Something Personal Episode 5: Financial Planning With, And For, Your Family
Shomari Hearn is Palisades Hudson’s executive vice president and chief operating officer. He’s also a dad with an adult child of his own. In the firm’s book Looking Ahead: Wealth, Family, Wealth and Business After 55, Shomari wrote a chapter focused on how to have conversations with adult children — and other family members — about your financial plans. This episode covers that advice, as well as widening the scope of the discussion. Shomari tells host Amy Laburda about tricky decisions about how best to assist or support adult children or grandchildren; ways to prepare family members who might receive significant assets after your death; the pros and cons of intrafamily loans; and much more.
About the Guest
Shomari D. Hearn, CFP®, EA, has been part of the Palisades Hudson team since 1998. In 2005, he established the firm’s first branch office in Fort Lauderdale, Florida; that location, where Shomari is still based, has since become the firm's headquarters. As the firm's first-ever executive vice president and chief operating officer, Shomari holds executive responsibility for all of the firm’s operations and for strategic initiatives, and he continues to provide a wide range of services directly to our clients. He is among the author's of the firm's book Looking Ahead: Life, Family, Wealth and Business After 55, and his chapter "Relationships with Adult Children" is the basis for this episode. For Shomari's full biography, click here.
Episode Transcript (click arrow to expand)
Welcome to “Something Personal”, the podcast where a team of financial planners discusses families and finances, and the intersection of those two things. I'm Amy Laburda, the editorial manager at Palisades Hudson Financial Group, and my guest today is Shomari Hearn. Shomari is our firm's executive vice president and chief operating officer. Thanks for being here today, Shomari.
Thanks for having me.
So, Shomari, in our firm's book, Looking Ahead, you co-wrote the chapter on relationships with adult children.
Amy Laburda 00:37
So, we've worked together for the past 13 years, which is as long as I've been at the company. And this is our third edition of Looking Ahead, so I know firsthand that when you wrote this chapter originally, you didn't have an adult child yet, but now you do. Has your perspective on this advice changed at all now that your own child has reached that point?
So, fortunately, no. My daughter is turning 20 now and is a junior in college.
Now she's at an age when I get to apply the advice that I've been providing to my clients for the past 25 years to my own situation.
So, this can be sometimes an emotionally fraught topic for some people. And I know that most of the advice you give in the chapter in the book is more geared toward interpersonal relationships between you and your adult child, rather than super technical advice. Do you find that's also true when you're giving advice to clients?
Yes, it is. When it comes to
clients sharing information about the family's wealth with their children or grandchildren, a conversation often centers around a client's relationship with their children, what information they're willing to divulge and when, and how best to communicate that information. This is because money can be an emotional and stressful topic for families. The technical part of gifting or leaving assets to children and grandchildren is often the easier part of this process.
Amy Laburda 02:03
Say someone comes to you wanting to provide financial support to an adult child. What are some considerations you'd tell them to keep in mind when they're making that sort of plan?
Although this may seem obvious, but people often forget about it, that they have to consider their own financial situation first. It's similar to being on a plane, and when the flight attendant tells you if we lose cabin pressure to put on your mask first and then
put on your child's mask, or whoever you're with. And that's the same when it comes to being able to help your children or grandchildren or other family members. It’s basically understanding that, you know, in order to be of help to others, you have to first be consider your own needs, because it won't necessarily help if
in the short term, you're able to help them, but longer term, you then become a burden to them financially. So it's a matter of making sure that whatever assistance you can provide is within your budget or within your means.
If you have a client come to you, do they often ask for help with specifics? “How much can I afford to help my children?” “How much can I afford to leave them?” That sort of thing?
Yes, that happens quite often, actually,
where we sit down with them, we identify what their needs are, looking at — and what we often do is what's called a cash flow projection or retirement plan, where we make certain assumptions about the amount of income that they have currently, if they're retired, also looking at what their income is in retirement, along with their living expenses, looking at what their retirement assets are and investment portfolio is,
making certain assumptions about living expenses and about investment rates of return, and then projecting that out. Also making certain assumptions about inflation rates for living expenses as well. So when taking all those factors into account, then we can say, “All right, let's make some assumptions about gifting,” or … More so typically gifting, right? Because it's during their lifetime. And seeing, depending on the size of the gift
the type of support that they plan to give to their children or grandchildren, how much of an impact that may be on their own financial situation. And what we do is we stress test it, not only looking at expected returns historically, but also looking at what happens in an adverse scenario where investment returns are much lower than anticipated for a long period of time.
