Two Levels of Investing: For Progress and for Preservation

Wealthy individuals and governments face similar problems dealing with today’s and tomorrow’s issues. One of the major tools for dealing with these issues is through wise and contemplative investments. Eventually, choices have to be made that will result in major influences to future actions of the general population as well as to those near and dear to us. While the processes to reach critical investment decisions by governments/politicians and those of wealth are similar, the advisors to the decision makers are different as well as the critical time frames. Today’s blog will seek to initiate discussions as to the investment implications for both sets of long-term investors.

The big picture

There is hardly any government in the world, no matter at what level, that is truly popular. Governments are tolerated because the various political forces, be it in the ruling family or other power bases, cannot find much better alternatives. Those in power, unless they are truly statesmen or stateswomen, want to stay in power whether or not they have completed their perceived missions. In effect, they are striving for preservation of power. (For some wealthy, this requirement translates to preservation of capital.) Both governments and individuals are prisoners of past decisions, made by ourselves and others. These prior decisions force us to deal with situations as they are, not what we would like them to be. Only governments that are in a constant state of surplus are not in the deficit production and control business. The whole legitimizing concept of government is that individuals are willing to give up certain actions and other assets in exchange for a third party providing required services. The deficit creation comes from our collective desire not to pay full price for the services acquired. The way the political process works is that one can stay in power by promising to provide more services to more people. Just raising revenues either through taxes or fees, in many cases is similar to pouring oil on a fire; it just leads to more expenses. The sudden cessation of spending, some call it austerity, can panic a society into massive curtailment of discretionary spending, which in turn could produce lower tax revenues. From our provincial vantage point here in the US, this is what we perceive in Europe and Japan.

In the US we see a different pattern, where governments are laying off and/or not hiring workers at the same time that the private sector is ever so slowly adding jobs. Having had to deal with corporate and institutional cutbacks, I recognize that most of the time layoffs at the low end do not produce enough savings to bring the books into balance. Only when some of the senior executives and whole departments are made redundant can sufficient savings be generated. While this is painful in the private and non-profit sectors, it is almost impossible to meaningfully accomplish in government. For example, when a senior employee of the State of New Jersey receives notice of being laid off, he/she can “bump off” (replace) a more junior employee almost anywhere within the state government. Yes, there is a decline in total salaries, but the state is stuck with the senior’s productivity or lack thereof. We have not yet begun to shrink the number of cabinet departments or members of various legislative bodies. Nevertheless, in the US, we are doing something to recognize the deficit problems mostly at the state level. This is being driven by the legal requirement that most of our states must produce a balanced budget. From an investment point of view, this could suggest that a number of our states could be more reliable credit risks than our federal government. This abhorrence of owning most federal debt is reinforced by the belief that it is only a matter of time until the US will join other countries in debasing their currency/debts through inflation. Further, I wonder whether all governments will lose some of their attraction as counterparties in a commercial transaction. I suspect that some governments will try to get out of paying their trade obligations in full and on a timely basis. Thus I am approaching a view that the corporations that have large government contracts should carry a lower valuation than a pure corporate counterparty.

The important picture for the wealthy

With the possible exception of the pharaohs, most wealthy have shown an interest in how their worldly goods are passed on to various heirs. I have written about this topic in my book, MONEYWISE (St. Martin’s Press). Today, I am returning to the critical discussion of multi-generational wealth transfer using a Linkedin Group to promote discussion, and as a resource for all who wish to think about and contribute their thoughts.

After observing families up close and personal as well as from afar, I can say that there is no single expert on all of the aspects of transferring wealth to your heirs. But a number of different kinds of experts are needed to give critical advice to the source of significant wealth, often called the grantor.

Most wills and trusts are developed with the initial assistance of competent attorneys with lots of trusts and estate experience. Their main function is to develop the document that captures the intent of the grantor as nearly as possible. Unfortunately, this is where many people end their search for advice. Tax accountants familiar with federal and state tax laws and regulations are essential, particularly for the wealthy with numerous and complex assets. Further, those who have assets outside of their home country will need competent local accountants and lawyers in each location of the wealth. Again, all too many wealthy individuals stop their transfer thinking process here. In my opinion, there are five other experts that are needed. Future blog discussions will address each expert need in detail.

1. The first expert required is someone wise enough to evaluate the current potential heirs as to their needs, prudence and experience in handling investment activities. As difficult as this task is, they or their successors need to update their views as various heirs mature, marry, divorce, get permanently sick, and leave their own estates and possibly trusts.
   
