Type of Insight: Articles

How women are shaping the future of family giving

 

Women are becoming a mighty force in philanthropic giving, bringing their passions, creativity, and concerns to a host of issues they want to address. With their growing earning power and rising wealth, women are helping to drive the agenda on philanthropic giving, creating an opportunity to draw their families into the endeavor as well.

Take McKenzie Scott, one of the latest billionaires to sign The Giving Pledge. Previously married to Amazon founder, Jeff Bezos, Scott, a novelist, is the fourth wealthiest woman in the world and has committed to donate the vast majority of her wealth within her lifetime. On her list of priorities are education, racial injustice, and women’s empowerment. Though Scott’s activities grab headlines, she’s by no means alone.

As women’s financial influence grows, their philanthropic might will too. Globally, nearly a third of all wealth is now controlled by women, and the number of women serving as the primary breadwinner in families has steadily increased over the last few decades. Younger women have greater financial literacy than women in previous generations, with 70% of millennial women saying they make the primary financial decisions in their households.

What’s more, women are on track to control the majority of the $30 trillion of wealth expected to change hands by 2030. All of this translates into greater philanthropic activity, given that women tend to place a strong emphasis on philanthropy when it comes to decisions in how they spend their money. For example, single women are more likely than single men to make charitable contributions and they tend to give larger sums. As their earnings rise they are also more likely to increase their charitable donations.

With women’s wealth on the upswing and their influence on charitable giving at peak levels, it’s only natural that they are transforming philanthropic giving and shaping the future of family philanthropy too.

The case for taking a long-term view

As you think about how you want to shape the future of your philanthropic giving, it’s important to articulate your family values and agree on what you hope to accomplish with your gifts over your lifetime and beyond.

While some charitable giving is used to address immediate problems and relieve suffering (say, for example, providing food assistance during periods of economic hardship), generational philanthropy efforts often take a more global view.

Thinking long term also allows you to engage your family in crafting your philanthropic vision. It can galvanize your family around issues you want to tackle. For example, if your family’s giving centers on poverty, it gives different family members a way to express their passions depending on their skill sets and interests. Perhaps your granddaughter wants to fund delivery of organic produce in communities located in food deserts, while your son wants to foster economic empowerment. Introducing charitable giving into the family narrative provides an opportunity to engage the next generation, teach them to be responsible stewards of wealth, and establish philanthropy as a core family value.

Choose the right vehicle

Once you decide on the vision for your philanthropy, you need to decide what form that giving will take, such as gifts of cash or stock directly to a specific charity, or through a structure like a private foundation or donor-advised fund (DAF).

Both private foundations and DAFs are commonly used for significant giving. Think of these entities as a basket you fill for your future charitable donations. You can bunch your charitable giving into years that provide the most tax benefit, and then dip into this basket each time you wish to make a gift to a charitable organization in the future. If the basket is not empty upon your passing, you can designate family members to continue funding charitable causes from assets remaining in the basket. But there are important differences between private foundations and DAFs.

A private foundation can be established by an individual, family, or corporation to fund their charitable activities. The Bill & Melinda Gates Foundation is an example of this structure. While a private foundation gives families the most flexibility and control over their charitable giving, these vehicles also have many restrictions, such as requiring a board of directors or trustees to oversee the foundation’s operations. Foundations must also file tax returns and give away at least 5% of the value of their noncharitable use assets each year. In addition, there are legal and administrative costs for setting up and managing a private foundation.

An increasingly popular vehicle for charitable giving is the DAF which provides many of the same benefits as a private foundation, but with less administrative burden for the donor and a potentially larger income tax benefit. DAFs allow you to make charitable contributions — and receive a corresponding income tax deduction — currently up to 60% of your adjusted gross income (compared to 30% for private foundations). Additionally, DAFs are not subject to the 5% minimum distribution rule that applies to private foundations. Donors should be aware, however, that although they may recommend grants, the charitable sponsor (who holds the DAF funds) makes all final decisions.

 

As women take the reins of wealth, they have an opportunity to create a lasting philanthropic legacy, both for their families and communities.

While the origins of your philanthropic mission may be yours, allowing younger generations to have their say and building the structures to honor their contributions, will allow the important work you are passionate about to live on for many years to come.

 

Engage your family

With the understanding of your philanthropic might and the right vehicle in place to carry out the work, turn your sights to passing down your charitable values to the next generation. A philanthropic entity can unite a family around shared goals and visions. Whether it’s education, poverty, racial equity or climate change, your philanthropic activities set a powerful example for younger family members and leave a lasting legacy.

Consider these steps to engaging family members

• Be an open book.
  Help your children and grandchildren understand why the causes you support are so important to you. Sharing your views engages multiple generations and helps you model core values.
• Share the power.
  Give family members a forum for expressing differing ideas and perspectives. You may find that bringing in a consultant to coach family members on respectfulness, listening, and sharing candidly will help shape discussions.
• Teach them.
  While philanthropy is an important goal in and of itself, it’s also a powerful platform from which children and grandchildren can learn financial, governance, and due diligence skills. Philanthropy can also be a good way to teach the responsibilities that come with wealth so children who will inherit wealth are prepared.
• Give the gift of time.
  Time is our most precious commodity. The time you spend together working in the pursuit of a greater good will surely become your most cherished memories.

 

Kris Yamano is Vice President and Arizona Market Leader with BMO Private Bank. She has 20 years of experience in the financial services industry. Kris leads a team of professionals dedicated to providing high-net-worth families, closely-held businesses, and charitable organizations with a full range of customized wealth services including investment management, private banking, trust & estate services and comprehensive wealth planning.

For many high net worth families, amassing wealth may be the easier part. Passing down the knowledge and tools necessary for a successful wealth transition, that’s where things get difficult. Wealth creators can be busy with their businesses and community obligations and neglect this important step or, more commonly, simply don’t know how best to start.

As an inheritor, this can leave you in an awkward position, not knowing what’s expected of you, what role you should play and how you should prepare. It’s an all too common situation. According to the survey, Preparing heirs: five steps to a successful transition of family wealth and values, by Williams & Preisser, a quarter of heirs feel unprepared for their roles.

Empower yourself with knowledge and skills to help yourself and the wealth creator make the best decisions for themselves and your family’s legacy.

