Tag Archives: personal planning

Effective Wealth – Legal and Strategic Considerations

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alvinIn my first piece on effective wealth, I laid out…

  • Individual wealth => 5 to 10 years cost of living
  • Generational wealth => 10 to 25 years cost of living
  • Multi-generational wealth => 25 to 40 years cost of living
  • Surplus (excess?) wealth => beyond 40 years cost of living

We hold our individual wealth in Living Trusts – these have the benefit of being fully revocable (assets in and out easily) and transparent to the IRS (easy for taxes and administration).

TIP – five years cost of living in a debt-free balance sheet will change your life and make you far less susceptible to corruption and influence. Once you hit ten years cost of living (in a debt free balance sheet) then you should consider cutting expenses and working part time. At a minimum, 5-10 years worth of wealth should trigger a sabbatical to consider personal wellness and how you allocate time.

Generational wealth is held in an irrevocable Grantor Trust that benefits my spouse and kids. I can’t get the assets back nor can any creditor or petitioner. In my lifetime, I retain the obligation to pay taxes on the trust as well as the ability to swap assets in/out for fair consideration. Admin is about the same as managing a partnership/LLC with similar assets/earnings.

TIP – once you are nearing 20 years cost of living in a debt-free balance sheet you are close to the breakout point where you can stop working, forever. Now is the time to shift towards personal wellness!

Multi-generational wealth – this is small part of my family balance sheet, because I followed my advice at each of the above segments. We use a Private Trust Company (in a state without income tax) that oversees a trust that benefits my descendants. We also use 529 (college) accounts.

TIP – the first time you realize that you might be making money for your adult children STOP and undertake a life review that focuses on how you allocate time and personal wellness.

+++

What does all this cost? Charging market rates for my work, I oversee the structure for less than $5,000 per annum. Living Trusts/Will were $5,000 to set up. Grantor Trust was $5,000. Private Trust Company and Family Trust was $10,000. These are Boulder, not New York, rates.

How does this give you peace of mind? My personal assets are the smallest of any adult in my family tree. By value, I own less than 1% of the above structure. I am free to give my family the gift of service.

I’ve said what needs to be said.

I’ve done what needs to be done.

I’m free to focus on loving those that love me.

 

The legal and tax consequences of an error in your family structure can be severe. Take expert, local advice. Nothing on this site should ever be considered professional advice.

Effective Wealth – Due Diligence Results

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tulipsThis series started with a definition of effective wealth and a due diligence exercise for your family.

I’ll share the best tips that I received from my due diligence work:

A general liability umbrella policy can be an effective way to insure against ruin – in my life, hosting events (where athletes might die) was the source of my greatest liability. Due to my other insurance coverages, $5,000 per annum bought me $5,000,000 of coverage.

Have an expert read your insurance contract to ensure you’re covered for your key risks. I’ve reviewed draft policy documents that specifically ruled out the only reason I was buying the policy!

Paying $5,000 per annum got me thinking that there might be a better way to structure my life. There is a better way and I’ll share my family legal structure in a future post.

Hosting athletes is a low-margin business and my need for multiple insurance policies greatly reduced the profitability of the events. So I handed the events off and removed myself from their promotion and management.

In speaking with successful families, three things stood out.

#1 – the advice to share information widely and control the structure narrowly. As much as possible the family is involved and consulted on family matters. However, not more than two individuals from each generation are involved in governance. Write out the process for a family member to become a fiduciary, or trustee.

#2 – each generation must decide their own values. It’s impossible for elders of the past to influence third and fourth generation family members. The best tip here is a reminder that no matter what you do, what you decide, what you structure… there will be aspects of life that you find disappointing – in yourself, in your spouse and in your kids.

#3 – young family members should be given the opportunity to learn from mistakes early in life. No family member should be given the opportunity to bring down the entire family and individuals should experience the impact of their poor decisions.

How To Make Money At Real Estate

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taxiEffective last month, my family owns a house in North Boulder for a net cash cost of US$100,000. It took me a decade to get that deal done. I did a similar one in New Zealand in 2001.