   
2. The next expert is the supervisor of the administration of complex instruments and relationships. Details that are not properly executed can thwart the intent of the grantor. The ability to supervise is particularly critical in this era of mergers of law firms, accounting firms, banks and trust companies.
   
   
3. Many wealthy believe that they have obligations to their definition of society, and at the same time do not want to make some or all of their other heirs too wealthy and destroy their fruitful life styles. In this case an expert is needed to review not just requests from various charities, but also their operations and leadership
   
   
4. The next to last expert needed is one that can appropriately make corrections for unexpected changes including any of the heirs, supporting experts, laws and regulations. I have often seen in beautifully drawn, long-term trusts, some need to adjust the then-new reality that was not in the mind of the grantor when he/she approved the document. Too often the only recourse to get changes are the courts who will be guided by the written law and the specific trust language, not the current cast of characters and current thinking as to the natures of well-being, investment structure changes, etc.
   
   
5. The final person that is needed for a successful wealth transfer plan is the investor advisor. Actually he/she should be involved all the way along the process. The grantor needs advice as to what is going to be the composition of the transferred assets which may include operating and financial liabilities. Often investment organizations want you to put all the money in one big pool and have each heir get a designated slice at a specific time. This is the easiest way to administer the pot of wealth. It may not be the best as different heirs, including charities have different needs for current income, “real” income, tax adjusted income, long-term capital production, collateral for other obligations, etc.

Wealthy families around the world have these challenges in common. Through the mechanism of a Linkedin group titled Multi-Generational Wealth Transfer, I hope to explore many of the aspects of successful wealth transfer, and respond to your questions and comments. My goal is to assist in the optimum multi-generational wealth transfer.
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Seven Steps For Giving to Charities

At this time of year snail-mail and email carry an extra heavy burden of pleas to give money to any number of mostly worthy charitable causes. Due to various disclosure documents and/or if your zip code is in one of the higher income tax payment districts, one certainty is that any charitable giving this year will generate many more requests next year. These requests will come from the same group to which you gave, but also many others who learn (or guess) that you are good for a contribution.

My Seven Steps for Giving to Charities:

1. The first step is to have a CHARITABLE GIVING PLAN. There will be more urgent pleas for your money than all of your resources. (As Mark Antony was quoted by Shakespeare in Julius Caesar, “They are all honorable men.”) This plan could encompass this year or future years. Due in part (and only, in part) to high “death taxes,” charitable giving is an important part of many people’s estate plans.

As with any plan, writing the first plan is the most difficult. The writer or if you prefer the professional term, the grantor, is often paralyzed by trying to think of every conceivable element to the plan. This paralysis usually prevents the production of a plan. As one who has drawn up many business and organization plans, I recognize that the first step is a commitment to plan. Experienced planners know that plans are meant to be revised over time. Nevertheless, if shared with one’s attorney, the first plan can become one of the foundations of an estate plan with a good chance of doing what the grantor intended. As one matures in the art of preparing and revising charitable giving plans, there may be comfort in discussing the plan with selected beneficiaries, now and in the future.

2. TRANSFERRING RESOURCES is similar to an equation. On one side are the resources. Most often cash or securities are deducted from one’s total and added to one or more charities. The motivation for the transfer is triggered by a belief there is a benefit from the transfer. This benefit is often difficult to measure or even define. In some cases the benefit is best summed up by the phrase, “A warm feeling.” I suggest one should be a little more precise in identifying the benefits.

The first benefit is that the specific charity can accomplish a favored endeavor that it could not do at all, or as well, without the contribution. The next possible benefit is that the charity’s work relieves others of an additional requirement that would have to be funded. (Perhaps improved educational opportunities that help children lead a productive life rather than increased taxes for incarceration.) There can be a personal benefit, other than a tax deduction, e.g. helping children learn a trade or a business that is needed for a well- functioning society. We need more plumbers, landscapers, and bookkeepers as well as classically-trained musicians, among many other skill sets. One of the benefits for giving money away wisely is to teach other, younger members of the family how to help others.

An important part of your charitable giving plan is to identify and understand the benefits of charitable giving.

