Philanthropy

Awakening From Slumber: Ten Years After The Financial Crisis

Posted on Jun 27, 2018 in Community, Investments, Philanthropy, Planning, Retirement

Ten years ago I was in Rome and passed a shop on Via del Corso that sold crystal balls.  If I Image result for crystal ball shop italycould have figured out how to bring one home without setting off airport security, I would have picked one up for the office. Then when you ask me what I think will happen in the market, I can point you to my little Roman souvenir and you will be able to see the future as well as I can.

One of the closest things I have to a crystal ball is my relationship with PIMCO. In addition to being the largest bond manager in the world, PIMCO has the biggest and most geographically widespread research team I know. Most of you who work with me hold at least one PIMCO fund in your portfolio. Even if you don’t, you have heard of their research: they were the folks who came up with The New Normal to describe economic and financial life after the Great Recession. (And which you are likely using to describe any number of new trends in your own life.)

Each year, PIMCO holds its Secular Forum, a gathering of its internal investment professionals along with guest speakers to discuss and debate the state of the global economy and markets over the next three to five years. Like much of PIMCO’s team, my background is in bonds as well, in markets for which critical to understand not only an individual issuer’s ability to repay a debt, but also the longer-term trends that will affect its ability to do so. As part of PIMCO’s investment process, its Secular Forum is designed to promote new ideas and differing points of view, to look into the future for the trends they believe will have important investment implications. They meet, then they publish their results for their advisory firm clients.

The title of this year’s look at 2018 and beyond is called “Rude Awakenings.” That gives you an idea of where we are headed.

The Great Recession: Ten Years Later
After The New Normal, PIMCO dubbed the last five years (2014-2018) the “New Neutral.” This moniker described the low growth, low interest rate environment we found ourselves in world-wide, chugging along without much economic change, with your savings accounts earning next to nothing, but overall slow and steady growth in the economy.

PIMCO predicts our economy will be more volatile over the next several years than this past New Neutral period, and the global political environment will be rockier as well. Nations which worked together to combat the aftermath of the Financial Crisis are showing nationalistic tendencies, meaning it may be every-nation-for-itself when the downturn comes. Neutral no longer, we will need to be prepared for Rude Awakenings. We will need to be flexible, to be able to respond to changing conditions, and to take advantage of opportunities in the investment landscape as they present themselves.

Here are four of the Rudest Awakenings we can expect:

Rude Awakening #1: You expect the same stock market growth in the next 10 years that we’ve had since the Financial Crisis. The big question many of us are struggling with is the state of the business cycle, and when we will shift from expansion and growth to contraction and recession. PIMCO’s research points to a good chance of recession in the next three to five years, most likely sooner rather than later. It’s surprised many of us that the stock market continues to be supported at its current level.

PIMCO forecasts a downturn in 2020, though they note it could be a little later due to government spending (fiscal stimulus) on infrastructure, which means more jobs and economic growth. But because this type of deficit-spending is coming at a time late in the economic cycle when we have very low unemployment, PIMCO calls this stimulus a “fiscal sugar rush.” The “sugar rush” is the artificial high that comes from spending money we don’t have (deficit spending, thanks to tax law changes) on roads, bridges, and the like and risking overheating the economy when unemployment is already so low. This type of stimulus tends to be an expansion-killer as debt levels become unsustainable, and spending that creates deficits increases uncertainty that PIMCO believes is not yet reflected in the stock market. Any of you with kids know how bad the crash can be after a sugar binge.

The things that most affect the timing of the recession are what the Federal Reserve does to manage inflation, whether we get a rise in worker productivity, and whether the current trade spat turns into a full-fledged war.

Rude Awakening #2: Growth in worker productivity is always good for the economy  Worker productivity has been below average since the Great Recession, and while gains in productivity are typically desired as a means of expanding the economy, productivity growth can have a dark side.

Technology-driven productivity growth could extend the current period of expansion, pushing out the recession to a later year. But technology can also be disruptive to markets and the economy. In the case of new technologies, these have an additional impact on legacy companies: think Amazon and every bookstore chain you’ve ever known. New technologies often disrupt industries and displace/replace workers. This higher “technological unemployment” can lead to a populist reaction, and we’ve seen a snippet of what populist sentiment can reap in a number of countries, the US included.