When I buy, I look for a good asset, at a fair price, with built-in options that can create upside.

If you’re going to make superior returns then it will be due to an option embedded in the deal.

For example:

  • Excess land gives the option to subdivide (Boulder 2010)
  • Buying outside my “home” currency of US dollars gives the ability for international arbitrage (New Zealand 2001)
  • Buy homes for less than their cost to build (Tucson 2010)

The goal is not having a property that you would be proud to show off to your friends. Until recently, I owned a “pride” property. A 6,000 sq. ft home that earned my family nothing for the time we lived in it. Truly fantastic house, mediocre investment.

Likewise, the option should not be created by using a ton of leverage. High leverage is appropriate only when you’re using other people’s money in a non-recourse vehicle. More here.

When should you buy?

#1 – Buy when you need the asset. You rarely need the asset! Be patient.

#2 – Buy when the cost to own is FAR less than the cost to rent – see my free ebook for how to do this calculation.

#3 – Buy when banks are foreclosing – banks, governments and trustees often sell for less than fair value.

#4 – Buy when the local debt market has collapsed – a cash buyer in a liquidity crisis will receive favorable terms.

Note, these tips apply to every asset and you’re going to need substantial liquid assets to take advantage.

All of the above, imply that you should study your target market for a decade before you buy. I also recommend that you limit your equity investment to 15% of your family’s balance sheet.

Right now, we’re in a bull market and you probably feel like you will never get another chance to buy at distressed prices.

You’re wrong.

In my working life, I remember bear markets in 1990 (UK), 1997 (Asia), 2000 (US) and 2009 (Global).

Take your time and remember you don’t need to do the deal.

Once a decade, the patient investor will be sent a fat pitch.

 

Beyond Positive Addiction

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rainbowPopular culture is filled with inspirational stories about people leaving the darkness of negative habits by shifting towards a positive addiction.

If you make the change, and awaken the giant within, then you may find a huge source of energy.

With this burst of energy, you will start to attract people as well as “what you think you need.”

This isn’t wishy-washy philosophy. It’s how the world works – positive results flow from positive actions.

Consider a charismatic leader, especially those with a dark backstory, and note their ability to attract what they want.

Students, wealthy clients, groupies, money, notoriety… all of these flowed (on a small scale, thankfully) as I tapped into my positive addictions.

At this point, there is a trap waiting for us.

The trap is thinking that embracing a positive addiction is The Way.

A more accurate description is embracing a positive addiction can be an effective way to shift self-destructive habits.

But what next?

If we’re not careful then we might become a guru of positive addiction!

Which might work, until it doesn’t work.

When life starts to fray, our addiction will remind us that we run the risk of returning to our old life. It might say… you must continue along the path of positive addiction or you’ll slide back towards obesity, sloth and alcoholism!

After 20 years of better choices, I’m starting to realize that my fears don’t fit the facts.

What to do?

Continue the path of self-improvement by releasing the grip of my positive addictions:

  • Competition
  • Vanity
  • Greed
  • External Validation
  • Emotional Pain

Allow myself to consider the alternative of gently letting go of habits that don’t seem to be working any more.

When more ceases to work, consider trying less.

Wealth Habits – Aspirational Spending

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bunny_gGrowing up the following fell somewhere between normal and aspirational:

  • Private education from Pre-K through Graduate School
  • Winter ski vacations
  • Summers spent at a waterfront cottage
  • International trips to tropical and European destinations
  • Two family cars, bought new, every five years
  • A walk-in closet filled with wonderful clothes and shoes
  • A garage packed with the finest sports equipment

Depending on where you live, you are signing up for $3,000,000 to $20,000,000 of aspirational spending.

…and you haven’t bought a bag of groceries!

Is there another way?

Save half of your after-tax income until you have ten years living expenses banked.

Then cut your living expenses and work part-time, so you can…

  • Spend thousands of hours with each of your kids before they graduate high school
  • Live where you don’t need to leave
  • Encourage your family to actively participate inside your community, and outside your demographic
  • Cultivate inexpensive passions (mine are reading, writing, forest walking and cycling)
  • Share simple, local experiences with your spouse (love, holding hands, serenity)

Time & health.