An inheritance is a challenge

Do your parents like your taste in music? Do they have the same views on community involvement? Parents and children have different opinions on many things and an inheritance may  be one of them. When we work with families of wealth, we see four main challenges:

1. Sense of entitlement.

Parents may worry that wealth will undermine their children’s ambition and financial responsibility. They want to ensure that inheritors will be good stewards of the wealth.  As a result, they may want to parse out your inheritance only after you hit certain milestones such as a college graduation or a certain income threshold which demonstrate ambition and values. You, on the other hand, may feel that an inheritance should come with no strings attached.

2. Heirs’ differing needs.

Parents generally hope to treat their children equally or fairly.  However, within each family there are bound to be differing capabilities and needs. It can lead parents to consider providing for inheritors differently. For example, you might have a sibling with a chronic illness or you may have a sibling earning a smaller salary because they chose to be an artist or teacher or work for a not-for-profit.  These differences may lead your parents to consider providing a bigger inheritance to your sibling to ensure lifetime support and an equal comfort.  Unless you understand the reasoning, you might take offense about your smaller share.

3. Grandchildren.

Your parents might struggle with how to divide their estate equitably if you and your siblings have a different number of children.  Often grandparents seek to treat all grandchildren equally, but this could mean one sibling’s family receives a larger share if they have more children.  Again, it is important to understand the philosophy here to avoid strife.

4. Lump sum or extended distribution.

Parents may worry about leaving lump sum payments if their children haven’t achieved a certain level of maturity.  They can also be concerned about protecting inheritance from creditors or ex-spouses.  For this reason parents often consider trusts to protect your inheritance for your benefit.

The key to tackling these challenges is open communication, giving parents an opportunity to explain their intentions and allowing you to understand your parent’s intentions as well as to have the time to learn the skills you need to become a responsible and prepared inheritor.

Tell me a story – the tale of the family values, vision and mission

Everyone loves to talk about themselves, especially people who’ve lived exciting lives and built successful businesses and careers. While your parents may be reticent to open up about their estate plan, how much they have and how much they intend to leave you, chances are they will relish the chance to tell their story.

Storytelling sessions aren’t about dollars and cents—that part comes later. Instead, it’s a chance to learn about your family’s unique journey so that you can appreciate the values, vision and mission that led to the creation of the wealth as well as where you fit in.

Remember that each generation and each person has a preferred communication style. To glean as much as possible from your parents’ storytelling, make sure you’re communicating in their preferred style. Skip the Tweets if your parents place a premium on face-to-face communication. On the other hand, your parents might prefer to write you a letter or a short memoir detailing their life.

Also recall that different personality types have a preferred approach.  For example, some family members may be very detail oriented whereas others may be more about the big picture and punchline.  Taking into consideration personality preferences can also help to facilitate the best open communication.

As you talk, keep these things in mind:

• Be empathetic and respectful.
• Inquire about how your parents created their wealth.
• Ask about the challenges they encountered and how they overcame them.
• Find out about what they consider to be their greatest accomplishment (the answer may surprise you).
• Ask if they have any regrets.
• Listen more than you talk.
• Consider what is similar to your values, vision and mission and how they differ to best bridge what you have in common.

The key to engaging in family storytelling is that within the family story, are the values and strategy that was deployed to garner the family wealth.

The family blueprint

Once you understand the family story, you can move to the next phase. Work with your parents to help them more clearly articulate and document their vision, mission and values for the family, if not already done, as part of outlining the overall  family blueprint.

A family blueprint can include a family tree, mission statement (family goals and objectives), family entity diagram, family balance sheet, income tax projections, cash flow projections and   an outline of the estate disposition. It can be a guiding document for not only the values your family holds dear—but also how the assets, cash flow and estate disposition serve that purpose.  It can also help you to see your roles and responsibilities within this family construct.

For example, if running a successful business is central to your family’s values, the family blueprint helps to lay out the roles that family members can play.

Likewise, if one of your parents’ value towards philanthropy is education funding, the family blueprint can help to instill the sense of generosity and gratitude in younger family members and counter the sense of entitlement your parents may worry about. The family blueprint can articulate what form that philanthropic intent will take. It allows the younger generation to learn about money management and due diligence in a supportive environment, under the watchful eye of a matriarch or patriarch.

A family blue print is an evolving document reflecting market conditions, changing family dynamics, life events and philanthropic focus. It will be revised time and again as things change but can be not only a benchmark for the family to be strategic in moving toward family goals and objectives, but also a means to educate family members regarding the wealth enterprise.

The business at hand: the family meeting

With an understanding of your family’s story, you are ready to delve deeper into conversations about wealth transfer. Use the structure of a family meeting to provide the space for that to occur. Family meetings can be an opportunity for information gathering and working together to resolve potential problems.

Some families have well established, open lines of communication. Their family meetings can be as simple as a hike in the woods or a Sunday brunch—pretty much any time they gather together. Other families prefer a more formal approach. They might want to set aside several times throughout the year to discuss family business.

Regardless of how your family conducts its meetings, make sure there’s an agenda so nothing falls through the cracks and assign action items for each member to tackle before the next meeting. If your family is finding it difficult to get started, consider using a neutral third party to facilitate a family meeting.

As your family moves forward with the wealth transfer process, your parents can start assigning roles to different members based on their interests and skillsets. In general, there are four roles within a family’s wealth transfer that can be filled by members of the next generation: beneficiary, trustee, steward and shareholder.  Oftentimes, family members play one or more of these roles and should understand the different hats they might wear in playing each of these roles.

Final thoughts

In a perfect world, parents would have a well-thought out plan for wealth transfer, explain their intentions and help their heirs learn their roles and responsibilities. But life doesn’t always unfold in an orderly way or provide such a roadmap. Sometimes, inheritors may need to step in to play a more active role so they can empower themselves to be educated, responsible and prepared.

Key things to know and planning strategies to consider

 

After a long delay, the SECURE Act (which stands for “Setting Every Community Up for Retirement Enhancement”) has now been signed into law by President Trump.  The Act makes some significant changes for retirement account planning.  Some of the key provisions impacting individuals include:

RMDs moved back to age 72
Required Minimum Distributions (RMDs) from traditional IRAs, 401(k) and other qualified retirement accounts generally have been required to begin when you turn age 70½.  The SECURE Act pushes the initial year of RMDs back to age 72 for everyone born July 1, 1949 or later.  So if you do not need to access your retirement accounts for cash flow needs you can now let your retirement funds grow tax-deferred an extra 1½ years before being required to start taking distributions.