Rude Awakening #3: Populism doesn’t seem to have much impact on the economy Whatever you might think about the current US administration, the American version of populism has been well-liked by financial markets. But expect a different flavor of populism if we hit a recession: Expect a more radical populism that demands redistribution of wealth or income tax increases, nationalization of key industries, and/or a protectionist trade policy.  Italy is serving up an early 21st century version today, where we’re seeing a widespread populist reaction to world events.

Rude Awakening #4: Protectionist trade policy will level the playing field for US goods PIMCO considers China to be less of a risk to the global economy now than previously, as they have re-centralized power and are exerting more control over their economy; they are less of a loose cannon now. That said, tensions over the trade imbalance with the US and over intellectual property rights are growing. PIMCO sees the US-China smackdown as the Rising Power vs. Ruling Power WWF fight of our time: In ancient times, Athens challenged Sparta, in the last century, Germany challenged Britain. Neither of these bouts ended well for the challenger, but there was a whole lot of disruption to global economic systems. China’s challenge to the US as the world’s pre-eminent power is not expected to lead to armed conflict but could lead to rude awakenings on the geopolitical front. Not even a month after PIMCO’s Secular Forum, it appears this expectation of disruption is becoming reality with escalating trade tariffs.

What Will this Next Recession Look Like?
If the future plays out in these ways, what kind of recession will we be waking up to find? The expectation is that this time, the downturn will be shallower and longer than it was in the Great Recession (December 2007-June 2009). Two things that are different now are that (1) it’s hard to rely on central banks to ride to the rescue this time, and (2) we have much greater economic inequality worldwide. The first issue means we won’t have the same solutions we had during the last downturn to help avoid a global economic meltdown, and the second issue means that more people could be affected in this next time, with seriously frayed social safety nets and little protection against great economic harm.

What To Do?
So now that I’ve given you lots over which you can lose sleep, what are you supposed to do about it? How you can prepare? Consider the following:

Get serious about paying off debt. Whether it’s credit card balances, a home equity line of credit or other non-mortgage borrowing. The next year or two is the time to get serious about paying it down. It’s going to cost you more in interest as the months go by, and you might need that debt capacity if things hit the skids.

Build up your cash reserve. If you’re working with me, I’ve already bored you with the fat cash balance I think you should have in reserve. For the rest of you: plan on setting aside a minimum of six months’ worth of expenses (12 months if you are self-employed) in a savings account, or a couple of CDs.

Start setting aside funds for planned major purchases.  You could end up getting them for cheap. One of the things about a recession is that overcapacity as the economy winds down means many goods such as cars and other big ticket items go on sale, and start to come on the market at better prices. If you can, maybe wait to 2019 or 2020 to pick up a new car or major household appliances for less.

Work on pink slip-proofing your job. You know you are doing a great job at work, but you will need to make sure others know, too. No one is immune to job loss, and if you think you’re high enough up on the food chain to avoid being sent packing, remember from the company’s perspective, getting rid of you means getting rid of your big comp package too.

Retirees need to re-assess their asset allocation. -With the next recession expected to be shallower but longer than previous ones, that means arranging your resources so that you’re not having to liquidate anything at an inopportune time. If you’re working with me, we’re building “buckets” of assets to protect your retirement draws three to five years from now. Going forward, structuring this protection becomes even more important.

Consider stockpiling your resources for charitable giving.  Our social safety net is more frayed now than it has been before, and when the recession comes, more people will need help. Demand on charity will be greater, just at a time when donors are more strapped, too. If you are charitably inclined, using a donor-advised fund to accelerate the tax benefit of your contributions is one way to stockpile funds to donate when needed over the coming years.

Take this time to reflect on what’s really important to you. This is my standard refrain. When times are good, it’s often easy to drift towards all things bright and shiny and to forget about the warm and wonderful: the people you love, the things you like to do, the experiences you want to have. It’s also a hard time to put off gratification when it seems like the whole world is on a shopping spree (they are, but it will more than likely come to no good end.)