True wealth.

True luxury.

An Illusion of Individual Experience

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riverMy buddy, AC, wrote a good article about his athletic journey.

Alan’s article was a reminder of my own capacity for self-harm and a need to remain vigilant against fooling myself. You see, my story is the same with different details.

I make a cameo in the last decade of Alan’s life and my friends have been talking to me about their own experience.

I wanted to share part of a conversation…

A – I could never do that.
G – Never do what?

A – I could never share my story.
G – You might want to be careful with that.

A – Careful with what?
G – Be careful about making affirmations to conceal your truth

When you start to share your truth, you’re likely to discover that it’s really our truth.

Be brave.

Understanding Your Family’s Risk of Ruin

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nightwalkIn my previous piece on effective wealth, I made the case for linking wealth to spending.

  • Individual wealth => 5 to 10 years cost of living
  • Generational wealth => 10 to 25 years cost of living
  • Multi-generational wealth => 25 to 40 years cost of living
  • Surplus (excess?) wealth => beyond 40 years cost of living

Spanning 25 years and a range of industries, my careers have had one thing in common… clients can sustain significant losses.

Early in my working life, permanent financial loss didn’t concern me.

  • I had limited assets
  • I was an employee
  • I was insured by my company
  • I was indemnified by my clients

Over time my exposure changed and, eventually, I realized that I had a significant risk of ruin.

My definition of “ruin” has changed over time. It’s worth writing out your own and discussing within your family.

For example, “losing everything I own:”

  • didn’t concern me at 25 – I had a small balance sheet relative to my future earning potential
  • would have been a huge problem at 35 – I had limited earnings, moderate personal leverage and a balance sheet containing more than 15 years cost of living
  • isn’t a problem today – low leverage, small personal balance sheet, greatly reduced cash flow deficit relative to my young family’s assets

Today, ruin consists of adverse events with my family’s human capital.

While I run our family structure, it’s a very small piece of what I do.

Because… the purpose of getting family structure correct is to enable a focus on what matters – human capital and shared experience.

  • marriage
  • kids
  • family
  • health

Get the structure right so that you can focus on things other than the structure!

  • Simple
  • Straightforward to manage
  • Cost-effective (time, expense, future flexibility)

Consider:

  1. Are you worth suing?
  2. In what capacity could you be sued?
  3. What’s the nature of the losses that could be sustained by any party?
  4. What can go wrong outside of lawsuits? Personal disability, for example.
  5. Can financial, or legal, structuring reduce these risks?
  6. What’s the cost to insure these risks?

Brainstorm the answers and schedule consultations with:

  • an experienced litigation attorney – quantify and understand how you will be ruined 🙂
  • an experienced trust and estate lawyer
  • a fiduciary with experience advising families similar to your own
  • a family that has managed two successful generational wealth transfers – what does success look like when you’re gone?

Write out your notes from these meetings, discuss with your family counsel and reach a rough consensus on your family values.

Here are reading resources to help you understand family wealth.

  • Consult widely
  • Seek out smart people that disagree with you – you’ll both benefit
  • When family members disagree, pause
  • Change slowly

More on the specifics of my own journey in a future installment.

A Lesson From Richard Feynman

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snow_bunnyThe mistake I made was not reconsidering my involvement once the original reason for agreeing to help had been removed.

The quote is Richard Feynman’s. It refers to his role in building the nuclear weapons that killed more than 100,000 people. You’ll find the story of his involvement in The Pleasure of Finding Things Out.

One of the most dangerous biases that we’re prone to is consistency and commitment tendency.

Once we start down a path, it takes uncommon effort to get us to deviate, or change our mind. In fact, the harder outsiders try to change our minds, the more we dig in. Think politics, patriotism, corporate policy and religious dogma.

However, it is not all bad news. We can acknowledge this tendency and harness it to make positive changes in our lives.

Write down key decisions and own our errors. I force myself to do this annually.

Force ourselves to look inwards and discover the irrationality and intellectual arrogance that we see in others. My wife is an expert at gently pointing out inconsistencies!