In situations like that, that may tell us, well, maybe we don't want to give as much now. Maybe we can give a certain amount to help support them, but we may not do a lump sum upfront gift, but rather give it in installments over time that still helps them, but also make sure that the parent or grandparents don't run out of what they need.
Sure, I imagine you have both the idea of personal things popping up in your life and,
as the COVID pandemic reminded us, sometimes things happen that no one saw coming.
If you have clients asking you about supporting their children, do you ever bring up ideas of things other than direct monetary support for them?
Yes, we do actually. It can depend on what their child's needs are, as well. So for example, maybe we're saying instead of just outright cash gift, maybe it's looking at, “Well, where do your
children need the most help,” right? Is it to help cover certain living expenses or tuition? Or are you helping them with a lump sum down payment on a home, to purchase a home? So yeah, it typically depends on the situation and then figuring out whether or not the best type of assistance to provide,
or what's the most effective way that they can help.
So what happens if a client comes to you and they have an adult child who's actively in trouble, either because of bad decisions or bad luck, a combination of the two, and they're concerned about being part of the problem and not part of the solution. What kind of advice do you tend to give?
I think in that situation, it's more helpful to give targeted gifts, or assistance, rather. So in that situation, maybe it's, “All right, I will help
pay a particular bill,” like a certain utility bill, “or I help them by purchasing their groceries.” Because you don't want to be in a situation where you're gifting and enabling them to continue these bad habits. But at the same time, you do want to provide assistance because you want them … to help get them out of that tough situation that they may be in. So that may mean — for example, I've had a client where his daughter is
attending grad school and of course, because of the workload, you know, her ability to make income that's sufficient enough to cover her, you know, living expenses and her needs. The clients decided to pay for her rent during this time. And that took a huge financial burden off of her plate, but at the same time, it allowed them to make a specific gift
or assistance, which ensured that instead of just giving her the money and then she potentially was spending it on things that are not necessary, or discretionary spending, it went for an actual need that was really going to be supportive and helpful for her.
And as you mentioned earlier, there is also the problem of giving so much that you’ve then created a burden down the road, which is another thing that sounds like you want to steer people clear of, so
you're not just throwing unlimited amount to fix a given problem.
Are there other goals that may lead parents to make lifetime gifts to their adult children?
Yes. So I think it depends on the amount of assets, say, those parents have and how much they think that they'll be leaving behind as an inheritance. But also in realizing, especially if it's a sizable amount
of assets or wealth, that they want to give them an opportunity to potentially make certain mistakes during their lifetime by giving them a certain amount of money now to see how they handle it. Are they going to take some of it and use it wisely, like, all right, purchasing their first home or putting some of that money to work in an investment portfolio?
And just seeing how they handle those funds. And then that gives them some sort of metric to understand, well, maybe, you know, we need to have more conversations with them, or maybe we need to have them have a meeting with a financial adviser, for example. And maybe they decide to, the parents may pay for that, that meeting with the financial adviser, just to help them develop a long-term financial plan or an investment strategy.
Or if they just need help with budgeting, to help with budgeting as well. But I also think that there's some benefit, in terms of, for the parents and the children, in terms of giving them some money during the parents’ lifetime so that the parents get to see their children enjoy some of the fruits of the parents’ labor.
Right. So I think there's multiple reasons for giving money during the lifetime, in terms of gifts versus just saying, “All right, we're going to keep it all held away until the parents are no longer around.”
So backing up a little bit to people who you've run the projection, you may not be able to just give a large lifetime gift without putting yourself in a precarious situation. Maybe you're concerned about later in your retirement cash flow, a
variety of things. But you do want to help out your children, maybe with a down payment, maybe some of the other things you mentioned. Are there other options that they have besides a direct gift?
Absolutely. A perfect example of that would be making an intra-family loan, right? This means that they'll lend them the funds, because they have the means to do that at this time. But fortunately, they'll be able to get the money back, or the principal back, at some point in the future.