In our always-changing world, it should come as no surprise that the next ten years will look very different from the last ten. Best we can tell, you can expect more volatility, and be prepared for a recession in the near term. The timing of a downturn is always a confluence of events that are not hard to see but whose coming together is difficult to predict. In the meantime, be cautious about getting overextended — whether stretching financially to buy a new house or taking on other debt to finance spending — and be mindful about maintaining or stockpiling a cash reserve.

Remember that there are limits to the things you can control, and the trajectory of our global economy is not one of them. Consider what you can do on the list above, and then go out and enjoy the rest of life: take a walk, see friends, hug your dog, hang out with family. These things you can do something about, and ultimately they are what really matter as well.

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Let the Debate Begin: Waiting for Tax Reform Details

Posted on Apr 25, 2017 in Community, Philanthropy, Planning, Simplicity, Tax

Now that your 2016 tax return is behind you, you might be thinking about how tax reform changes expected under the Trump Administration might affect you. We are expecting a big announcement tomorrow, but despite some advance hype of “massive” changes, we’re likely to get only minimal details. The tax code is 4,029 pages and covers a multitude of taxes and entities. Tax reform, like Repeal and Replace, is going to take longer than originally planned.

The Big Three Goals of current tax reform proposals are:

1-Reduction of the corporate tax rate
2-Lower tax rates on individuals (reducing tax brackets from 7 to 3)
3-Simplification

In general, Republican proposals strive to broaden the tax base and lower tax rates. Under the banner of freedom and personal responsibility, these proposals support the idea that government should be as small as possible, providing minimal benefits to individuals, but counter that with lower tax rates, meaning more after-tax dollars in pocket, with which people are free to do what they want.

What are the things to watch for tomorrow? Here’s what I’ll be watching for:

1. Corporate tax rate: Republicans originally wanted a 20-25% top rate, which even they felt was unrealistic. Expect Trump to hold out for the 15% corporate rate he campaigned on.

The argument for a lower corporate tax rate is one of global competitiveness. The Tax Foundation reported that the US ranks 32 of 43 countries in the OECD in terms of international competitiveness. Note that the Tax Foundation is the oldest non-profit think tank in the country, described as an “independent tax policy research center” but it is also noted for a conservative, business-friendly bias.

The top US corporate tax rate is 35%. But who really pays this? The US Government Accountability Office (GAO) issued a report in March 2016 that reviewed US corporate taxes over a five-year period. “From 2008-2012, profitable large US corporations paid, on average, US federal income taxes amounting to about 14% of the pretax net income that they reported in their financial statements. When foreign and state and local income taxes are included, the average effective tax rate across all of those years increases to just over 22%.”

One of my sources for tax policy research is the Tax Policy Center (TPC), a nonpartisan joint venture between the Urban Institute and the Brookings Institution. From TPC’s perspective, a 15% corporate tax rate would make the US one of the lowest corporate tax regimes – until other countries cut their own rates, as they did after the Tax Reform Act of 1986. It would also create a ginormous loophole for high-income individuals. Under the Trump proposal, the 15% rate would apply to partnerships and sole proprietorships, which would create a huge path for tax avoidance by sheltering wages through such an entity. If the new rules let pass-through entities, such as sole proprietors and LLCs (like this firm) be taxed at the lower corporate tax rate, then that benefits me (and dentists).

Let’s be clear about how this works: it’s not like there is one bucket for corporate tax receipts, and a separate one for individual tax payments, and yet another for payroll taxes. All tax receipts go into the same bucket, and go right out again to pay our collective expenses. Those countries with lower corporate tax rates also have much higher personal tax rates. (The plan in the US is to cut those too – at least at the very top levels. You can guess where this is headed.)

The one bright idea in corporate tax reform proposals is to tie corporate tax rate reform to reform of individual tax rates, potentially aligning rates and eliminating this type of income-shifting loophole.

2. Fewer tax brackets for individuals: The idea is to simplify the tax system. The following chart shows how your tax bracket might change under the proposed simplification.

By the way, this doesn’t come without a cost. The deficit is expected to increase by $6 trillion in 10 years. That’s more than a 25% increase. Your kids and grandkids get to figure out how to pay for that.

