The Alchemia Group

Everyday we hear that less is more, simple is better and of the benefits of a minimalist life style. In fact, this observation has been around in an articulated form since 1906 when Italian economist and philosopher Vilfredo Pareto (1848 – 1923) observed that 80% of the land in Italy was owned by 20% of the people.

This idea became conceptualized in 1937 as the Pareto Principle by Joseph Juran  (1923 – 2008). A management consultant, he observed that 80% of the peas in his garden came from 20% of the pods and thus was born the idea of the vital few and the useful many. Said another way, 80% of the results are the product of 20% of the causes.

The principle is very much alive in the world around us. Interestingly, it does not need to add up to 100%. For example, 15% of your actions may account for 95% of your satisfaction in life.  5% of your library may be source of 75% of your wisdom. Richard Koch, in his excellent series of books on the ‘80/20’ idea, goes into great detail of how you can bring this focus to your own individual life. For those interested I recommend all three but in particular Living the 80/20 Way.

Applying “Pareto Analysis” can have a tremendous impact on our daily lives.

Imagine now you could identify the 20% of the pods that give you 80% of your peas. Not in isolation, but in all aspects of your practice. Let’s look at some specific areas where this could apply:

Social Media

All right … here is where Twitter shows up. If you follow people or ideas which ones give you the most useful information? Which 10% or 20% of those you follow have actually contributed to your personal, professional or economic success? Apply this same litmus test to the blogs, listservs, Linkedin groups and other of points of virtual connection to which you subscribe.  Which ones are the vital few?

In the last year which ones actually gave you something useful personally, professionally or economically?  Did you join those six linkedin groups just because someone you know asked?  How much time and focus could you re-claim by limiting your ‘cyber-exposure’ to just the vital few?

Books and Professional Journals

I can name the authors in various areas who contribute 90% or more to my learning and skill in certain areas. Why have books by other, not-the-vital-few, authors bury their effect?  I still keep these books and authors in my library, but they do not clutter my direct work space. They are the useful many but the examples of my vital few are:

• Creativity: Michael Gerber, John Daido Loori, Leonardo DaVinci, and Frank Cioffi
• Advisory Practice: Jay Hughes, Scott Fithian and JohnA Warnick
• Grounding: Trevanian, Daniel Silva, George Leonard and Eliot Dascher
• Spirituality: Karen Armstrong, Huston Smith and Stephen Batchelor

Centers of Influence and Business Relationships

It is easy to be busy meeting with, and courting, business relationships. How might your impact and results expand if you instead identified the 6 or 12 “vital few,” and put focus on specific things of interest and support to these vital few to share with the useful many?

The application and implication of using 80/20 analysis and thinking are large, both personally and professionally.

What do you think?

Recently we talked about the importance of a “good conversation” when helping clients consider if and how they should utilize the large lifetime gift exemption, which is set (I say set but who really knows!) to expire on December 31, 2012. As part of that post, I mentioned Simon Sinek’s TED talk on “Start with Why” (and the book of the same name).

http://www.ted.com/talks/simon_sinek_how_great_leaders_inspire_action.html

I have revisited this talk at least six times since then. I have also been following the onslaught of wealth planning ideas and strategies coming from The Heckerling Institute, The Washington Report and a host of other sources. I believe more than ever that we need to meet our clients as people first, and present strategies second. I can completely understand how all the noise is causing this very unique opportunity to create a transforming gift for generations, to get lost.

Sinek’s approach (he calls it the “Golden Circle”) starts with a center circle of “why”, a second ring of “how”, and finally and an outer ring of “what”. In an advisory position, it becomes why we do what we do, how we do what we do and what we do. If every advisor took the time to go through their why, how and what, and then added that to the conversations they have with clients, I believe many more meaningful implementations and results would occur.

I’ll share my own why, how and what:

Why: I want to increase the happiness and satisfaction with life felt by individuals and families

How: I facilitate transformational thinking

What: I design, implement and sustain Family Legacy Plans using appropriate wealth strategies

When your “why you do what you do” is clearly in line with a client’s important value or goal, the development and implementation of quality work is a natural result.

What do you think?

A common theme from 2011 is “fewer people are taking advantage of the increased exemption than expected”. This despite, as Blanche Lark Christerson of Deutsche Bank says in SmartMoney (13 December 2011):

“Considering that the gift tax exclusion had been frozen at $1 million for many years this increase represents a remarkable opportunity to pass property to heirs free of gift tax.”

So why so relatively little implementation?

