Friday, May 7, 2010

Inheritance, Buffett/Gates, Distinguishing Myth From Fact

New, New, New ~ The Burnett Ontological Argument ~ New, New , New 

Proverbs 13:22 ~ A good [man] leaveth an inheritance to his children's children: and the wealth of the sinner [is] laid up for the just.


As a  Christian, Wealth Transfer Strategist and provider of financial services I have often heard that the wealthiest agnostics in the country are giving away their fortunes but not to their families. Surprisingly, both the Gate's and the Buffet's children will continue to be wealthy and live from the wealth accumulated by Bill and Warren for generations to come. 

Myth: Bill Gates & Warren Buffet aren't giving any of their money to their children. This is FALSE.

As a financial advisor, I can do nothing but applaud the financial and business acumen and moves that these wealthy individuals have made and will make to assure that the money they have earned continues to impact the world according to their plans even after their death. I will conclude this article by sharing their strategy with you and briefly explaining why they are using this particular strategy and it's financial impacts and results in favor of their family.  I will also encourage you to do similar plans and take similar steps in securing the financial future of both your family, community and ministry. First let's take a brief look at the individuals involved:

The World's 2 Most Wealthy Men

Bill Gates: Estimated Salary $902,000 plus dividend income $175.6 Million, Net worth 2010 estimated at $50,000,000,000 United States dollars.  Belief system: Agnostic/ Humanist Believes in biblical style encouragements for morality has no need for the church under the current context.

How The Gates Financial Fortune Is Handled:
"Bill Gates: Well, the first thing was the decision that it probably wouldn't be good for my kids, for it to go to them, and so then the question of--

G. Stephanopoulos: Will they get nothing?

Gates: They'll get something, but not a substantial percentage. Then, the question is how to give it back to society to have the best impact. And so my wife Melinda and I talked about what was the focus in the United States that we think could have the biggest impact? And then we picked education and scholarships. And then on a global basis, what was the greatest inequity? And as we learned about these health issues, we realized that that's where you can make a huge change and that has such a positive effect on all the other things. ~ 'Why Bill Gates Is Giving Away His Fortune' 11/2005 ABC News This Week
Gifts:
$30 Billion to the Bill & Melinda Gates Foundation present interest gift, of mostly highly appreciated Microsoft stock. The funds will be used towards fighting such diseases as malaria, HIV/AIDS, and tuberculosis and the improvement of U.S. libraries and high schools.

 
Warren Buffett: Estimated salary $519,490 total compensation (Berkshire-Hathaway) in 2009, Net worth 2010 estimated at $40,000,000,000 United States dollars. Belief system: Agnostic/ Humanist Sees no reason for divine intervention in naturalistic endeavors. Human potential is the best potential. Believes some religion and religion belief is irrational.

How Fortune Is Handled:
"No, what I've always said is that my family won't receive huge amounts of my net worth. That doesn't mean they'll get nothing. My children have already received some money from me and Susie and will receive more.

I still believe in the philosophy - FORTUNE quoted me saying this 20 years ago - that a very rich person should leave his kids enough to do anything but not enough to do nothing. [The FORTUNE article was "Should You Leave It All to the Children?" Sept. 29, 1986.] ~ CNN Money
Gifts:

$1 Billion present interest gifts to each of his 3 children's foundations for charitable works

$2.5 Billion given to the Susan Thompson Buffet Foundation which is established in his late wife's memory and run by his children. money passed to this foundation by his wife's will. The foundation has mainly focused on reproductive health, family planning, and pro-choice causes, and on preventing the spread of nuclear weapons.

How & Why?

The question is why are these wealthy individuals giving their money away? The optimistic religious will say that its because God is dealing with their heart. The atheistic crowd will say that they are proving that it doesn't take God to do good in the world. 

Neither assertion is quite true in this case. Neither the Buffets nor the Gates are acting merely because they can. There is significant and substantial reason for them to act as they do. Part of it is certainly because they desire to help the human circumstance and condition. However, another part, equally as valid, is because of self-interest; they desire to protect assets, minimize taxes, reduce or eliminate capital gains taxes and create estate privacy. 

The Family Foundation or Charitable Foundation is the #1 way that the ultra wealth have found to insulate assets, reduce or eliminate taxation on highly appreciated assets and insure that assets will survive beyond one's natural life. How is this done?