Elimination of “Stretch” IRAs for non-spouse beneficiaries
The SECURE Act eliminates the current rules that allow non-spouse IRA beneficiaries to “stretch” RMDs from an inherited retirement account over their own lifetimes which potentially allowed retirement funds inherited by children or grandchildren to grow tax-deferred for decades.  Instead, all funds from an inherited IRA (or other retirement account) received as a result of a death occurring after December 31, 2019 must now be distributed to non-spouse beneficiaries within 10 years of the IRA owner’s death.  There are no RMD requirements within those 10 years, but the entire balance must be distributed by the expiration of the 10th year.  These new RMD rules do not apply to retirement accounts inherited by a non-spouse beneficiary as a result of a death occurring on or before December 31, 2019.

Surviving spouses who inherit a retirement account of a deceased spouse will still be permitted to “roll over” those accounts into their own names and delay taking RMDs based on their life expectancy until they turn age 72.  Distributions over the lifetime of a non-spouse beneficiary will also still be allowed if the beneficiary is a minor, disabled, chronically ill or not more than 10 years younger than the deceased account owner.  For minors, the exception only applies until the child becomes an adult and then the 10 year distribution requirement takes effect.

No age restrictions on IRA contributions
The SECURE Act repeals the previous rule that prohibited contributions to a traditional IRA by workers age 70½ and older.  Now you can continue to contribute to a traditional IRA if you decide to continue working into your 70s.  There also continues to be no age-based restrictions on contributions to a Roth IRA.

Penalty- free withdrawals for adoption or birth of a child
The SECURE Act allows up to $5,000 to be withdrawn from a retirement account within one year following the birth or adoption of a child without the usual 10% early-withdrawal penalty.  For married couples, each spouse can withdraw up to $5,000 from their retirement accounts penalty free.  Income taxes will still be owed on the distributed funds.

 

Grad student fellowship/stipend payments treated as compensation
Under the SECURE Act, aid amounts paid to students in pursuit of graduate and post-doctoral study or research (such as fellowships, stipends or similar payments) will now be treated as compensation for purposes of making IRA contributions.  This will allow students who may not have work related earnings to begin saving for retirement while still pursuing advanced degrees.

Planning considerations

 

The SECURE Act makes some significant changes to retirement accounts.  Key planning considerations include:

Roth conversions
Roth IRAs may be more attractive now.  One option to reduce the impact of future taxes would be to convert traditional IRA funds into a Roth IRA.  You would pay the taxes now but your beneficiaries’ future withdrawals would be tax-free.  Tax rates may be going up in the future so you might be paying less in tax now with conversions rather than what your beneficiaries may pay in the future.

 

Charitable donations
Consider using RMDs from your IRA to make qualified charitable distributions (QCDs) and using your retirement accounts to fund charitable bequests rather than using your other assets for such gifts.  Taking advantage of a QCD once you reach your RMD age to fund your charitable giving is especially beneficial if you no longer are able to itemize deductions for income tax purposes because of the recent significant increase in the standard deduction.  QCDs are not included in your adjusted gross income which can also potentially reduce your Medicare tax amount.  Unlike an individual, a charity will not pay income taxes on retirement funds it receives so funding charitable bequests with retirement account assets and using your other assets to fund bequests to your children, grandchildren or other individual beneficiaries will produce the best overall income savings.

 

Spend IRA funds and bequeath taxable investments
Depending upon tax brackets, it may be beneficial for you to use your retirement accounts to fund your cash flow needs during your lifetime and preserve your taxable investment accounts to pass on to your heirs.  Your stocks and other securities will receive a tax basis adjustment to their values as of the date of your death, meaning all prior appreciation will escape tax and your beneficiaries will only realize gain on a subsequent sale on the increase in value after your death.  Your beneficiaries will also be free to sell such securities whenever they wish and time sales to take into consideration taxes, rather than being forced to withdraw IRA assets within 10 years making it more challenging to plan for a favorable tax outcome.

 

Review estate plan
You should consider having your estate plan reviewed if you have named a trust as a beneficiary of your retirement accounts to avoid potential unintended consequences resulting from the new 10-year distribution rule under the SECURE Act.  Many trusts that are intended to receive retirement funds are structured to be “conduits” meaning that any retirement account distributions received by the trust are immediately distributed to the beneficiary.  While this can be favorable for income tax purposes because of the high tax rates trust are subject to, it may result in a beneficiary receiving substantial amounts at a younger age than possibly intended.  Some trusts also provide for the potential accumulation of retirement account distributions which can have adverse tax consequences.  Trust provisions should be reviewed to ensure that your trustees are afforded flexibility to manage retirement account distributions in the most beneficial manner.

 

Reassess IRA distribution strategies
As you approach your RMD age, consider whether it will be beneficial as part of your overall wealth planning to delay taking distributions from your retirement accounts until age 72 to fund your cash flow needs.  Alternatively, consider whether making withdrawals from your retirement accounts earlier in retirement to take advantage of lower tax brackets may provide overall long-term tax savings.

The SECURE Act changes to retirement savings should be evaluated in light of your complete financial picture and long-term wealth plan.  Working with your trusted advisor to determine how these changes personally impact your planning may help avoid potential pitfalls and identify tax savings opportunities.

For many high net worth families, amassing wealth may be the easier part. Passing down the knowledge and tools necessary for a successful wealth transition, that’s where things get difficult. Wealth creators can be busy with their businesses and community obligations and neglect this important step or, more commonly, simply don’t know how best to start.

As an inheritor, this can leave you in an awkward position, not knowing what’s expected of you, what role you should play and how you should prepare. It’s an all too common situation. According to the survey, Preparing heirs: five steps to a successful transition of family wealth and values, by Williams & Preisser, a quarter of heirs feel unprepared for their roles.

Empower yourself with knowledge and skills to help yourself and the wealth creator make the best decisions for themselves and your family’s legacy.

An inheritance is a challenge

Do your parents like your taste in music? Do they have the same views on community involvement? Parents and children have different opinions on many things and an inheritance may  be one of them. When we work with families of wealth, we see four main challenges:

1. Sense of entitlement.

Parents may worry that wealth will undermine their children’s ambition and financial responsibility. They want to ensure that inheritors will be good stewards of the wealth.  As a result, they may want to parse out your inheritance only after you hit certain milestones such as a college graduation or a certain income threshold which demonstrate ambition and values. You, on the other hand, may feel that an inheritance should come with no strings attached.

