this in my closer friends. It’s an interesting phenomenon to see on the outside.

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Middle class inheritance.

I have a friend who lost her parents a few years ago. Her family was a quintessential middle class family. She worked as a manager in a local small business. No one in the family had professional degrees, but they all managed well. All of the siblings ended up splitting the savings accounts and the house. As I recall, each recipient received on the order of $100,000 total.

I would take a windfall over nothing on most days, but you realize that an amount like this isn’t going to allow anyone quit their day job. Taking all of this in cash all once would probably trigger a relatively sizable tax amount for the average American too.

I’d want to take back my loved one any day in this situation.

Upper class inheritance.

I have another distant colleague whose parents were in some shipping business. She is a general surgeon who doesn’t seem to practicing medicine anymore (I don’t know her that well, but she stopped after having kids).  Her husband was “in the finance industry”. Now, it was no surprise based on her lifestyle during medical school that she came from serious means. Nice clothing, furniture, apartment, and vacations. If I were in her shoes, I might not have even had the ambition to go into medical school, yet alone become a surgeon. When her mother passed, I recall that people spoke about “serious amounts of money” in the inheritance. Not sure what that means, but the people who spoke about it were all doctors, so I would assume that these amounts were big in my book too.

Thanks to Facebook, I now see vacation pictures from their family almost every other month. They have a nice home in the Bay Area that recently sold for nearly 8 figures.  I think that they are all happy.

Windfalls and their impact on your lifestyle.

The easiest way to ruin any person’s self-initiative is to give them a crazy amount of money before they have established their careers. In this regard, it’s probably a good idea to set up a trust fund if you end up having significant wealth to leave behind.

Fortunately (or unfortunately) most of us will never have enough excess money to ruin someone’s life. But we should consider whether leaving an inheritance should be part of the investment equation. My strategy is as follows:

1. Work hard and save as much as you can before you have dependents.
2. Continue to work hard and instill work ethic into your dependents or mentees.
3. If you are able to contribute to others’ well-being, do so. Invest in their education and work ethic.
4. If you have excess after helping out your family and friends while you are still alive, consider the charities that you have left out.
5. Leave behind what amount you feel is adequate after you’re gone.

That’s it. Simple and sweet. If you hustle enough in your working years to fall into the trust fund level, congratulations. You’ve gone above and beyond. Otherwise, there are more pressing matters to deal with in your lifetime.

(Photo courtesy of Flickr)