And along the way, they'll earn some interest. And it works out well for both the parents — they're going to get some money in the form of interest — and the child will be able to pay interest at a lower rate than they may get from a third-party lender. It just requires that the loan be set at the applicable federal rate that the IRS issues on a monthly basis.
So with the applicable federal rate, is it always lower than the kind of rate you would get from a bank from a mortgage?
Shomari Hearn 11:33
Yes, it's always more favorable than what you would get from a third-party lender. So to give you an example, the long-term AFR rate for September of 2023 is 4.19% of the interest that’s being paid on an annual basis. Versus it was just a headline in September, at which point mortgage rates were above 7%,
which is over a 21-year high. So just to give you an example, over 7% and 4.19%, you can see that it's a substantial difference. And it may not seem that way, when you're looking at it, just viewing percentages. But when that translates into what that mortgage payment will be, in terms of between principal and interest,
you can be talking about, depending on the size of the loan, it could be anywhere from hundreds of dollars to a couple thousand dollars. So it's always pretty —- well, I won't say it's always pretty significant, but it's definitely more favorable. The AFR rate is always more favorable than long-term or third-party rates.
So what happens if they set the interest too low? It's below the applicable federal rate. What happens then?
Shomari Hearn 12:57
Yeah, in that situation, then the IRS will deem it as a taxable gift from the parent to the child. And I know on another podcast, you guys will talk about estate planning and gift tax implications, as well as estate tax implications. But it winds up using up some of —- potentially using up some of your lifetime exemption amount, just depending on the amount of the interest that would have been due,
right? If it was charged at essentially a market rate.
So I can picture, if my parents were in a position to give me a loan, I would certainly rather pay them interest than a bank. I think there's certainly a family-building component. But I can easily imagine with some families, this could also be pretty tricky interpersonally. Has that been something you caution clients against as well?
Yes, I do. I think in terms of, you know, letting the clients know that — especially,
the clients know their children. And I think that also plays a large part in it. And also with the parents needing to communicate to the child that, “Yes, this is a loan. I expect you to pay me back.” In order to formalize this, we're going to document in a formal loan agreement, just depending on the needs, it could just be a promissory note that they can draft up, both parties, the parents and the children sign. And
just saying what the terms are, right? It’s going to stipulate how much is being lent, the amount of interest that will be paid on an annual basis, and when the principal needs to be repaid. Is it going to be part of the monthly payment, if the child is paying and making monthly payments on the loan, or will it be paid at the end of the loan term? Essentially like a balloon payment. But it's, I think it's important to,
and this is where communication comes in, to reiterate that this is a loan and I expect you, just like if you were to borrow from a bank, that you will honor the terms of the loan. Otherwise you would be in default of the loan. Now, of course, the third-party lender doesn’t really care. They will come after certain assets, right? So if it's a loan that's secured by a property or real estate, then they can foreclose on that property.
Parents, that can put them in a tough situation, where they don't want to have to kick their children out of the home. But there should still be consequences. So, there may, in this situation … Those consequences might be forgoing future gifts to that child, or adjusting whatever their inheritance will be, due to the fact that
this loan essentially has now become a gift.
And is that something, I assume you just encourage clients to talk about upfront, when they're setting the loan terms, the repayment, all the other things, is the consequences of default as well?
Yes, it is. And I think, again, it winds up going back to the particular client and the family dynamics. If the client's children are very responsible, then that's an easier conversation for them to have, if they need to have it at all.
But for maybe a child that has shown to be less responsible in the past, I think it's important that they have that conversation at the outset. But it's great too, because this also is a way for the parent to help teach responsibility and accountability. So even if they were less responsible in the past financially, this is an opportunity for them to show that they can be financially responsible going forward. I know
in an earlier question that you had asked regarding loans, I failed to mention a good example. I had a client who was helping his daughter and her husband purchase their home in California, which of course, real estate values are extremely high in that market. So it might've been difficult for them, with their incomes, to be able to secure a loan large enough to purchase that property.