2. Heirs’ differing needs.

Parents generally hope to treat their children equally or fairly.  However, within each family there are bound to be differing capabilities and needs. It can lead parents to consider providing for inheritors differently. For example, you might have a sibling with a chronic illness or you may have a sibling earning a smaller salary because they chose to be an artist or teacher or work for a not-for-profit.  These differences may lead your parents to consider providing a bigger inheritance to your sibling to ensure lifetime support and an equal comfort.  Unless you understand the reasoning, you might take offense about your smaller share.

3. Grandchildren.

Your parents might struggle with how to divide their estate equitably if you and your siblings have a different number of children.  Often grandparents seek to treat all grandchildren equally, but this could mean one sibling’s family receives a larger share if they have more children.  Again, it is important to understand the philosophy here to avoid strife.

4. Lump sum or extended distribution.

Parents may worry about leaving lump sum payments if their children haven’t achieved a certain level of maturity.  They can also be concerned about protecting inheritance from creditors or ex-spouses.  For this reason parents often consider trusts to protect your inheritance for your benefit.

The key to tackling these challenges is open communication, giving parents an opportunity to explain their intentions and allowing you to understand your parent’s intentions as well as to have the time to learn the skills you need to become a responsible and prepared inheritor.

Tell me a story – the tale of the family values, vision and mission

Everyone loves to talk about themselves, especially people who’ve lived exciting lives and built successful businesses and careers. While your parents may be reticent to open up about their estate plan, how much they have and how much they intend to leave you, chances are they will relish the chance to tell their story.

Storytelling sessions aren’t about dollars and cents—that part comes later. Instead, it’s a chance to learn about your family’s unique journey so that you can appreciate the values, vision and mission that led to the creation of the wealth as well as where you fit in.

Remember that each generation and each person has a preferred communication style. To glean as much as possible from your parents’ storytelling, make sure you’re communicating in their preferred style. Skip the Tweets if your parents place a premium on face-to-face communication. On the other hand, your parents might prefer to write you a letter or a short memoir detailing their life.

Also recall that different personality types have a preferred approach.  For example, some family members may be very detail oriented whereas others may be more about the big picture and punchline.  Taking into consideration personality preferences can also help to facilitate the best open communication.

As you talk, keep these things in mind:

• Be empathetic and respectful.
• Inquire about how your parents created their wealth.
• Ask about the challenges they encountered and how they overcame them.
• Find out about what they consider to be their greatest accomplishment (the answer may surprise you).
• Ask if they have any regrets.
• Listen more than you talk.
• Consider what is similar to your values, vision and mission and how they differ to best bridge what you have in common.

The key to engaging in family storytelling is that within the family story, are the values and strategy that was deployed to garner the family wealth.

The family blueprint

Once you understand the family story, you can move to the next phase. Work with your parents to help them more clearly articulate and document their vision, mission and values for the family, if not already done, as part of outlining the overall  family blueprint.

A family blueprint can include a family tree, mission statement (family goals and objectives), family entity diagram, family balance sheet, income tax projections, cash flow projections and   an outline of the estate disposition. It can be a guiding document for not only the values your family holds dear—but also how the assets, cash flow and estate disposition serve that purpose.  It can also help you to see your roles and responsibilities within this family construct.

For example, if running a successful business is central to your family’s values, the family blueprint helps to lay out the roles that family members can play.

Likewise, if one of your parents’ value towards philanthropy is education funding, the family blueprint can help to instill the sense of generosity and gratitude in younger family members and counter the sense of entitlement your parents may worry about. The family blueprint can articulate what form that philanthropic intent will take. It allows the younger generation to learn about money management and due diligence in a supportive environment, under the watchful eye of a matriarch or patriarch.

A family blue print is an evolving document reflecting market conditions, changing family dynamics, life events and philanthropic focus. It will be revised time and again as things change but can be not only a benchmark for the family to be strategic in moving toward family goals and objectives, but also a means to educate family members regarding the wealth enterprise.

The business at hand: the family meeting

With an understanding of your family’s story, you are ready to delve deeper into conversations about wealth transfer. Use the structure of a family meeting to provide the space for that to occur. Family meetings can be an opportunity for information gathering and working together to resolve potential problems.

Some families have well established, open lines of communication. Their family meetings can be as simple as a hike in the woods or a Sunday brunch—pretty much any time they gather together. Other families prefer a more formal approach. They might want to set aside several times throughout the year to discuss family business.

Regardless of how your family conducts its meetings, make sure there’s an agenda so nothing falls through the cracks and assign action items for each member to tackle before the next meeting. If your family is finding it difficult to get started, consider using a neutral third party to facilitate a family meeting.

As your family moves forward with the wealth transfer process, your parents can start assigning roles to different members based on their interests and skillsets. In general, there are four roles within a family’s wealth transfer that can be filled by members of the next generation: beneficiary, trustee, steward and shareholder.  Oftentimes, family members play one or more of these roles and should understand the different hats they might wear in playing each of these roles.

Final thoughts

In a perfect world, parents would have a well-thought out plan for wealth transfer, explain their intentions and help their heirs learn their roles and responsibilities. But life doesn’t always unfold in an orderly way or provide such a roadmap. Sometimes, inheritors may need to step in to play a more active role so they can empower themselves to be educated, responsible and prepared.

October is National Cyber Security Awareness Month, and an ideal time to focus on keeping your financial information out of criminals’ hands. Many of today’s fraud rings target consumer information they can easily access online, says BMO Financial Group’s Chief Information Security Officer, Aman Raheja. As a result, learning more about basic cyber security (online safety) can go a long way toward keeping your financial accounts and personal information private.

Here are some of Raheja’s best tips to help protect yourself and your information over the internet. And—good news—you can do all of these things on your own, even if you’re not electronically savvy.

Regularly check your credit
If you’ve been affected by a recent data breach of any kind, this is a key first step. And even if you weren’t impacted, it’s good practice to regularly review your credit file. Monitor your credit reports (via www.annualcreditreport.com) for new accounts or other details you don’t recognize. These could be signs that someone is fraudulently accessing your accounts or otherwise fraudulently using your personal or financial information.