The problem may be that all the talk is around the technical/tax/quantitative benefits and not what can be accomplished for the human beneficiaries of the gift. In the end, it is a gift, and as such the conversation should begin with what can be accomplished by making such a gift. Will it be transformative in the lives of future generations of the family? What will it be used to accomplish? Education? Opportunities? Community/Philanthropic causes?

Clients are bombarded with the latest tax and financial ideas on a regular basis. The arguments about tax policy and rates create an overwhelming amount of noise which can drown out the real opportunity. The opportunity to do something with this “once in a lifetime gifting opportunity” that can create lasting, sustainable and empowering benefits for multiple generations.

Simon Sinek, author of “Start with Why” gave this TED Talk, http://www.ted.com/talks/simon_sinek_how_great_leaders_inspire_action.html. Using what he refers to as “The Golden Circle”, he demonstrates how focusing on the Why of doing rather than on How or What of doing changes everything. Helping clients discover a powerful “Why” for using the increased exemption amount is not only a better conversation but the one with the most potential for a real result.

What do you think?

It is projected that as much as 90% of affluent family assets will be “trust owned” in two generations. While this may indicate a prevalence of great tax and financial planning, what does it mean for the development of financial skills in the coming generations? In an earlier post (The Dis-Incentive Effect of Incentive Trusts), we talked about the idea of financial skills language in a trust. The second part of financial skills is the growing and managing a personal balance sheet.

A personal balance sheet reflects your “personal ability” to create a lifestyle for yourself. It includes lifestyle assets, such as a home, investment assets of several different types and purposes, business assets and risk management assets, such as insurance policies. Having a personal balance sheet has the impact of making someone a better trust beneficiary. Decisions about which “bucket”, (trust or personal), to utilize for a specific need, help create an understanding about long term thinking around capital creation, preservation and stewardship.

In a very thoughtful article, Jim Grubman compared creators and inheritors of wealth to immigrants and natives of the land of wealth and opportunity. An immigrant has worked very hard to arrive in the land. S he is very appreciative of everything. A native however was born into his circumstances and lacks the immigrant’s point of comparison. The often heard phrases “They don’t appreciate what they have!” and “They don’t know what it took!” are very true because, as natives, they haven’t had the experience.

Creating a personal balance sheet can begin with a relatively low cost asset; a life insurance policy on the child’s life. Owned in a custodial account, it can be the foundation for the financial future and the understanding of what a personal balance sheet is all about.

What do you think?

As the political rhetoric heats up, the conversation includes the idea of our society being a “zero sum game”. More for you means less for me. There is only a finite amount. Unfortunately, this thinking can easily enter into the family wealth transfer plan discussion. It can be most problematic when the asset base of the family necessitates shared ownership.

Sometimes “more for one” also means “more for all”. The best example of this is leaving control of the family business to the heir most capable of continuing it, while leaving non-voting interests to non-working heirs. In many situations, this is the most effective way to grow a family asset. In a very real sense this benefits all equally; both emotionally and financially. Zero-sum thinking can inhibit the long-term benefit of well-stewarded family wealth. Imagine having Bill Gates or Warren Buffet as your brother. Would you trust their abilities to grow wealth for the family? Even if on the surface it appeared they received “more”?

Much like entitlement, “zero sum” thinking needs to be discussed and dealt with openly. Awareness of the issue is the first step. Changing the description from “transfer” to “transition” creates a context for the next generation of the family. It describes a well thought out strategy to preserve the benefits and enjoyment of family wealth across the generations.

Then, unique financial instruments like life insurance can create the financial stability and security around the “shared ownership” assets. The strategically planned delivery of cash via a life insurance portfolio, coupled with a well-communicated family asset structure, can help preserve both family harmony and family assets.

What do you think? We’d appreciate your comments.

Since 1986 the Generation Skipping Transfer (GST) Tax has been a major factor in planning for affluent families and for many states seeking revenue from trust fund business. A study in the Yale Law Journal (Vol. 115, pg 356. 2005) reported there were twenty one “Perpetual Trust” states with nearly $100 Billion in assets. Life Insurance has provided a powerful way to leverage the GST exemption creating pools of assets which could alternatively enhance the lives of beneficiaries for generations to come or create a perpetual leisure class. (See you this winter in San Moritz). This has been the conundrum addressed by planners and the wealthy (see Andrew Carnegie’s The Gospels of Wealth) themselves for years. The unintended consequences of perpetual trusts, among them the possibility of a permanent leisure class, has been cited as part of the cause of both the French and Russian Revolutions.