Ultimately what you care about is what you have in your pocket, as well as what things you have to pay for (health care, city services, college, retirement, etc). While marginal tax brackets are expected to change, if some deductions and exemptions are eliminated as expected, you could end up paying more in taxes. Fortune magazine took a look at the impact of expected changes on take-home pay, and this is the result:

If you’re in the Top 1% of earners, this works for you.

Hand-in-hand with the compressed brackets are higher standard deductions ($15,000 for a single filer, $30,000 for marrieds).  The higher standard deduction could make your tax calculations simpler by eliminating the need to itemize.  It may also make your tax liability higher, and remove incentives for certain spending and investment.

3. Deductibility of state income tax:  One of the items on the chopping block is the deductibility of state income taxes. Let’s not kid ourselves about this being payback to states that went blue and voted for Clinton. The states most effected: California, New York and New Jersey.

That said, Trump is not the only President to use tax reform to rectify political slights. We have the current rule on the non-deductibility of donations to not-for-profit organizations with a political agenda because President Lyndon Johnson was miffed over a preacher literally using his pulpit to bully Johnson. Trump has suggested repealing the Johnson Amendment, which essentially shut down lobbying activity by 501c3 organizations.

But if you don’t have itemized deductions of at least $30,000 for a married couple (or $15,000 for a single filer), it might not make that much difference to you, and might simplify your tax return.

4. Deductibility of mortgage interest: This is a classic middle- to upper-income deduction on the block. Each household can deduct mortgage interest on mortgage indebtedness up to $1,100,000 on up to two homes (that means loans totaling up to $1.1 million, not a deduction of $1.1 million). So mortgage interest on your house (and vacation home) is deductible up to these limits. What if you hold a multi-million loan on your home? Or own more than two homes? You’re not able to deduct that interest anyway. No skin off your nose.

5. Cap on total itemized deductions & 6. Deductibility of charitable donations: One proposal last summer from House Republicans suggested eliminating all itemized deductions except those for home mortgage interest and charitable contributions. The latest scuttlebutt puts charitable donations on the chopping block too. Or at least capping them.

Trump campaigned on capping all itemized deductions at $100,000 for single people and $200,000 for couples. You might not care about this one either, if you’re not making seven figures. But a lot of support to not-for-profits comes from higher earners. A taxpayer making over $1 million paid an average of $260,000 on state and local taxes according to the TPC. At this point, this taxpayer’s itemized deductions would be capped, eliminating the tax incentive for charitable giving by high earners.

One of the arguments made by those favoring smaller government is that people should have the choice of how their money is spent, and if they want to give to social services and other philanthropic causes, they can give to charity directly. Congress created the charitable deduction 100 years ago this year, to incent Americans to support their communities. With smaller government and a capped or eliminated charitable deduction, the landscape of American society will fundamentally change.  If you are in the camp that believes an American spirit of generosity is in part responsible for the success of capitalism (as I am), things won’t be changing for the better. The “compassionate conservatives” in the Republican Party won’t be happy with the reduction in tax incentives for charitable giving either, as it would affect donations to religious organizations.

7. Limits on donor-advised fund deductions: It’s unlikely we’ll hear anything tomorrow on this detail of the tax code. There are already some limits based on income for large charitable contributions, either directly to an organization or to a donor-advised fund (DAF). A DAF allows a taxpayer to “bunch” deductions for future charitable contributions into a single tax year. I recommend DAF contributions to charitably-inclined clients when they have a windfall, to off-set some of the tax they would otherwise pay in that year. Proposals here have included a time limit on the pay-out of DAF money through grants. Under current law, there is no limit on how quickly you need to make donations from a DAF; some proposals are suggesting funds be distributed to charities in 5 years.

Simpler is not always better. In my view we have the wacky tax code we have due to the same strong special interests we have always had, and because our economic world has grown more complicated. If you think about the tax code as a tool to incent certain behavior, as an example, you get to deduct your mortgage interest and property taxes because as a society we think it’s better for wealth building and maintaining capital stock for individuals to own their own homes. We have other tax rules to rectify imbalances, such as the Alternative Minimum Tax (AMT), which was created because in 1962 it was discovered that a bunch of millionaires were paying no tax, and that seemed unfair. That it was not inflation-adjusted and had unintended consequences years later doesn’t mean it was a bad idea, it means it needed to evolve as the economic landscape did.