Freeze your credit file
You may want to consider freezing all three of your credit files: those at Equifax, Experian and TransUnion. A credit freeze:

• Makes it much harder for someone to open a new credit card or other account in your name
• Is a simple process to set up, and you can easily “thaw” your credit if you ever need to apply for new credit.

Just keep in mind that freezing your credit doesn’t prevent fraudsters from making charges to your existing accounts. That’s why Raheja strongly encourages you to keep monitoring your credit files even if you freeze them.

Request a fraud alert on your credit file
If you’d rather not go for a full credit freeze, you can instead ask the credit agencies to put this alert on your files.

A fraud alert:

• Notifies creditors that you’ve been a victim of identity theft
• Encourages creditors to do a much more careful background check before approving new credit accounts

Use strong passwords and update them regularly
This sounds like a basic move, but it’s still very important. Raheja recommends using passwords that are strong, not easily guessed (like your children’s or pets’ names) and unique.

Further, Raheja suggests to use long passphrases, rather than passwords, where systems, websites or applications support it. It provides protection against brute-force attacks and password spraying attacks, especially if the passphrase also contain complexity, like lower and upper case letters, numbers and special characters.

“Ninety percent of all less-secure passwords can be cracked within seconds,” notes Raheja. So don’t make it easy for fraudsters to get into your bank or other accounts. And absolutely, positively don’t reuse your Facebook, Twitter or other passwords on your bank account. Don’t use your bank account password for other accounts, either. Also, consider setting up two-factor authentication for extra protection when you bank online.

Be less personal on social media
Many people use their birthdate, their pets’ or children’s names, the city in which they were born and other information as part of their internet passwords and online security challenge questions. If a cyberthief wanted to impersonate you, they might easily find some of this information on your Facebook, Twitter, Instagram and other online accounts. Be careful about how much you share.

Don’t take the phishing bait
Phishing emails are fraudulent emails that look frighteningly similar to real emails from a bank or other reputable organization. These emails may ask you to “verify” certain pieces of your existing account information. If you click on links in these emails, explains Raheja, they may take you to fake sites designed to steal your financial and personal information. These links can also download computer viruses and malware.

BMO never sends emails asking you to verify account information, reminds Raheja. If you get an email that appears to be from BMO but looks at all suspicious, report it right away to bmoharris.phish@bmo.com.

Raheja also encourages BMO customers to download the free Trusteer Rapport Software. The Trusteer app:

• Can help prevent financial malware on all of your digital devices
• Secures your connection to bmoharris.com when you bank online and helps protect your computer from common online threats
• Is downloadable from the Apple Store, Google Play or BMO

Keep a tight grip on mobile device safety
More and more people are accessing their financial accounts and using mobile-payment apps on their smartphones and tablets. According to Raheja, experts are still learning how to best prevent mobile device crime. That means you should be extra careful about protecting personal and financial information on your devices.

• Keep it locked. Fraudsters can’t physically access your phone/tablet if it’s protected. Be sure to set strong passcodes for unlocking your mobile device. Also, follow directions from your phone manufacturer or service provider to find or lock your phone if it’s lost or stolen. You may also want to set up the option to wipe all information from your phone/tablet if you can’t recover it.
• Put safety at your fingertips. If you’re an Apple user, you can now use your fingerprint as your password for BMO Mobile Banking. This feature is available through Touch ID Sign In on Apple iPhones 5s and newer, and running iOS 8 or higher.
• Be wary of public Wi-Fi. If you shop or do banking on your mobile device, only use your cell connection or a secure Wi-Fi connection. The best Wi-Fi networks use secure passwords, such as the trusted ones at your home or workplace. Avoid doing financial transactions on public Wi-Fi networks (free hotspots with no password or a password available to anyone). Fraudsters love them because they make it easy to hack into your banking or other financial information.

Protecting your children online

• According to a 2018 study, approximately 50% of teen girls and 39% of teen boys are near-constant online users. With 95% of teens having access to smartphones and 45% admitting that they’re online constantly, they’ve become prime targets for various types of cyber crime. Share these tips with your teens:
• If you wouldn’t say or share it on a busy street corner, don’t put it on social media. When it comes to social media, privacy is always key.
• Avoid publicly sharing locations on social profiles. While it may be fun to show friends where you are and what you’re doing, fraudsters can use this information for malicious attacks.
• Always review an app’s privacy settings before downloading it. Some apps may be lots of fun but may come at the cost of your personal information and phone security.

Seniors Online
Nearly half of today’s seniors own smartphones and are connected online. Unfortunately scammers target seniors because they tend to be wealthier, more trusting and less likely to report fraud, according to the FBI. A 2015 report estimated that seniors lose $36.5 billion each year to financial scams and abuse. Seniors should:

• Use strong (8 to 12 characters, including numbers and symbols) and unique passwords for all their accounts.  Use a Password manager to keep track of those passwords.
• Keep your antivirus software up to date to prevent hackers from accessing your computer. Don’t fall for phone calls that ask to access your computer to “update or fix” your computer.
• Don’t give your personal information over the phone or in emails. Banks and governments will never call or email and ask for your password, accounts or demand payments.

For more tips on helping protect your financial and personal details online, contact BMO or check out our BMOHarris Security Center.

Eight tax considerations for small business owners

 

As we enter the fourth calendar quarter, tax planning often takes center stage (it should be center stage year round). If you’re a small business owner, there are many tax deductions and credits to be aware of.  We are highlighting several here that have broad application. Be sure to speak with your tax advisor before you take action.

 

Tax breaks for small businesses fall into two categories: credits and deductions. Tax credits directly reduce the amount of tax you owe, giving you a dollar-for-dollar reduction of your tax liability. Tax deductions reduce how much of your income is subject to taxes, which may or may not reduce your actual tax bill. Below are some of the most common credits and deductions, although this is by no means an exhaustive list.

 

Tax credits

1. Research and development (including payroll tax credit)

This credit is available to companies in a variety of industries for increasing specified research and experimental expenses from year to year, including those for qualified software development. A qualified small business can elect to use the credit (up to $250,000) to offset the employer portion of social security tax liability on wages. Many small businesses (especially start-ups) operate at a loss or don’t throw off sufficient income to effectively utilize the income tax credit currently.  The payroll tax credit election allows for current utilization – a real cash flow benefit.