So the parents basically lent them the money to purchase the home. In exchange, they became the lender, but it facilitated the transaction. The children have been responsible in repaying the loan. So it worked out really well. And in the meantime, the parents are getting some interest on that money. We're in a different interest rate environment now, but during that time, I think the applicable federal rate
for that long-term loan was probably 2.5% or so. So it worked out well. The parents weren't getting much money with that sitting in essentially cash or money market funds in their portfolio or at the bank. And it also set the loan at a rate that was very affordable for their children.
Amy Laburda 18:13
I think that's a great example. And we've talked already a lot about the importance of communication. It's something I know you talk about a lot in the book chapter as well. Financial conversations are definitely a thing some people find very easy, some people find more difficult. I'm sure you see that with your clients as well. What is some advice that you often give for starting those kinds of conversations with an adult child, especially if it's not something you've been doing all along and sort of set up from a younger age?
Shomari Hearn 18:39
That's another great question. And this comes up often with clients, and it's something that we often have to encourage because, again, because of the family dynamics. It sometimes can be a topic that is difficult for the parents to feel like they can broach. But we strongly recommend setting it up as a family meeting in a neutral location,
that's private so everyone can speak freely. And that they, you know, and we typically recommend, and we help by facilitating that meeting, by having a financial advisor. You know, oftentimes we participate in those meetings. Or the estate planning attorney to sit in on those meetings to basically explain, you know, what the plans are and the different aspects and provisions of that plan. But also it's great because the
children get to hear directly from the parents what their thinking is and why they're making ... they've set up their estate plan in a way that they have, to why they're making a certain amount of gifts to, say, their children during their lifetime and how much... I wouldn't necessarily get into specifics in terms of the exact dollar amount, so what will be left behind, because of course, for various reasons, that answer is... that response is almost certain to be incorrect,
right, because you're talking about some point in the future. But giving them an idea of when they do pass, the parents pass away, where, you know, what portion of assets will go to whom and be there to support the family. That will typically make things, I think, a lot easier than if you withhold that information and just say, “All right, we're gonna make the plans and then once we pass away,
the children have to deal with it, right?” Well, if it's one child, that's one thing. That may not be so difficult. But if there's siblings involved, there's certain expectations they may have had, like, “I like this particular heirloom,” or “I was expecting to get this certain amount of money, because I wanted to start a business,” or purchase a home, or so forth. And then the results, or the outcome, it
doesn't match up with those assumptions. There's a lot of hurt feelings. It can create a lot of family strife. So going back to your question, the communication is essential. So those family meetings help facilitate that a great deal.
Yeah, I know it's never super fun if you have a parent that you love, as an adult child, to think about them passing. But avoiding those surprises also can, I imagine, lessen the shock a little bit.
And it does seem like on this podcast, we always come back to death and taxes somehow. It just always comes up.
That's true. I mean, they are unavoidable. But just going back to the family meetings, there's been a couple that I've been a part of where … One in particular, they're more of a, can be a complex situation. You can often see these, where there's
maybe a second marriage and there's children from the first marriage. So you're trying to balance out how much you're leaving behind to, you know, those children, but also providing for the needs of the surviving spouse, right? So I think in those situations, those type, those family meetings and that, you know, laying out what your plans and intentions are, are even more important, right? Because, you know, after you … after, say, that
one parent has passed away. Now there's dealing with the relationship between the surviving spouse and the children, and not wanting them to fight over money. By laying out the plan early on, I think it helps hopefully reduce a lot of, any potential tensions or so forth that might exist.
So we've talked sort of about
big-picture family meetings, with probably many attendees. Would you recommend generally that if someone has designated an adult child as their executor or a trustee, should they have extra meetings more one-on-one with them? Or is that a thing that you can usually handle in the family meeting? Or does it vary?
That's a good question. I think it helps if they're…
if there is some additional discussions or meetings, maybe they're not just necessarily formal meetings or conversations, but there should be some explanation of, or just informing that particular individual that, you know, I've selected you to be my executor or, you know, the trustee of the trust and how, you know, what those responsibilities entail. Have them meet, not only the financial adviser for the parents, but also
the estate planning attorney to help answer any questions, because estate planning can be very technical. So understanding what their responsibilities will be in that, especially in the case of being an executor or a trustee, they are acting as a fiduciary. So they have to put the interest of all the beneficiaries ahead of, say, their own personal interest, right? They’re doing it for the benefit of
the collective, as opposed to just themselves.
