Thinking only with your heart? Financial expert Margaret Starner says, 'Invite your brain.'

“The ability to think financially is not intuitive nor is it natural because we weren’t raised to think about money. I help women learn how to think financially.  

“Money is just a proxy for having options in life. First, I ask clients what they really want out of life. What do they want out of this relationship [with money]?

“The most important goal is to be able to take care of your own needs, now and down the road, so you won’t have to depend on anyone else. My mother always told me it's better to be in a position to help others than to need help. That's a very, very strong philosophy. When I meet a new client, we initially spend a lot of time on what we call ‘the understanding phase.’ Do you understand the future implications of how you live and spend today?

“Once we go through the understanding phase, we do a lot of education. Many people don’t understand the consequences of their financial actions. They think that everything is good now, but the truth of the matter is, it takes a lot of money to retire comfortably because we're all living a lot longer.

“As you get older, you may have to buy services to do the same things that you normally do on your own now, such as shopping. You think you're going to be spending less, but if you live a long time, you’ll probably need somebody to help out.

“If you're financially independent you don't have to worry about whether or not your kids are there to help.  My daughters live in Texas and California. They flew here and took care of me when I had surgery. But they can’t be here all the time. Someday I might require help day in and day out.  Florida is a laboratory. I see everyday what's happening with age.”

REAL-CLIENT SITUATION, PART 1 

To loan or not to loan, that is the question

“Judy is a wealthy widow in her early sixties. She’s smart and she’s a good person, maybe too good of a person. Her daughter (from her first husband) and son-in-law are in a bit of a mess because they invested in a house they thought they’d flip and now they can’t sell it. They’ve asked Judy for a $150,000 loan to fix it up and, hopefully, make it easier to sell.

“Judy came to me for advice and I said, ‘let's first think about what outcome you want. Is this something that your children should figure out without help from you? Is it going to a ruin their lives if you don't help them? Or is it just going to set them back? Tell me what you really want to accomplish, besides reducing your daughter's pain, which is not a goal. What do you want your daughter to learn? You won’t always be there to help her.’

“Judy now gives her daughter and granddaughter $13,000 each every year as tax-free personal gifts. She also wants to pay for her granddaughter’s pre-school, which is fine because that’s also not a taxable gift against Judy’s estate.

“Although it wouldn’t hurt her financially to give her daughter $150,000, and she wouldn’t lose much ‘opportunity income’ (from investing the money), Judy was aggravating herself over the decision because she didn’t want to enable her daughter. Judy earned her money on her own. Years ago, if she made a financial mistake, she had to deal with the consequences. Today, we often treat our kids differently.

“As part of our financial planning services, we are helping a number of ‘kids’ in their forties learn fiscal responsibility. Sure, Judy’s daughter and her husband will be set back a bit if they don’t get the $150,000, but it won't be devastating. They're the ones who thought they could get rich quick by investing in real estate in Florida and other places. This is the story of America today.

“On the other hand, it would be a business proposition if her daughter wanted $50,000 to start her own therapy practice. It's a whole different ball game because Judy would be helping her daughter build a future rather than getting her out of messy situation.

What would you do if you were Judy?

REAL-CLIENT SITUATION, Part 2

To give or not to give, that is the question

"When Mary’s second husband died a few years ago (he was quite a bit older), he left her a Qualified Terminal Interest Trust (QTIT). Whatever remains from that trust when Mary dies will go to his three adult children from his first marriage. This way he provided for Mary, but what is left goes back to his own children instead of to Mary’s daughter.

"Mary received her husband’s pension plan, too. Her total assets are about $6 million.

"Mary and her husband also had a vacation home that they owned jointly. He asked that the value from his half of the house be paid to his children upon Mary’s death.  If she decided to sell the house, she still wasn’t obligated to have the children reimbursed until after her death.

"Mary sold the house for $750,000. Her husband’s children, however, did not want to wait until she died to get the money from their father’s half of the house. They were already furious that they didn't get more from their father's estate. (Mary actually gave them about $300,000 each when he died, thinking they’d appreciate her generosity.)

"Rather than continuing to argue with these three children, Mary wanted to give them the money (around $100,000 each after closing costs), but those would be taxable gifts. 

"First, we wanted Mary to determine if doing this would affect her lifestyle and what ‘opportunity income’ she’d be giving up if she didn’t invest the $300,000.

"She also needed to consider the tax implications.  You can only give away $3.5 million tax free to the next generation ($1 million while you’re alive). Anything over that is taxed at 45 percent. Mary’s estate is worth more than $3.5 million. If Mary gave her husband’s children $300,000 before she died, her $1 million tax-free lifetime allowance (which she would like to give to her own daughter) would be reduced to $700,000

"Solution: Give the $300,000 to the three children and their spouses over a number of years utilizing the $13,000 annual gift exclusion. The goal was to honor her deceased husband’s wishes and not use up a tax benefit.  While the kids would get the proceeds from the house over time, it was still much sooner than waiting until she died." 

What would you have done in Mary’s situation?

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