 

In the past, small businesses had been limited in their ability to claim the R&D credit due to net operating losses or even alternative minimum tax (AMT) positions. However, the Protecting Americans from Tax Hikes (PATH) Act of 2015 included these valuable changes:

• Eligible businesses with less than $50 million in gross receipts can take the R&D credit against AMT liability.
• Certain small businesses with less than $5 million in gross receipts can take the R&D credit against payroll taxes.

2. Health care

The small business health care tax credit can benefit eligible employers who provide health coverage for their employees. Generally, to be eligible for the credit, your business must have fewer than 25 full-time equivalent employees, pay an average salary of less than $54,200 a year (in 2019), and pay at least half of your employees’ health insurance premiums. In addition, you must use a SHOP Marketplace Plan for the health coverage.

 

If your business qualifies, the maximum credit is 50% of employer-paid premiums (35% for tax-exempt employers – this is a refundable credit). You can claim the credit for only two consecutive taxable years. Even if your business does not owe tax, you can carry the credit back or forward to other tax years. Keep in mind, even if your business does not qualify for the credit, you may still be able to deduct the cost of contributing to monthly employee premiums from your federal income as a business expense (and the premiums in excess of the credit amount should be deductible if you qualify).  (See “health insurance premiums” below.)

 

Deductions

3. Bonus depreciation/Section 179

Under IRC Sec. 168, business owners can write off the entire cost of qualifying purchases under the 100% bonus depreciation rules enacted with the Tax Cuts and Jobs Act. That means your business can generally expense 100% of the cost of any property with a recovery period of 20 years or less and deduct it in the year the property is placed in service.

 

Under  IRC Sec. 179, you may elect to expense all or part of the cost of any Sec. 179 property in the year it is placed in service. As of 2018, the maximum deduction is $1 million with a phase-out threshold between $2.0 and $2.5 million.

 

Section 179 property includes (new or used but new to you):

• Machinery, equipment, computers, furniture and vehicles
• Qualified real property, which may include improvements made to nonresidential real property

 

The benefit to Sec. 179 over Sec. 168 is that it is easier to fine-tune annually (elected property by property), doesn’t complicate UNICAP for those businesses subject to IRC Sec. 263A, and covers certain qualified real property not eligible for 100% bonus depreciation.

 

4. Business loan interest 

The TCJA  introduces some limitation for deduction business interest expense.  However, if your business has average annual gross receipts of $25 million or less over a three-year period, you may be eligible to deduct the full amount of business loan interest from qualifying loans. (Large businesses can only deduct interest amounting to 30% of their adjusted taxable income.) In addition, if you take out a personal loan but use some of the money for business expenses, you may be able to deduct the interest on the business portion.

 

You’ll want to keep good records to make sure you comply with any IRS requirements. For example, keep your loan agreement handy and be sure to document that your lender is processing your payments.

 

5. Health insurance premiums

Even if your small business doesn’t qualify for the health care tax credit, you may still be able to deduct health insurance premiums as a business expense.  For example, you can take a deduction for:

• Payments made for group health insurance premiums
• Payments made through formal medical reimbursement plans, such as Health Reimbursement Arrangements (HRAs)
• Contributions to Health Savings Accounts (HSAs) (subject to annual limits)

 

It’s important to note that, for S-corporations, if you own more than 2% of the company’s shares, you must include the cost of your health insurance in your income. This means the amount you pay for health insurance is subject to income tax, but not FICA. You may, however, be able to then take a personal income tax deduction on the health insurance premiums paid by the business.

 

Finally, sole proprietorships, partnerships, S corporations and C corporations all (or their pass-through owners) may be able to write off long-term care insurance premiums to some extent or another.  Premium payments generally are a deductible business expense, similar to traditional health insurance premiums. For C corporations, this applies to the owners, their spouses and dependents, and all employees.  For partnerships and S-corporations, only premium payments for non-partners or non-2%-owners are fully deductible. For all others considered self-employed for purposes of this fringe benefit, the  premium is added to the applicable owner’s income (similar to health insurance premiums) and there are age-based premium amount limitations further subject to itemization rules.

 

6. Business travel and meals

Travel expenses are the ordinary and necessary expenses of traveling away from your normal place of business for business purposes. They can include travel by airplane, train, bus or car; fares for taxis or other types of transportation; shipping of baggage and other materials; use of your car or a rental car while at your business destination; and meals and lodging. While you cannot deduct entertainment expenses, you can deduct 100% of your business travel costs and 50% of your qualifying meal expenses.

 

7. Retirement plans

Planning for retirement is often left behind by business owners because it’s not seen as a necessary business expense. However, a qualified retirement plan can allow you to start growing tax-advantaged retirement savings while providing valuable business deductions starting this year if you act quickly.

 

There are many options available, and each has its pros and cons. While IRAs are arguably the easiest way to get started, you may be able to save more with a defined benefit or pension plan. Some plans have to be established before year end but others give you until the tax-filing deadline of next year.

 

Retirement Plan Details
	SEP IRA	Traditional/Solo 401(k)	SIMPLE IRA	Defined Benefit Plan
Generally best for	Businesses with few to no employees. Flexible and easy to administer.	Solo 401(k) is for businesses with no employees. Traditional 401(k) plans are for larger firms.	Businesses with fewer than 100 employees. Easy to administer.	Business owner who wants to maximize contributions and can manage the administrative costs
Effect on income tax for employees	Owner may deduct on 1040.	Employee contributions are pretax (Traditional). Reduce taxable income.	Owner can deduct on 1040. No deduction for employee, but contributions are pretax.	N/A. Employer only contributions.
Effect on income tax for employers	100% deductible contributions (limits may apply).	100% deductible contributions (limits may apply).	100% deductible contributions (limits may apply).	Deductible contributions with limits based on actuary computation.
References	IRS Pub 4333	IRS Pub 560. IRC Sec 401. www.irs.gov/retirement plans/one-participant-401k-plans	IRS Pub 560. IRS Pub 4334 (SIMPLE Plans)	IRS Pub 560

 

 

8. Qualified business income 

The qualified business income deduction generally allows you to deduct—on your individual tax return—up to 20% of your qualified business income or 20% of your taxable income net of any capital gain, whichever is lower. There can be income limitations, however ($321,400, if married filing jointly, or $160,700 for all other filing statuses in 2019). Eligible businesses include pass-through entities, including partnerships and S corporations, as well as other unincorporated entities such as sole proprietorships and single-member LLCs. The qualified business income deduction started in tax year 2018 and, as of now, it will end after tax year 2025.