3. GET TO KNOW THE ORGANIZATION. Many charities will treat contributions they receive as “manna from heaven,” and spend the money as they see fit. There are a large number of horror stories of various charities spending money that was intended for various forms of “good works” on themselves in the forms of compensation, facilities, and entertainment. Others have used money to influence the political process. Some contributions have been diverted to favored commercial activities. While each of these is improper and possibly illegal, the biggest waste of contributors’ resources is through inefficiencies or outright mismanagement. People who work in the non-profit world, in general, are attracted because they have faith in the good works of their particular charities. Often, but not always, they lack management skills and training. Quite often they are short in financial and investment skills. In dealing with these types of concerns, one should compare the size of one’s intended gift relative to the size of the organization.

I believe, if one is intending to become an important contributor to a charity, it would be wise to get involved as a volunteer. For a few non-profits, my principal contribution is to be a member, or chair, of their investment or finance committee. Over time what I can save for them (or earn for them) is much larger than my initial contribution. (I urge my children to follow a similar pattern for any non-profits that have an interest in helping.)

Your charitable giving plan should take into consideration not only your cash contributions, but other resources, most importantly the time being given. Unfortunately, a number of worthy causes are organizations that are not well managed.

4. UNDERSTAND WHAT YOU ARE SUPPORTING. Once one begins to show any sort of sincere interest in a non-profit, one quickly learns of its projects, programs and policies.

Projects typically spend money today or in the near future to accomplish a mission by a certain given date. Think of a new YMCA facility, a specialized hospital wing, or dormitory. Each of these requires an estimated amount of money to be spent on a specific funding schedule. Some of these projects require cash up-front; some require cash to meet progress payments due to contractors and others may require long-term financing for mortgages or equity for the charity.

Programs are often a continuous activity of involvement, with the people the charity sees as its audience. Most often, this takes the form of providing education or medical services to a community that can not afford to pay for these needed services. Instead of brick and mortar spending, program spending is mostly about paying people to work with those in need. “As the poor will always be with us,” the funding needs will almost always be with us. However, the size of the funding support can change based on the flow of contributions and perception of the immediate need.

Policies often deal with the charity’s desire to change the world. This may entail focusing public opinion on a need or attending to a problem. In working toward this goal, interacting with various levels of government is required. This activity is labeled “educating the government,” not specifically lobbying. While the mission of most charities won’t change, their policies can change slowly or dramatically depending on visibility and the political focus.

Understand what you choose to support; projects, programs, or policies. Each can have different funding needs and opportunities.

5. UNDERSTAND THE DIFFERENCES BETWEEN TRADITIONAL CHARITIES vs. MORE VENTURE DRIVEN CHARITIES. Many of the new-multi millionaires have generated their wealth quickly from being involved early in successful companies funded along the way by various venture capitalists. With their newly-achieved fortunes, they want to use the methods that made money for them when they invest in non-profits. I use the term “invest” intentionally, as this is their attitude. They look for a clear mission statement, which appears do-able. They want to see capable management in place, or at least specifically identified. They expect a timetable with specific milestones. Further, they want to see the same level of intensity in the non-profit that they “invest in” as they employed in building their fortunes. Since many made their money in new companies, often they favor new charities. But do not expect them to work their way through the various seats on a board of directors/trustees in the traditional path before they become the anointed leaders!

Understand the differences the way established charities work versus the more venture driven new charities and determine where your comfort level is.

6. MEASURE THE RESULTS. We live in a results-driven world. One of the elements of a well- thought out plan is the measurement of results. Many charities publish self-congratulatory annual reports which trumpet their perceived successes, and the even larger needs facing them. These are like other corporate annual reports or fund reports, which give one side of the story. An intelligent grantor should come up with his/her expectations and measurement yardsticks. In assessing the relative success of a potential gift, one should include personal benefits. For example, listening to great concerts, meeting interesting people, or gaining a deeper understanding of important factors about the community. If other family members have benefitted from these experiences that is also important.

In very human terms, we should periodically measure our efficiency in giving as well as living.

7. SELF-CORRECT. The final stage in any business plan or charitable-giving plan is the feed-back loop so corrections can be made and errors of judgment corrected. Facts believed will prove to be incorrect. One’s knowledge of what is important, will evolve. All of these elements should lead to the next edition of our charitable giving plan.
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*One of the advantages of publishing a blog is that I receive feedback. Often some of the most insightful comments are from my family. The topic of this week’s blog was suggested by my writer son, Don, who believes that some multi-millionaires need help in thinking through their gifts to charities. Thanks, Don.