Make a habit of micro-change. Fake it until you make it and give yourself permission to change your mind “just a little bit.”

Making significant changes in our lives is such a hassle that we nearly always wait until a crisis forces our hand.

  • Divorce
  • Health emergency
  • Large scale financial fraud
  • Ethical lapses
  • Criminal behavior
  • Addiction and abuse

These are opportunities to reassess but, in a crisis, I’m too overwhelmed to think clearly!

My solution is to schedule time to consider time.

  • Family
  • Career
  • Relationships
  • Athletics
  • Volunteering

Remembering why I started.

Did my choices today make sense?

Allowance 3 2 1

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amigosMy six-year old has been hounding me to buy her stuff:

  • Pink iPhone
  • Pink Mermaid Tail
  • Pink Guitar

Rather than entering into a philosophical debate on consumerism with my kindergartener…

I decided to put her on the payroll.

We’re starting at $6 per week and I told her that she’d get a raise of $1 per week on her birthday.

$6 also makes the math easy for what I want to teach her.

I gave her three envelopes. I wrote on each…

  1. Save
  2. Spend
  3. Donate

My weekly recommendation was to save three dollars, spend two dollars and give one dollar away.

She asked if she had to do it my way.

Knowing that the purpose is to create ownership, embed good habits and learn from errors… I said it was up to her.

So far she’s saving 100%.

She asked if she had to do any extra work.

Hoping that a reasonable allowance might reduce lying and petty theft, I said that it didn’t rely on anything.

My wife felt that $6 per week was a lot. Looking at a CPI calculator, it’s the equivalent of $2.50 when my wife was six and $1.25 (!) when I was six.

Seems reasonable and the round numbers made it easy to introduce the concept of allocating income (Save, Spend, Give).

Saving half of everything I earned before 30 was the best financial decision of my life.

It will be interesting to see the unintended consequences.

Effective Wealth and Diversification

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2015-03-18 07.31.56I was asked to update thoughts on family legal structuring. Before jumping into that topic, I want to define effective wealth.

If you remember one thing from this post…

Your effective wealth is most closely linked to your spending, not your balance sheet.

Consider US$1,000,000. Depending on where you live, this money could support:

  • a CEO for a year
  • a family for a decade
  • a village forever

The first thing to understand is your core cost of living. It’s going to contain:

  • Housing / Property Taxes / Insurance / Maintenance
  • Groceries
  • Income Tax
  • Health Care & Dental
  • Utilities / Mobile / IT
  • Transport

My family’s total approaches $100,000, which is a big number. However, on a per person basis we’re under $20,000, which is less than I’ve been able to live on my own.

Next comes discretionary spending (mine in descending order):

  • School Fees & Childcare
  • Gifting
  • Club Fees, Subscriptions & Kids Activities
  • Date Nights
  • Cleaning

Before parenthood, I missed the step change in expenditure, and associated wealth effect, of kids. Note that kids increase human capital, are sources of love and have tremendous option value!

Finally comes luxury spending – travel and vacations. With five in my household, luxury spending has been on a rapid downward trend since my second child was born.

Pulling all of that together, you’ll be able to consider your financial wealth relative to your spending.

  • Individual wealth => 5 to 10 years cost of living
  • Generational wealth => 10 to 25 years cost of living
  • Multi-generational wealth => 25 to 40 years cost of living
  • Surplus (excess?) wealth => beyond 40 years cost of living

The appropriate legal structure changes as your family wealth changes.

To understand effective diversification, express your asset allocation relative to your spending. Consider these categories in years spending:

  • Family home
  • Business investments
  • Real estate investments
  • Retirement accounts
  • Education accounts
  • Taxable investment accounts
  • Cash equivalents
  • Non-yielding luxury assets (art, jewelry, vacation homes)
  • Depreciable assets (boats, RVs, vehicles)

Also write out your sources of income and make your cash flow concentration visible.

Looking at asset, income and cash flow concentration should make your key financial risks more obvious.

Be aware of the human tendency to look away from things that make us uncomfortable.

Micromanaging the “little” will make you miserable – remember to focus on the big things.

Change slowly.