Inter-Generational Financial Planning

The Leadenhall Building in London is a useful example of how modern tools and concepts can make things happen that would not have been possible in the past.

It is a story of ingenuity.  A prefabricated skyscraper? A large building on such a small lot?  A construction schedule where every hour was accounted months into the future?

Up until now, no one knew you could. Logistics matter.

PBS did a special on the building in their Super Skyscraper Series  and you could watch it here.  It is close to an hour long but quite fascinating.

There is a useful point that carries over to other activity.  Modern tools and modern methods are not like the old ways only faster or maybe better.  Old ways may miss quite a lot of what is possible.

Planning today is dynamic.  You can model future cash flow and test the weak points.  You can see the effects of significant changes and develop methods ahead of time to deal with them.  You can see both shortfalls and surpluses within a range.

The effect is that people can move parts of their estate to their heirs sooner. Consider a simple case.

Mom & Dad have $200,000 in bank investment certificates earning around 2% and their financial model shows that this is about 40% of their probable surplus.  Their child Mary and her family have a $200,000 mortgage on their home at 3.5%.

There are four players in this game.

  1. Mary who supplies $7,000 of interest paid on her mortgage.
  2. The bank who keeps $3,000 before paying the other $4,000 as interest
  3. Mom and Dad who get the $4,000 of interest from the bank
  4. The government who takes $1,600 from Mom and Dad as income tax.

Mary pays $7,000 and Mom & Dad keep $2,400 of it.  Eventually Mary will inherit the $200,000 but not until there has been considerable financial leakage in the family.  If there was no surplus, the leakage would be merely the cost of living the way they want to live.  These people have another choice.  Eliminate the bank and the government.

There are things to consider.

Should parents give the money to the child to retire the debt?  No is the most common answer.  The current mortgage payment is $1,000 or so each month.  Parents fear that the $1,000 will turn into a lease payment on a Porsche.  They also think that the discipline resulting from owing payments is a useful lesson.

There are  family law points.  What if there is a marriage breakdown?  Half of their capital would be essentially lost.

The fix.  Put a new mortgage in place for their investment.  Same monthly payment but no interest.  Mary could pay this mortgage off in about 200 months versus 300 months if they continue with the middlemen.  Parents spend their former $200 per month and invest the rest.

If they are very clever they may invest the other $800 per month in universal life insurance policies with Mary and her husband as lives insured.  The investment grows tax sheltered and eventually it will regenerate the original capital but in a form that can transfer tax free to their heirs and provide useful capital if tragedy should occur.  They own it and control it and could take the money themselves if they need it.

Knowing you have a surplus and knowing there is a modern financial tool that can bring the pieces together makes for wealthier families.  Ask about it.

Contact: don@moneyfyi.com  

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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