For a quick overview of the three main proposals and detail on some of the main changes up for consideration that you may hear about tomorrow, check out http://www.taxpolicycenter.org/feature/preparing-2017-tax-debate

Remember that Trump views himself as a disrupter and a master negotiator, and as such, he’s not likely to start with a centrist proposal meant to bring everyone into the fold. Once we do have a detailed bill to consider, the legislative process begins. That means lots of hearings, followed by changes, more review and comments before the House then Senate vote. But Democrats in Congress are not aligned, and Republicans  may attempt to push through a tax bill with only Republican votes, though they may not have enough.

Alternatively, Republicans can use the Budget Reconciliation process to overcome this legislative hurdle. There are many rules that need to be followed, but it’s possible we’ll get tax reform this way. We got the Affordable Care Act this way under Obama and the 2001 tax cuts under Bush.

To date, there has generally been strong support for tax incentives for retirement savings, home ownership, and some charitable giving. Under the proposals being floated thus far, these tax-preferenced items are expected to have less value in the future.

We’ll find out more tomorrow.

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Tax-Diversify Your Portfolio Part 3: Back-Door Roth IRAs – Advanced

Posted on Apr 1, 2014 in Philanthropy, Tax

For those of you with income higher than the limits to contribute directly to a Roth IRA, you can still achieve tax-free savings through a “back door” Roth strategy: contributing first to a Traditional (non-deductible) IRA, followed by conversion to Roth.

This “Contribute-then-Convert” strategy provides a tax efficient way to tax-diversify your accounts provided that you do not have other IRAs that contain pre-tax contributions.   These IRAs with pre-tax savings include rollover IRAs from 401ks or 403bs, and SEP-IRAs from self-employment.  The existence of these other IRAs changes the math involved in the conversion calculation, and lessens the tax efficiency of the strategy.  The non-taxable part of a Roth contribution is calculated according to the following formula:

 

Tax basis of all IRAs

——————————————————            X   Amount of IRA converted to Roth = NONTAXABLE

Value of all IRAs at end of year of conversion

 

Example: If you had contributed $11,000 to a Traditional IRA (and taken no tax deduction), you have an IRA with a tax basis of $11,000 (the total of after-tax contributions).  If you convert that IRA to a Roth when its value is $11,050, the non-taxable part of the conversion is ($11,000 / $11,050) x $11,050 = 0.9955 x $11,050 = $11,000.  $11,050 converted – $11,000 not taxable = you’ll owe tax on $50.

Example: Same facts as the previous example, but now let’s say you also have a rollover IRA (all pre-tax savings from a 401k) valued at $100,000. If you convert the $11,050 IRA to a Roth, you’ll have to include the $100,000 balance of the rollover IRA. In this case, the non-taxable part of the conversion is ($11,000 / $111,050) x $11,050 = 0.0991 x $11,050 = $1,095.  $11,050 converted – $1,095 not taxable = you’ll owe tax on $9,955.

In each case, you only converted $11,050 to Roth, but the tax consequences were vastly different, given the presence of the other IRA money.

 

If you have other IRAs with pre-tax savings that will dilute your Roth conversion, there are some things you can do.  The effort to tidy up accounts to lay the foundation for a tax efficient Contribute-and-Convert strategy is not immaterial.  But the long-term benefits are numerous:

  • Never having to take taxable required minimum distributions
  • Tax-free compounding on savings until you need the money
  • When you need your Roth savings, you can take it out tax free
  • Your heirs can take it out any income from a Roth you leave them tax free
  • A Roth can reduce the impact of the new American Taxpayer Relief Act of 2012 (“ATRA”), which brought back the phase-out of itemized deductions and gave us the new net investment income tax
  • If you believe your accounts will grow in value, converting a smaller account balance results in a smaller tax liability today, with any future growth now occurring in a tax-free account

Here are some tips if you find yourself in a Roth conversion situation complicated by other IRA assets:

 

Planning Tip #1: If You Have an Old IRA – Roll It to Your 401k

Many employer plans will accept rollovers of previous employer’s plan balances.  If you rolled a previous employer’s 401k or 403b to a rollover IRA, check with your current employer’s plan administrator to see whether you can roll those old retirement plan funds into your current plan.  You need to complete this “roll-up” of your old 401k/403b into your current plan in the tax year before you convert any other IRA balances to Roth. One drawback of using your existing employer plan is that will be limited to the investment choices in your plan. 

