Knowing When To Shift Gears Part Two - How To Maximize Happiness For Your Heirs

If You Have A Surplus Consider The Following To Address The Potential Problem

When retirees become clear on their goals – including the goal of leaving a fixed amount to heirs, and they have an Essential Capital /Surplus Capital™ financial plan prepared, they’ll know (based on conservative assumptions) how much of their capital is essential to maintain their lifestyle and achieve their estate goals, and how much is the surplus which can and should be used before they die.

There Are Five Ways In Which A Surplus Can Be Handled:

1. Do Nothing And Let The Surplus Grow

This is what most people do and as a result they give up opportunities to enjoy life to the fullest, they pay more in income tax, probate fees will be higher and they increase the probability of a legal battle over the estate.

We find it hard to break a lifetime habit of working hard, saving and wanting the portfolio to grow. Yes, the savings habit is hard to break, but if you’re running a marathon, after crossing the finish line you stop running! And when you have enough capital it’s a mistake to keep trying to get more. If you’re retired, and you have enough, it’s time to shift gears!

There are a number of reasons why you’ve not heard about this ‘surplus capital/ shifting gears’ idea. We don’t calculate or talk about using our surplus because:

We don’t realize that we’ve crossed finish line!
It’s difficult to shift gears and break a lifelong habit of saving and trying to increase net worth.
We’re naturally cautious and want to be prepared for the worst (but we should know the cost of protecting ourselves against things that are unlikely to happen).
This topic is rarely talked about in the media.
In the financial services industry there is no incentive to urge people to give their money away. (A fee-based advisor who convinces clients to give away half their capital will see his or her income reduced by 50%).

2. Live A Richer Lifestyle

Retirees who have saved more than they need can use their surplus to live a richer lifestyle. They could move to a better neighbourhood, travel more and travel business class, buy better wine (or a vineyard), spoil the grandkids, etc.

There is nothing wrong with enjoying life and pursuing happiness. Even Mother Theresa did what she did because she believed that helping poor people in Calcutta would give her more happiness than anything else she could do with her life. If you think about it you’ll agree, the only reason anyone ever does anything is because they think the result will be more happiness (or less pain).

3. Give Your Heirs Advances On The Future Inheritance.

By having family meetings to discuss finances and estate planning the parents can explain that they expect to leave an estate of a certain amount and for the following reasons they would like to give the heirs “advances” on the future inheritance. The benefits of this strategy include the following:

You get to enjoy seeing the good that you can do.
You give funds to your heirs when they need it the most and when they can use it to create memories. Too often 60 year olds say they’ve just received an inheritance, but they now have no need for the money. They say it’s too late to create memories with the children, but they sure could have used some help when the children were young. They say they wished their parents had trusted them enough to have a discussion about money.
You can see if the inheritance is being wisely used. Unfortunately some heirs have bad habits or addictions and for these individuals a lump sum may be used in a way that could create serious problems. If the parents see that this is how the money will be used they have an opportunity to change their will and prevent the heir from self destruction.
Each year you’ll save income tax and the estate will pay less in probate fees.
You reduce the possibility of the family being torn apart by a dispute over the estate when you are gone. It is not uncommon for the heirs of large estates to contest the will or to challenge the actions of the executor. Disputes over a small estate are less common.
If the heirs have no experience in investing, the advance may allow them to get investing experience and to make their mistakes and learn their investing lessons with relatively small amounts. We all learn from our mistakes and it’s much better to make mistakes with small amounts than to make a mistake with the entire fortune.

4. Become A Philanthropist

According to an ancient Chinese saying, “If you want to be happy for an hour; take a nap. If you want to be happy a day; go fishing. If you want to be happy for a month; get married. If you want to be happy for a year; inherit a fortune, and if you want to be happy for a lifetime; help other people.”

All the great philosophers and all the great religions say the same thing: helping other people is one of the truest sources of happiness.

Why can helping others be a source of increased happiness?

We’re social animals and we enjoy being with people who think like we do and who share the same interests and values. This is why we have friends over on the weekend. When we get involved with a charity, or a cause we care about, we find enjoyment in working with people like ourselves.
Helping other people causes the brain to release the ‘feel good’ hormone called Oxytocin. This is the same hormone released during sex and breast feeding!
Bottom line is when money is donated to a charity the charity receives a benefit—but the donor receives the greatest benefit—and the good feeling and the memory may last a lifetime.

5. Invest /Create Multigenerational Legacy

It may be that the children are too young to give advances on their inheritance. If this is the case, and the goal is to create a multi-generational legacy, the “legacy” money can be set aside for long-term strategies which are only appropriate for funds that you know will not be needed in the short- or medium-term.

If you know that there is a surplus earmarked for future generations you may use strategies such as family trusts, foundations, tax exempt insurance, or purely capital gains producing investments.

To Summarize This Point

If you have a surplus you have to make a choice about what to do with it. Doing nothing is not the best choice because you pay more in income tax, you lose an opportunity for happiness and you may cause harm to your heirs.

There are a number of reasons why it makes good sense to distribute a portion of the estate while the parents are in control and can see how it is used.

To ensure the happiness of your children consider giving less to them and more to philanthropic causes you decide to support as a family..

Warren MacKenzie, CPA, CA, CIM – Head of Financial Planning at Optimize Wealth 416 979 3820.