Next generation money
In a goal-based approach to wealth management, gifting and bequest capital is identified by first planning the spending goal
In a goal-based approach, all resources are given a purpose in order to be sure that capital is working as efficiently as possible.
In a household, the main claim on resources is lifetime spending. It dominates because meeting core needs, particularly in retirement when employment earnings have ceased, is critical and because a high value is likely to be assigned to being able to spend more than core needs. For all but very risk averse people who are also willing to accept a spending level that offers little more than meeting core needs, the potential for higher spending, or meeting wants as well as needs, is a key part of what denotes satisfaction. But in both cases, wants and needs in terms of spending are the main purpose of resources.
Beyond a certain point, the potential for higher spending competes with another form of possible satisfaction: helping family, typically children and grandchildren. And at some point, there may be no value assigned to yet more spending. The only satisfaction with those even better investment outcomes comes from helping the next generation.
It is planning the primary spending goal that will identify the scope for gifting and the amount of satisfaction derived from each of your own spending and gifting.
In a Fowler Drew goal structure, the gifting motivation can be met in either of two ways:
- a different approach to risk taking in the spending portfolio
- a separate ‘next generation’ or bequest portfolio.
- A ‘joint venture’ with the next generation
- the next generation will only share in the high-end payoffs of your own risk taking
- there is uncertainty about when you might be able to afford to gift.
- A dedicated ‘bequest’ portfolio
The reasons for integrating the two goals in one portfolio and making the risk approach partly a function of the gifting motive are twofold:
The best ways to think about why you might adopt this approach is the concept of ‘optionality’ and of children being joint venture partners in the payoffs of their parents’ risk taking.
Only where there is a clear surplus relative to the resources required to satisfy your spending motive but no desire to gift in the near future do we suggest a dedicated portfolio.
In this case managing the assets differently is made much more intuitive by thinking of what would denote satisfaction for the ultimate beneficiaries. When thinking about how to put yourself in someone else’s shoes it is also helpful to think like a prudent trustee should:
- how are the beneficiaries’ ‘best interests’ defined
- what are their approximate time horizons, based on when they will use the money
- how would they (if fully informed) make trade-offs between long-term outcomes and short-term volatility?