Generally, qualified business income refers to profits from your business. It does not include salary or wages you received either as W-2 wages from an S-corporation or guaranteed payments from a partnership.

In practical terms, this deduction means you may be able to reduce your estimated taxes. However, be careful because the penalty for underpayment of estimated taxes can hurt.

The combination of tax credits and deductions can go a long way toward minimizing your small business tax liability. With the year winding down, there’s still time to take advantage of small business tax breaks. Speak with your BMO financial professional and tax advisor soon to discuss the best options for your business.

10 ways to promote financial literacy for kids.

All parents want their children to be financially savvy and to make smart financial decisions. Money management skills are particularly important for kids from wealthy families who will likely inherit significant wealth, which can add complexity and unique burdens.

Nevertheless, many wealthy families fall short when it comes to teaching kids about money. One study1 showed that 67% of wealth holders are apprehensive about sharing inheritance details with their heirs. And only 10% provide complete information to them. Some of the reasons they hold back include:

Concerns that children will become spoiled and lack ambition

Unsure what assets to leave them

Waiting for them to get older

Fear they will rely on wealth that might not materialize

The belief that it’s simply none of their business

While these are valid concerns, your children will need to understand how to manage wealth and, like any skill, money management must be taught. Few schools incorporate financial literacy into their curriculum, including universities. Only one-third of states require high school students to take a course in personal finance.2 Plus, celebrities and others in the media are eager to influence your children, and their approaches may not align with your family’s financial values.

Here are ten ways you can teach your children and other heirs about money and managing the wealth they may one day inherit.

1. Talk values, not figures

As soon as your children can comprehend basic money concepts, you can start instilling your family’s financial values and priorities. There’s no need to disclose your net worth or even your income. By focusing on values, you set groundwork that your children can rely on for years when managing money, whether it’s money they’ve earned or inherited.

The book Kids, Wealth, and Consequences offers five financial values to consider teaching your children:

Handle hearing no. Teach your children to learn how to accept “No” from you and also how to say “No” to others.

Differentiate between wants and needs. What does your family consider a need? The lines can be blurry and may not be the same as your neighbor’s. Help your children understand the difference.

Tolerate delayed gratification. Although some children are naturally better than others at this, it’s important to teach the benefits of waiting. For example, you could encourage your child to forego a small item today in order to save up over time for something more expensive.

Make tradeoffs. Even if you can afford to give your children everything, it’s important they understand that they can’t always have what they want. This lesson teaches them to think before making a purchase and helps them avoid impulsive spending behaviors.

Develop a healthy skepticism. Children are bombarded at a very young age by media and advertisements. Teach them to not believe everything they see and to research a large purchase before making one.

2. Model good behavior

Your spending habits speak powerfully to your children. Every purchase you make can teach your children what you value. Consider having conversations about the importance of a legacy and of responsibility to future generations. Finally, share stories of your financial failures as well as your successes. Your children can learn from your mistakes, too.

3. Open a bank account

Children can start putting money aside in a bank account at any age. Consider these ways to use banks and bankers to help your children learn about money:

Open a custodial account and encourage children to make regular deposits to help establish a habit of savings.

When appropriate, convert the account to a student account that can stay with your children through their college years, helping them learn to use a debit card wisely and make their own withdrawals.

Take older children with you to visit your bankers and financial advisors. Many wealth management firms provide guidance and resources to their clients’ children. Some even have formal education programs.

4. Teach budgeting

As soon as your children start earning an allowance or any income, teach them the basics of a budget. In a previous article, we introduced the “save/spend/share” jar system. Very simply, you set up three jars, one for each child to use for saving, one for spending, and one for sharing.

This helps them understand that choices have consequences, and lays the groundwork for basic budgeting. Consider matching their contributions to encourage them to save or share more.

5. Practice investing

The next time you’re looking to invest new money, include your children in the decision-making process. Let them see how you analyze and choose an investment. Perhaps narrow the field and then allow them to make the choice. This lets them learn from their mistakes early before they inherit significant wealth. Depending on your children’s ages, you could gift a small amount of money to them and allow them to invest it directly.

6. Establish credit

Encourage children to establish credit as early as possible. Many credit card companies offer low-limit cards to college students with part-time jobs. Otherwise, consider co-signing with them. They will likely make mistakes but it’s better that they learn the consequences of misusing credit (such as monthly interest charges) while the credit limit and risk are still low. Also, when they inevitably do incur interest charges, consider having them pay those amounts with their own money.

7. Involve kids in philanthropic efforts

Many charitable organizations have junior boards and ways to involve the whole family. See Preparing Heirs for a Lifetime of Charitable Giving to learn more about teaching your children the role of giving in wealth stewardship.

8. Discuss college costs

Many young adults start out their lives with significant debt from student loans, which negatively affects their ability to save for their future. One of the greatest advantages of your wealth is the ability to fund your children’s college educations in order to avoid this situation. However, making your children contribute gives them accountability and helps them see the value of their education. Discuss mutual expectations about upcoming college years and put a dollar amount against the expense to set a savings goal for your children to meet. Resist the urge to pay for everything, especially extras, so your children can experience the pride of contributing.

9. Explain employee benefits

One of the most valuable financial lessons your adult children can learn is how to make the most of the benefits their employer provides. They can learn a lot from your experience with various types of benefits, including:

Health, vision and dental care

Flexible spending accounts

Health savings accounts

Life and disability insurance policies

Employer-sponsored retirement plans, such as 401(k) plans

Discuss the power that compounding can have on retirement savings, and when it makes sense to maximize 401(k) contributions. The Rule of 72 can also be helpful. With this simple formula, you divide 72 by the expected annual rate of return to see how many years it will take for your money to double. This can help encourage your children to start saving early and often. Remember to emphasize the impact of employer matching contributions as well as Roth contributions.

10. Support a first home purchase

From lending or gifting money to your children to co-signing on a mortgage, you can use your wealth to help your children secure their first home. Home buying can be challenging in many markets in the United States, and your children will likely need to borrow a portion of the cost, either from you or from a bank. However, just like college costs, it may be wise to require your children to contribute a portion of the cost, at least the 20% down payment needed to avoid PMI. Be sure to consult with your financial and tax advisors before you lend a helping hand financially, as there may be tax implications for you.

