At the Alchemia Group we are helping our clients think & act differently in regards to their wealth and its impact on thier family - because we know it is more than just numbers and plans, it's the Balance of Art & Science with Pragmatism and Vision.
2014 marks the 100th anniversary of the start of WWI, also known as The Great War and The War to End All Wars. It was the first war fought with modern weapons, such as machine guns, and the last war fought using old tactics like throwing large numbers of men at each other as we saw in the civil war. Battlefield medicine had not caught up with the ability to inflict the increased damage to humans. The overall cost in human lives was horrific. Between all the combatant nations over 65,000,000 men were mobilized. Of these over 29,600,000 were killed or wounded. Another 7,700,000 were taken prisoner or missing in action. In terms of percentages these numbers are staggering.
What does this have to do with Family and Wealth? It shows us what can happen when we are ‘armed’ with new tools but fail to account for them when we implement strategies. Two recent examples come to mind. First, in many states it is possible to establish a trust that can last for 1,000 years or more. For literally centuries most trusts were forced to terminate after about 90 years based on the Rule Against Perpetuities. Even then these trust often times became problematic after about 20 to 25 years. Trusts drafted in the 1960s have a hard time functioning effectively in 2014. Now, just because we can, trusts are being established with ten times the life span but with very little forethought on their impact and functionality in the future.
The second example is the ability to gift over $5,000,000 tax free. In 2012, when we thought the provision would expire, there was a rush to create a trust (see above!) and then use discounting techniques to fund that trust with large amounts of assets. In an October 28, 2014 article in Bloomberg News Richard Rubin and Margaret Collins reported:
The wealthiest Americans poured $335 Billion into tax-free gifts amid worries in 2012 that Congress would clamp down on the practice, according to data released today by the Internal Revenue Service. (See entire article here.)
As a point of comparison, the same group, in the five years preceding 2012 gave
2011 $83.5 Billion
2010 $473 million
2009 $449 million
2008 $509 million
2007 $558 million
Between 2011 and 2012 there was a quadrupling of tax free gifts.
Note the key phrase “..amid worries Congress would clamp down on the practice.”. These gifts were, for the most part, made to protect assets rather than to enhance the lives of the recipients. In other words, set up the guns and fire away. Many of these ‘gifts’ will end up causing family friction and fracture.
In planning we are facing many new ‘weapons’ like the Perpetual Trust and the ability to ‘gift’ large amounts of asset value. Additional forethought on both how to use them and how to prepare our families to deal with them is critical.
Planning Question: Do your plan reviews include questions about the impact your plans will have on the coming generations?