Capital Gains & Highly Appreciated Assets

A highly appreciated asset, is normally considered an asset that has over the life of ownership significantly increased in value of net worth.

Example: Jane purchased a stock for $25,000 20 years ago. The stock has a current value of $525,000. The appreciation is generally $500,000. This is called the Capital Gain (CG) [($525,000 CV (Current Value) - $25,000 IV (Initial Value or Basis)] Under most circumstances the tax upon sale or transfer of this asset to a child, next generation would be $75,000 plus applicable state taxes. Highly appreciated assets (in this case stock) is generally taxed upon sale at a rate of 15%.

Capital Gains Taxation is based on the formula which comes into play at the time of asset liquidation or transfer under certain circumstances. This formula would look something like this: [CG = (CV-B) x .15 ]. There could be a stepped-up or carry over basis under certain circumstances. Certain assets, such as tax exempt retirement accounts, are exempt from this calculation so advice is of a premium. A quick Capital Gains calculator can be found HERE.

Estate Tax Considerations:

Another part that could be equally as devastating is estate tax. Repealed for 2010, (as the heirs of the late George Steinbrenner found out) the estate tax is expected to return with somewhat of a vengeance in 2011 and thereafter. In future years this death tax could erode over 55% of the wealth left over $1 Million per spouse or $2 Million jointly. A stepped up basis could offset some taxation, but even then it is more than likely taxation on the amounts of the Buffet/Gates estates would be more than significant.

Without running a calculation you can readily see why (if death doesn't occur in 2010) that the Gates and Buffet's would be more than interested in planning for future circumstances. To NOT plan would simply be foolish. Estate Tax rates and exempt amounts can be found HERE.



The Gates/Buffett Solution:

The Private Family Foundation

One way around this 15% flat tax is to give the stock away. Under certain circumstances there are restrictions and there are many ways to do this. For this type of transacton there is no or very little restriction upon what is called a Private Family Foundation which is established for charitable causes. Here are the main advantages and benefits of such arrangement: 
1. The donor contributes to a charitable cause and takes a tax deduction, while relinquishing personal control over the gift.
2. The donor minimizes their estate tax liability.
3. The donor avoids capital gains tax on the sale of appreciated property contributed to the charity of their choice.
4. The establishment of the foundation provides continuing employment and activity for your family members.
5. The foundation identifies and preserves the family name for years to come.
In Warren Buffett's case, although it wasn't planned for, there was an unlimited marital deduction and no taxation upon his spouse's death. When that occurred by the instructions of her will $2.5 Billion was contributed toward a private charitable foundation established in her name. This was a gift of highly appreciated stock upon which no taxation was levied.

What The Wealthy Expect In Return

Security:
These transactions, once enacted, provide asset protection on the amounts in question. in other words, assets contributed and relinquished into these arrangements become law-suit and judgement proof. As long as they don't run amuck of laws designed to keep one from defrauding creditors ie: Fraudulent Conveyance, the transactions become a buffer or hedge against future claims of creditors. In other words it is possible for a person to be wealthy, preform this type of transaction, be sued, and not relieve one dime to a creditor.   

Privacy:
By doing these transactions, the Gates and Buffetts have assured themselves of the greatest amount of privacy. They have bypassed probate with the assets they placed in or give to the foundation. Probate, in all venues (all around the country) is a public process and wills are subject to public disclosure and can easily be viewed upon request, including all terms, by anyone requesting such information. Don't believe me? Go to your county probate office and ask for the probate record of anyone you know (or don't know) that had assets or property upon their death. You may be surprised.

Income:
In the case of a Private Family Foundation the children or heirs are the recipients of the control of the money. Of course they must act like and do what the foundation document specifies, however the fact is that salaries are commensurate with duties and can be determined by the needs of the Foundation board or executive council, usually constrained by the document itself. under normal circumstances only enough stock is sold to fund the activities of the foundation and pay salaries.

Myth: Bill Gates & Warren Buffett give their resources because they know humanity is the highest gift and they want to better the human condition. THIS IS FALSE! Bill Gates & Warren Buffett have made and continue to make soME beautifully thought out financial moves that are self serving in the end. What they do will perpetuate their name, family and causes they would like to direct even from the grave. Their moves are smart, but they are not purely altruistic. Their is an expected payoff for them both currently and for their families. They certainly disenherit the government, state and probate court which cannot be despised. 

