We are out in the middle of oil country and, yes, we are some of the 'lucky' ones who receive income from our mineral ownership. We have one boy, who is farming with us, and three other children who do not. We think with the oil income we are receiving, the son on the farm – once he inherits his share from us – will be able to buy out the other three for the farmland. We've also put quite a bit away into savings to make certain the other children will receive other assets? Have we thought everything through correctly? – signed, Well Covered
Dear Well Covered:
If I were an accountant or ordinary financial planner, looking at your balance sheet and income, I'd probably have to agree with you – you are 'well covered'.
What accountants and other planners fail to plan for is what happens if the oil income suddenly dries up? What happens when they've driven as much steam and frag into your ground that whatever is recoverable has been recovered?
Well, other planners would say, "Gee, you've got this mountain of cash sitting over here in CD's and stock accounts and other savings. You've still got enough so the son on the farm can continue on." The same could be said for many of the farmers who have enjoyed record incomes over the past few years.
Me? I always advise my clients to plan for the worst and hope for the best.
Yes, you have a mountain of cash and assets sitting there but what happens if you end up losing your mind to Alzheimer's or Dementia and it cost four to five hundred dollars a day to keep you in a home? How long does your cash last then?
There are two groups of professionals – athletes and doctors – who have something in common. Professional athletes are young, sign big contracts, buy a big house for the momma, and within three years of retiring from their sport, over eighty percent of them are filing for bankruptcy.
Oddly enough, another highly paid group is doctors. Doctors are notorious for making life and death decisions day in and day out, being paid a lot of money to do it, but are the worst financial planners in the world. Many of them retire with virtually nothing other than the home they owned at the time of retirement.
What happens when the ordinary human being is subjected to large amounts of income coming in non-stop over months, years, decades?
In my experience, they think they become immune to 'ordinary' problems – like death and taxes, retirement and health issues. The money keeps coming at them and they lose perspective on the reality of being a human being. Then they just stop doing what the ordinarily would have done had they been poor or just comfortable in their living without any extra cash for fun.
Low income working people and people just getting by make planning a priority – they have to in order to survive.
But when you have tens of thousands of dollars coming at you yearly or monthly, even, you start thinking you can't possibly spend all this money in your lifetime or your children's lifetime and it gets into your psyche your ten feet tall and bullet proof.
I've had people come in with enough savings and farm assets to create significant estate taxes – millions of dollars in estate taxes. The oddest thing then happens in about fifty percent of the cases.
After explaining to these clients multiple methods of lowering, eliminating or leveraging their future estate tax debt coming, half of the people say, "With the money coming in and what we have in savings, let the kids pay for it – I'm not going to do anything." It's like these people feel guilty about this wealth that dropped down from heaven and either they or their children should 'pay' a penance for having this happen to them.
I think there's a lot more than the fifty percent of the people I see reacting this way because very few people receiving this type of wealth actually even reach out for help and financial counseling.
Many people have complained about stress, about wishing we'd go back to where we were, about the problems caused by this wealth, and it is a natural, psychological phenomenon. It's been shown winning the lottery brings with it the same amount of stress as losing a spouse or your home – and bankruptcy rates for lottery winners are over sixty percent.
But in the back of your mind, there's that nagging little bit of worry and that's your common sense telling you, "Hey, you gotta back up the truck and sit down and plan for this." Because if you don't, you might be right and you've got enough cash to pay for everything – or you could be seriously wrong and didn't plan to fail – you just failed to plan.
You could end up in a nursing home, or your children could owe millions of dollars in estate taxes, or your kids are going to fight about one child getting the farm when they didn't get any. It's also been my experience the more you give to children, the more they fight with each other after your deaths.
I bring my clients and my clients children in to explain to them the plan. If there's going to be any complaining, you want to hear about it now. After your dead and the litigation begins, it's too late. Listen to that little voice in your head, take some of the money coming in now and plan for what happens if the income or assets stops, slows down or is spent on other things. Get a reality check.