Was there anything else with family meetings that you feel like people should bear in mind?
Yes, I think that it should not be a “one and done” situation. You just have the meeting once and you'll be like, “OK, I feel relieved. I've communicated everything.” Because things change over time. We typically recommend, say, every
few years, maybe every five years or so, just to reassess. Maybe the first meeting, it was just more so covering the basics, giving them an initial lay of the land. And now maybe it's also looking at it and saying, “OK, now the parents are further along, the value of their assets and their estate has grown some more. Or maybe we want to start making lifetime gifts to the children.”
You know, just again, like I touched on earlier, you know, just seeing them benefit from it, especially if you see that, you know, one child or another may be, you know, struggling to make ends meet, for example. Or that they have a child that's about to go off to college and they need some help paying for tuition. You know, making their lives easier, but not necessarily killing their ambition to, you know, succeed on their own. Because you know, I think that is one of
the issues that parents can often grapple with, is why … They don't wanna stifle that energy or that focus, or their work — affect their work ethic, right? They still want them to work hard. Especially for the parents who, they accumulated their wealth, they didn't inherit it, and they worked hard and were able to earn it and grow it on their own.
They don't wanna stifle, they wanna see their children do the same thing, so they don't wanna stifle that in them. But I think at the same time, it also depends on their situations, right? So if the child is — maybe they are going into education, which doesn't typically pay a great deal, but they're working hard at it, and they're doing well at it, but it's a struggle to make ends meet. So they may want to help them. One of the other things I think is important
in these family meetings is also communicating that fair is not always equal. In a sense of — so given that prior example, it doesn't necessarily mean that within inheritance, that if we have, say, three children, that we're going to divide up the assets a third, a third, a third. It may be, for example, again, that teacher is one child,
but one of the other children is an investment banker who's achieved financial success on her own and doesn't really need any, or a significant amount, or equal amount of the inheritance, right? So, maybe they would leave more to the child that's in education. And so that also is important to be able to convey that in that meeting. So again, based on,
so that everyone is on the same page and is aware of what may be coming down the road. I also think it's helpful in being able to … those family meetings, in terms of just communicating to your child. I think more so in terms of that we are here to help in any way. So funny enough, I actually took my daughter out to dinner for
essentially a birthday dinner the other night, and we were talking. And one of her concerns is she wants to pursue a career in the music industry. Her focus is in marketing. And she's concerned about when she first graduates from college, her income that she may make and starting out may not be enough to live in a city like
New York City on her own and needing some, you know, whether or not she'll be able to make ends meet. And just letting her know that, you know, fortunately her mother and I are in a position that we're able to help support her, her vision or her goals, right? You know, luckily enough, we've both been able to provide for her in a way that she can pursue her dreams. And I'd rather her take a
focus on a career that she really enjoys and being successful at it. And eventually she can … she may see it pay off monetarily. Versus taking, you know, pursuing a career that she may not stand, but she knows it'll meet her financial needs, right? So,
I think those meetings help, you know, for a number of reasons. And basically conveying support
and the reason behind what the plans are of the parents to passing on wealth.
That actually leads me directly into another question. We've talked a lot about housing in this episode, which I think is not surprising, given the state of the housing market and it's on a lot of young people's minds these days. If, say, you were living in New York City or LA, and you had a child who had just finished college and wanted to live in one of those cities, but
didn't really have the finances to start out on her own yet. If you have an adult child who's either finished college or has had a life change due to a divorce, or anything else, and they want to come back home and live with you. Is that a thing that you have advice for clients on? Is that something you've seen?
Yes. We've seen it quite a bit. I mean, especially coming out of the Great Recession in 2008, 2009, it was a very difficult period for
young college grads coming out into-
I can say, I graduated in 2007, so I feel this very strongly.