 

Planning Tip #2: If You Have an Old SEP – Roll It to Your New Solo 401k

If you are self-employed, you can use a variation on Tip #1.  While a SEP-IRA would be included in the Roth conversion calculation, a Solo or Independent 401k (available to self-employed workers) would not be.  You can roll a SEP into a Solo 401k, and that takes the SEP-IRA out of the Roth conversion calculation, provided you moved the SEP to the Solo 401k in the tax year before the conversion of any other IRA balances to Roth.  Note that here you would not necessarily be limited in your investment choices.

 

Planning Tip #3: If You Have an Old IRA – Accelerate Charitable Giving

If you can’t move an old IRA with pre-tax savings into a qualified retirement account (i.e., 401k, 403b) and you are charitably inclined, you could accelerate your charitable giving using a donor-advised fund (DAF)  to “bunch” future years’ giving into the tax year of the conversion.  You need to consider your long-term financial needs, but if you can afford it, your contribution to a DAF in the year of a Roth conversion can help off-set some of the tax from the conversion. 

 

Planning Tip #4: Note Each Spouse Treats His/Her IRAs Separately

Sometimes one member of a client couple can do a tax efficient conversion, while the other cannot, so we look at conversion of each person’s accounts.  Note that the Roth conversion calculations for couples is based on what each spouse owns;  if he has a rollover IRA that would make a Roth conversion strategy less tax efficient, and she has no rollover IRA, she can do a tax efficient Roth conversion.  His rollover IRA does not affect her Roth conversion calculation, even if they are filing a joint tax return.

 

Satori Financial LLC has been working with clients over the past several years to clean up their IRA accounts, rolling them into existing 401k and other employer plans where possible when the investment choices in those plans are solid, to great tax advantage.   The rules can be complicated, so proceed with caution, or better still, seek advice from a tax professional familiar with Roth IRA conversion strategies.  Contact Satori Financial LLC to see how we can help you. 

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Getting Kicked Out of the Tribe, Part 1: You’ve Struck it Rich

Posted on Apr 28, 2013 in Community, Family, Philanthropy, Relationship

Congratulations. You’ve won the Google/Facebook/Amazon lottery. You got in on the ground floor of a successful company, you’ve worked hard, and it’s paid off. So what’s the downside?

Unless your entire social circle consists of co-workers enjoying the same liquidity event, you will likely experience shifts in your Tribe. That group of people you depend on for social connection, feedback, belonging, and the occasional phone call at 3:30 in the morning for bail money. That’s your Tribe. You’ve typically accumulated them over time based on shared experiences, or from a particular, notable point in your past. These are the friends you’ve had since kindergarten, the buddies you hung with in college, your cohort at that first job.

Even if the members of your tribe all won the lottery along with you, family members might see you differently, and expect different things from you. Take an extreme case, that of Michael Jackson and his family. Jackson was a hugely talented, hard-working artist whose success was deemed by his family to belong to them collectively. He was most conflicted about how to help his mother, Katherine, a fight many successful kids face. His painful struggle was meticulously and poignantly described in Randall Sullivan’s biography, Untouchable: The Strange Life and Tragic Death of Michael Jackson. Four years after his death, Jackson is still in the news, and his family is still fighting to get what they feel is theirs. (Katherine Jackson’s wrongful death suit against AEG, Jackson’s concert promoter, seeks damages based on Jackson’s future earnings potential, estimated to be $40 billion.) Jackson’s effort to make everyone happy took its toll as the extended family piled on to let his wealth support their lifestyles. Expectations regarding what you can do for family now that you’ve hit the jackpot can create new tensions in these relationships.

What Happens When You Come into Money
Any major shift in one’s personal circumstances is accompanied by a shock to the system. New money often comes with a rush of emotions: euphoria, guilt, fear, numbness, relief, feeling unworthy, depression. Making financial decisions in an emotional space is never wise, so first give yourself some time to adjust. Don’t spend it all, don’t give it all away; you can do these things later on if you still want to. Right now, wait, and do some research on getting help to sort out your financial options.