Recently, as reported in the AALU Washington Report, there is a move to limit the GST exemption to two generations. Long term this would cause assets to ‘return’, at least for tax purposes and possibly for societal use.

What do you think?

For most of us, a decision made several, probably four or five generations ago, is part of why we are where we are today. Some ancestor in a little village (or large city) on the other side of a large body of water decided that he or she wanted a better life for themselves and their family. They decided to embark on a difficult journey to a place where they didn’t speak the language, knew very few people, if any, and weren’t sure what the outcome would be. They were going to the “land of opportunity”. They made a decision that we, generations later, can honor.

What decisions are you making that, generations from now, someone will look back on and honor? It is possible that with thoughtful planning, purposefully crafted documents, meaningful conversations and the implementation of appropriate financial instruments, such as life insurance in a trust, an ongoing and sustainable “land of opportunity” can be created for future generations.

We have these conversations regularly and would enjoy sharing them with you. Let us know your thoughts.

At the 2011 Heckerling Institute, well-known estate planning attorney Jon Gallo presented The Use and Abuse of Incentive Trusts . He collaborated with his wife, Dr. Eileen Gallo (an expert on the psychological impact of sudden wealth), and Dr. James Grubman, (a family wealth consultant), on the idea of a “Financial Skills Trust” rather than the traditional “Incentive Trust”.

According to the Gallos’ research, “Incentive Trusts”, (which were actually part of a marketing program in the 1980s), are in fact more likely to thwart the development of motivation than support it (pages 11-5 though 11-11). The idea of an alternative is beginning to resonate with clients as they implement trusts such as “Irrevocable Life Insurance Trusts” which have very long lives.

The “Financial Skills Trust” incorporates guidelines for the trustee to consider when making discretionary distributions. Things such as demonstrating the ability to live within your means and the management of debt and credit are highlighted, and the trustee has the ability to assist beneficiaries in these areas. In the presentation there are a total of six primary skills and two secondary skills which the trust helps the beneficiaries develop (pages 11-20 through 11-42). The authors believe this focus creates a “Results Oriented Trust Environment” (ROTE).

While not for everyone, but for those that are concerned with their children/grandchildren becoming “Trustafarians”, it presents an interesting option. At the conclusion of the presentation there is sample language that could be used as part of the document.

I think this “adds to the conversation” as wealth-holders weigh how to best take advantage of the increased gifting opportunities of 2011. What do you think?

With all the litigation around trusts, beneficiaries and trustees, the question of why bother with one in the first place surfaces loudly. Certainly, there are very smart tax and asset protection reasons for trusts. The unhappiness (read: litigation) is generally not about those things. It goes to a much deeper issue — the human component.

Ever since the first crusader “entrusted” his bishop with his assets, trusts have centered on a very straightforward idea:

One person (the grantor) gives a second person (the trustee) something to hold for the benefit of a third person (the beneficiary).

Too often the focus is on the “something” rather than the “someones”.

We see the opportunity to act differently arising at the very first design meeting. It begins and ends with a new set of questions to be considered by the grantor and the advisors:

• How would you want to be treated if you were a beneficiary of this trust?
• What do you want the coming generations of beneficiaries to say about you and this trust?
• What are the key values and principles that you believe are critical to success in life?

Questions like these can then be translated into a document that could:

• Begin with a simple statement of purpose or faith;
• Be written in the first person;
• Sound like the voice of the grantor.

Consider this opening language from an actual multi-generational trust:

While from a legal and tax standpoint this Trust must be construed from the perspective that I am the sole “grantor,” my children and their future descendants and families should know that its creation was very much a collaboration of the mutual philosophies and ideals of my wife and partner, and myself. We have deliberated carefully on the purposes we would want this Trust to fulfill. Whether this instrument uses the singular “I” or the plural “we” when it speaks of goals, objectives or intent, I want my children and descendants to know that those expressions echo the thoughts and desires of both my wife and me.

The Trust does not exist as an end unto itself. It is merely the means by which we have chosen to share some of our wealth with our children, and eventually our future descendants. It is a framework to help our family better govern itself, and to encourage our children and their descendants to strive to be the best individuals they can be and to seek joy by living in accordance with the values expressed in this Agreement. We hope that this Trust will remind our children to discover the personal growth and satisfaction that can be realized through sharing our good fortune with those who are less fortunate. We also hope the Trustee will offer positive encouragement and assistance to each beneficiary in their quests, crises and challenges.

Perhaps more about the “someones” and less about the “somethings” in the trust equation would lead to better results.