Rich guys sometimes ask me “What’s a good way to give money to my kids without spoiling them?” My idea: For every dollar they earn, give them $N. That way they have to work, but they don’t have to work a repulsive yuppie job to enjoy a comfortable lifestyle. The main objection to this approach is that it is tax-inefficient. If the kid earns $50,000 per year doing something he finds rewarding and you give him $150,000 that year, you have to pay a big gift tax. Some sort of trust fund and/or life insurance policy that the kid can claim after you die would be more efficient.
Is an increased tax liability so bad? Not for the truly rich. These guys intend to give most of their wealth away to non-profit organizations. The federal government funds roads and airports that we all enjoy using. The feds pay for health care for the poor and the old. Our tax dollars pay for intrepid military personnel who go out and kill angry foreigners (in most cases) before they can arrive on U.S. soil and kill Americans here at home. For a non-profit organization of its size, the federal government is surprisingly efficient. Most federal employees work in big box-like office buildings, not in $300 million monuments to some architect’s ego. George W. Bush gets paid only $400,000 per year, less than half of what a lot of university presidents earn.
Can we tweak the $N bonus idea at all? What if a kid becomes a repulsive yuppie despite the lack of financial necessity? Won’t his siblings become envious when Chad, Jr. gets a $3 million check from Chad, Sr. to supplement his $1 million/year earnings at J.P. Morgan? Perhaps there should be a sliding scale for the bonus where the first $100,000/year is muliplied by 4, the next $100,000 by 3, the next $100,000 by 2, and the rest of the kid’s income is not subject to a parental bonus. Or there could be a lifetime cap of $10-20 million per kid (no Gulfstream for Johnny 🙁 ).
How about tweaking the tax liability? Perhaps the money could go first into an irrevocable trust, but only paid out by the trustee as a multiple of income. I’m not sure if this escapes gift/estate tax.
Actually, there’s nothing preventing a fellow from setting your terms upon trust fund disbursement. I’ve heard of at least one similar arrangement in the past, though following a simpler algorithm.
Once I earn $1, I get $3 from my parents (for N=3) having the total of $4. Then I fake earnings of $4 to get $12 more. The task of the parent is to make sure their gift is not channeled back as earnings.
http://www.pgdc.com
I engineer for these folks, Planned Giving Design Center. There are a lot of ways to give. When most advisors are tested they fail at knowing a majority of the creative ways of giving.
The trickiest bit isn’t in how much you give your child imo, it’s making sure they have a value system, that they are balanced and not some Paris Hilton wannabe. In my life I plan on aquiring wealth, that wealth will have been earned through multiple decades of hardship that I want to be gifted to my children if they show to have competence in life. Once they have those foundations the amount doesn’t really matter, in effect it’s going to be turned into a positive force. What I don’t want to see is valueless rich children that believe that their a part of aristocracy squanding opportunity and choice.
A matched system is a nice idea but isn’t it too comfortable? I’d rather see graduated accomplishments that maybe earned them a net return. Run a successful business and I’ll help you into the next tier. Show that you can both have ideation and execution and I will be there for your endeavours. Show that you have fantasies but can’t traction and I won’t be there to just enable you.
Definitely a tussle of thoughts that’s for sure.
-a
Buy the kid (or grandkid) a house near where he lives. Let him stay in it rent-free, in exchange for finding N other tenants and dealing with maintenance. For offspring who turn out to be gifted property managers, trade up to an apartment building.