Once it becomes known you’ve hit the jackpot, you are a target. A target for scam artists, money-seeking paramours, friends and distant and not-so-distant family who may have a changed view of you. Part of my work involves helping clients given away their excess – helping them design a philanthropic strategy to improve the parts of the world they value most. In the beginning, I was impressed with those who gave anonymously. I felt slightly guilty that personally I wanted the credit for my own donations. But often these lists of donors are targets for salespeople, scammers and highly specialized professional lawsuit creators. These donors were giving anonymously perhaps because they didn’t need the validation of seeing their names in the annual report, but in large part they were giving anonymously to protect themselves.

You Will Need to Work to Keep the Friends Who Matter
Most celebrity success stories – those people who manage to skirt the ego-engorgement and excesses that often come with renown — have a Tribe that goes back to their pre-fame days. These are the people who will laugh in your face when you get a little too full of yourself. Who will be there to bounce ideas off of, with no vested interest in the result other than trying to give you the best advice they can. They are the people who liked you even before you came into money or fame. These are the people who know you, and can call out when something you’re suggesting doesn’t fit with who they know you to be. They will remind you who you are.

Once you’re surrounded by people who are on your payroll (for real, or just every time you’re picking up the tab) it becomes very hard to know whether they are telling you the truth. An early Microsoftie who signed on in the late ‘80s retired several years later at 33. He found himself surrounded by a great group of people who enjoyed a lot of the same music, the same clubs, the same lifestyle he did. Until the tech bust wiped out his ability to buy them drinks. Suddenly he was dealing with a personal financial crisis that turned his world upside down and a time in which needed friends the most. Turns out that’s when they needed him the least. He was alone in his house, sorting out what was left of his portfolio, including a hefty tax bill, with no one to turn to for support.

What to Do?
•  Recognize that your friends will not be able to keep up.  You might pick up the tab from time to time, but the friends that are worth keeping won’t want to be on your payroll. Consider mixing up time in the VIP suite at the Giants game with lunch at a food truck to maintain some reciprocity in your relationship.
•  Be aware that you will attract attention. Buy that Model S and you’ll get attention. Carry that Prada bag and you’ll get attention. Move into that posh place in the city, and you’ll draw attention. That’s not always a bad thing, but recognize that it becomes more difficult to discern the draw of your charm from the draw of your dough.
•   See an estate attorney. You might not yet have stuff to protect, but you have moved into a situation in which establishing trusts to protect financial assets could make sense. You may also want to shield future acquisitions of property from the probing eyes of others.
•  Take a minute to think about what a shot at what financial freedom really means. The first question I ask new clients is what they would do if they were financial free. Money is no longer an issue. What would you change in your life? Would you change anything? Continue to work? Focus on different things? Retire? Can you really handle 50+ years of golf? Include everything – things, people, experiences — you think you want. Now is the time to consider how you really want your life to look.
•  Recognize that building new relationships will be challenging. I think this is the hardest part of new money. How do you want to develop relationships going forward? It might be easy to offer to buy lunch, treat a friend to a show, or try in other ways to even the playing field. But are you trying to make things more even between friends, or subtly buying affection? What are you worth to your friends, new and old? Do you feel you have something to offer besides money? Recognize that you may literally buy in to new groups to which access comes with money, but these relationships are based on a monetary foundation. They may evolve into more, but don’t confuse buying access with earning acceptance.

Education is your best defense against missteps that can derail your good fortune. Finding a financial advisor who can offer objective analysis and support over the course of your transition to your new circumstances, and a sounding board for decisions going forward, can be hugely beneficial. At a minimum, your advisor can be the “bad guy” who you can blame for not being able to fulfill the demands or other financially questionable requests from others. Fee-only financial advisors offer their advice free of conflicts from selling specific products, and many offer holistic planning that incorporates aspects of your financial life beyond your portfolio, including taxes, residential real estate, asset protection, charitable giving and long-term planning. You can search for a fee-only financial advisor in your area through the National Association of Personal Financial Advisors (NAPFA): http://www.napfa.org/index.asp

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