Talking about money with your kids may be uncomfortable, but the benefits of teaching them money management skills before they inherit the family wealth can have lasting importance. Furthermore, teaching kids about money doesn’t mean you have to divulge specific numbers, such as your net worth or income. Financial literacy for kids starts with instilling your family’s financial values, which they can pass on to their own children. For more information, speak with your financial professional about these and other ways to teach your kids about money.

How to answer the tough questions about money

At some point, your children are likely to ask you about your wealth and income, possibly well before they’re old enough to understand the value of a dollar.

How much money do your make

What are you worth?

How much will I inherit?

When you’re stumped or taken off guard by their questions, try replying with one of your own: “Why do you ask?” This gives you time to thoughtfully prepare an answer. They may be worried by news of a family in need or thinking about asking you for an expensive gift.

According to Kiplinger,3 you can try a simple, straightforward response: “We have enough money to buy the things we need and also save some of it.”

 

1 Campden Wealth, the Institute for Private Investors, and Wilmington Trust. “Navigating the Wealth Transfer Landscape.” May 10, 2017.

2 Council for Economic Education. “2018 Survey of the States: Economic and Personal Finance Education in Our Nation’s Schools.”

3 Bodnar, Janet. “When Your Kids Ask How Much Money You Make.” Kiplinger. February 19, 2015.

Six ways to teach children the role of giving in wealth stewardship

 

Beyond the tax deductions, there are many rewards to engaging in charitable giving as a family. Children of all ages can learn how to use wealth to help improve the lives of others or to support worthy causes. Even the very young can be taught to make charitable donations and volunteer their time. Whether your family has a well-established charitable giving program or you’re just starting out, there are meaningful ways to establish a culture of stewardship and philanthropy that involves the entire family. Following is a timeline of suggested strategies to help prepare your children or grandchildren for a lifetime of charitable giving.

 

Pre-school age

 

1. Take the kids with you when you volunteer your time 

One of the most precious commodities you and your family can give is your time. From helping an elderly neighbor with yard chores to signing up at a soup kitchen, your children can see firsthand how they can help make a difference in the lives of others. Volunteering also builds self-esteem and confidence in children, while making them more aware of their community and its diversity.

2. Create a legacy account

Earmark a portion of the household budget for specific charitable causes. This can be as simple as opening a designated bank account or as elaborate as establishing a trust. Consider diverting spending from even one small ongoing expense in your budget for charitable causes. As your children age, this act can demonstrate to them how one relatively small personal sacrifice can add up to a big contribution in the future.

 

Early elementary years

 

3. Encourage children to donate to charity

As your children get older, they can begin to make donations themselves. Clothing is a perfect example, given how quickly children grow out of one size into another. As they outgrow their gently used or new clothes, encourage them to decide which items are suitable to donate. Let them put the bag together and bring it to the donation center with you. You can take the same approach with toys that your children are no longer interested in.  In addition, don’t shy away from donating gifts your children have received that you know they won’t ever use or wear. Why not let someone who will enjoy those items use them?

This is also the age when children can join in charitable activities within school, scouting or religious groups. It can be tempting to simply make a monetary donation when these groups reach out, but your children will learn more about giving if you take time with them to participate. For example, if a request comes to donate nonperishables to a food pantry, make a short visit to a local food store with your kids to choose items. Or, allow them to rummage through your pantry for potential donations.

4. Use a “save/spend/share” jar system

Once your children start earning their own money, either from gifts, an allowance or earnings, show them how to divide their money up for specific needs. This teaches them financial responsibility and sets the foundation for later in life when they will need to manage their money. Here’s how it works:

 

Save jar	Share jar	Spend jar
This is money set aside for the long-term. As children, it can be used to buy an expensive toy, their first cell phone, or a new bicycle. As adults, this translates into traditional savings or retirement investing, including IRA contributions.	This money is designated for charitable causes. Children can take from it when the family is making any kind of cash donation or purchasing items to be contributed. It becomes the source for a variety of philanthropic endeavors over the years.	These funds cover day-to-day expenses. For children, this might include a portion of their lunch money or perhaps a small contribution to a special family dinner. For adults, this money supports lifestyle needs.

​

 

Eventually, children can learn how to use a budget to designate how much money goes into each jar, and then how the jars relate to actual savings and investing accounts at financial institutions.

 

Older elementary and middle school age

 

5. Allow children to direct a portion of the family’s charitable gifts

At this point, your children may be very aware of the charities you support as a family. Consider sharing more details with them about the amounts or percentage of the total you typically give to each. This is a great opportunity for you to understand what’s important to your children and how they would like to help. In turn, they learn the responsibility of helping others more directly and see how impactful the funds can be. Finally, it encourages them to understand how the funds are used by the recipients, whether you give to an organization or an individual.

 

Middle school and older

 

6. Allow kids to propose charities for the family to support

This is the time for children to learn how to research and choose a worthwhile cause. You can even ask them to submit a formal proposal to you or give a presentation about the charities they like. A good age to start this is between 10 and 12. Encourage them to research organizations online, even if they are already familiar with the charity. If the organization is local, make some time to visit as a family and see firsthand what the group does. Then, discuss the pros and cons of each to help determine which charities to support.

Next, get the children involved with making the actual donation. Although it’s convenient to simply transfer funds online, if you do, you’ll miss out on the most gratifying step in the process—seeing the impact of the donation to the recipient. When appropriate, deliver your donation in person. This moment is often the most inspirational part of the giving process and helps encourage future giving.

Importantly, each of these six steps creates habits that can help define how your children will steward their time and wealth as they grow. For example, they’re likely to continue volunteering throughout their lives if they start young. Likewise, they’ll see lifelong benefits to learning how to manage money in a way that lets them achieve their goals plus help others. Finally, your children will learn useful skills when researching charities and presenting options to the family.

Ask your financial professional for more information on charitable giving trusts and other strategies that may be appropriate your family.

 

Teaching children the tax advantages of charitable giving

 

If you itemize deductions on your tax return, you may be eligible to take a deduction for certain donations. As your children get older, be sure to teach them about this added benefit of giving and about consulting with a tax advisor to determine the most tax-efficient options for your family.