Exactly. Totally understandable. I think we see it more these days. I think that's totally fine. I think the conversations that I have with clients or that, at least in terms of giving them some advice and how that may go, will be understanding that
you know, again, this goes back to communication, but setting down ground rules at the outset, right? You know, that child has now had a good amount of independence, right? Especially if they've gone off to college and lived away from home for a number of years and now they're returning. Well, you know, the dynamics are different from when they were in high school, right? You know, curfews and things like that. You know, it was just understanding in terms of,
you know, what their responsibilities may be at home. How, you know, in terms of them coming and going. In terms of will they, in this situation now, will they be contributing anything towards household bills? Will you charge them rent? And, you know, whether or not they can have, you know, adult company over or, you know. Just communicating those things early on, I think will help make that process much smoother, go much smoother.
And then I think again, going back to the financial aspect of it, it still may help even if, you know, maybe you have them pay a utility bill or something like that, to feel as though that they are contributing towards the household in some way and not feeling as though that they're just being a burden on their parents. But it's also an opportunity for the parents to say, for example, you know, maybe they charge them rent. Or if they don't charge them rent, that they, you know, just tell them that
they expect them to save this money that they would have normally been paying on rent, that they put that money away so that they build up a nest egg, and that when they actually do move out of the home, that they have these resources available. They have this financial cushion. So I think that helps a great deal. And if they do charge rent, maybe it's more so to put in an account and to set aside for that child, again,
for when they move out of the house so that they have this money available to them. In most cases, I don't think the parent, or at least in our client situations, they're not looking to make money off of their kids. It's just more so to help teach responsibility and prepare them for when they do wind up moving out of the home.
Sure. So it sounds like, as with the loans, and really as with everything we've discussed, there's not a one-size-fits-all for what makes sense with the so-called boomerang kid coming back to live with you.
That's right. That's right.
There's so many different factors involved. It depends on the child, how responsible they are, the type of people they may hang out with, or so forth. I mean, it's just, there's so many facets to it. It just really depends on that specific situation. So trying to tell the client that even if they may have approached it a different way with their parents, maybe that's...
that's not necessarily the case in this particular situation with their own children.
So we come back to communication, which is very validating for me as a person who has made communication the center of her career. So as we're talking about communication throughout this podcast, throughout this chapter, we talked a little bit with our colleague, Eric Meermann, about philanthropy in his episode of the podcast.
And in that episode, we talked a little bit about legacy and the way that you might have hopes for your kids as it relates to your money. Do you have clients who are interested in establishing either a philanthropic legacy or another kind of legacy? And if so, how do you advise that they talk with their kids about it?
Another great question. We do. And with my clients, Eric and our other colleagues, many of us wound up broaching this topic with our clients.
I think from a legacy standpoint, and again, this goes back to those family meetings. It is a good way for the parents who, if they're very charitably inclined, that they convey that to their children. As part of their legacy and their core values of saying, “OK, yes, we've been successful on our own, but we feel as though it's important to give back to the less fortunate.” That might
you know, they may have certain initiatives that they care about greatly, and that they want to share with their children. But also saying, “Well, these were important to us.” Maybe there's, you know, other charitable initiatives that their children may be more interested in. But, you know, starting that conversation just to, again, help convey their values and
hopefully be able to pass that along to their children and their grandchildren and so forth.
Great. So we've covered a lot, but is there anything else you wanted to talk about with this chapter, or just family meetings in general, that sprung to mind that we didn't touch on yet?
I think when it comes down to it, it's really communication. I think communication is essential when it comes to understanding and conveying, not only
the family's values, but also what is available in terms of financial resources, and when those resources will be made available to, say, the children, whether it's during their children's lifetimes, or upon inheritance when the clients and the parents have passed away.
All right. Great, Shomari. Thank you so much for being with us today. It was a really fun conversation.
Oh, thanks so much for having me.
Amy Laburda 36:35
“Something Personal” is a production of Palisades Hudson Financial Group, a financial planning and investment firm headquartered in South Florida. Our other offices are in Atlanta, Austin, the Portland, Oregon metropolitan area, and the New York City metro area. “Something Personal” is hosted by me, Amy Laburda. Our producers are Ali Elkin and Joseph Ranghelli. Joseph Ranghelli is also our director, editor, and mixer. Our firm has written two books:
Looking Ahead: Life, Family, Wealth, and Business After 55 and The High Achiever’s Guide to Wealth, which offers advice for younger professionals, entrepreneurs, athletes and performers. Both books are available on Amazon, in paperback and as e-books.