Conclusion:

I initially began research for this article believing the notion that Gates and Buffett were cruel to their children by disinheriting them. What I found out was that these men are doing what anyone in a like situation should be encouraged to do. I find it very difficult to be as insensitive to the future as not to plan for certain known eventualities. These men may not be Christians, but they are doing on a certain level what the bible encourages individuals to do. A few questions are in order:

1- Are Buffet & Gates disinheriting their families?

A- Absolutely not! The proof is in the facts. Their plan will allow their heirs to receive in excess of 90%  of what they have earned during their lifetimes. Their heirs will always have a future income as long as the money is managed properly and will be able to undertake whatever personal ventures they desire to have in life.

2- Are Buffet & Gates more charitable than believing Christians?

A- It depends on how their gifts are measured. Many believing Christians give, on a ratio, much more than Gates and Buffett ever have or ever will. These men give out of their wealth, many Christians give out of their lack. Many Christians give where there is no asset protection scheme or promise of any benefit in return. Some teach that giving to God gives one a return on their dollar, but the bible demands that we give according to what has been purposed in our hearts and do that with gladness and praise to the one who has first given to us. 

3- Is it wrong to give for tax and estate benefits?

A- Absolutely NOT! I think it wise to be a good steward over the resource that God has provided. The benefits of the law should be explored, but that shouldn't deter a gift from being given and the benefits of that gift being maximized.  

4- I don't have anything approaching this sort of wealth. I don't need to do planning along these lines.

A- This is the greatest misconception of all time in the financial world.  Everyone has an interest in this life. There are various strategies that can be used with any amount of wealth to effect change within the community, build a family legacy and address the financial needs that are seen. ANYONE of any income can take steps to help themselves and serve their families and communities. A person may not need a family foundation, but there is some type of strategy that will help and create the appropriate protections. All it takes is a vision and the right guidance. 

5- God didn't tell me to worry about these sort of things. He'll take care of the future if I take care of now and just serve HIM.

A- Yea, right! And you probably started your adult life with nothing but the desire to serve God and live with the same drive to leave your heirs with  nothing greater than what you started life with. This is called irresponsible thinking and bad stewardship. When a person thinks how easy the next generation or the surviving spouse will have it, their desires are off center. I've seen this type of sentiment in my practice and in some cases it's warranted, but in others it's only selfish. Teaching is in order for this type of sentiment. 

Final note: What the Gates and Buffetts have not done is even more important than the perpetuation of their wealth and giving to charity. Building a strong spiritual foundation and building that upon the rock of Jesus is the one thing they have avoided and rationalized away. Their gifts, though needed and a blessing to many, will fade away with the sand of time. As we have seen during this financial crisis, all it takes is one monetary shift and none of their wealth means nothing. 

A biblical inheritance is more than a mere monetary gift. A biblical inheritance includes wisdom and knowledge of God through Jesus Christ which has proven to be a solid foundation for times of wealth and poverty. God has required that we leave a foundation that is solid both financially, morally and biblically. When we don't spend enough quality time building and teaching legacy, we get a mindless result. We should seek to set parameters and make the recipient responsible for the resources they will or potentially receive. 

My encouragement to you:
Share these concepts with your family during these family reunions this summer. Build your family legacy upon solid biblical principles. So many times we come together, visit one another and do nothing of lasting value or impact except for plan for the next reunion event. Let's find ways to build our communities, churches and families and create lasting wealth that will change the outlook and horizon of our environments. it can be done with the Lord's help.  

Blessed!   

Resources:

Dunamis Insurance & Business Services (Email me directly for advice based on biblical standards and reasoning.)


2 comments:

  1. The people who won't get the money is the church and the government. That's 4 sure!

    ReplyDelete
  2. I think Gates and Buffet are right on sharing their wealth to those who really need it. I agree that their kids will only get what is enough for them.

    In this case, they are also disciplining their kids. Life isn't all about money. It is also about attitude.

    ReplyDelete

Please send me an email if you try to post a comment and cannot do so. Dunamis1@netzero.com. Thanks.