Real Life Application
Today, I am going to continue our theme of 2025: Practical Application. I know that sometimes money topics can get quite philosophical, and we can lose the connection between concept and application. So, today, I seek to give the framework behind my thinking and how you can apply these financial truths to your financial life.
So, where should we start? How about one of the most well-known parables from Jesus?
Reckless Living
I am sure many of you are familiar with the Parable of the Prodigal Son. I want to unpack this parable not from a Sunday morning pulpit perspective – no intentions to feather out the theological meaning here – but rather a look at the parable from a simple face value approach.
The parable kicks off in a dramatic fashion:
And he said, “There was a man who had two sons. And the younger of them said to his father, ‘Father, give me the share of property that is coming to me.’ And he divided his property between them. Not many days later, the younger son gathered all he had and took a journey into a far country, and there he squandered his property in reckless living. And when he had spent everything, a severe famine arose in that country, and he began to be in need. (Luke 15:11-14)
In just one quick paragraph, a son requested his inheritance early, set off on a journey, spent it all on “reckless living,” and found himself in need. I draw one simple conclusion here: a windfall of wealth without experience and education can be dangerous.
The Windfall Principle
This windfall principle applies beyond the reaches of this parable.
In 1996, the Boston Celtics drafted 19-year-old Antoine Walker with the 6th pick of the NBA draft. Over the next 13 seasons, Walker had career earnings of $108 million. In 2010, Walker filed for bankruptcy, and as he described it, “I came into the league at 19 years old, I came from humble beginnings, so I was not used to having money at all.”
In a look at lotto winners, CNBC notes, “The CFP Board of Standards says nearly one-third of lottery winners eventually declare bankruptcy, and lottery winners are more likely to declare bankruptcy within three to five years than the average American.”
Again, windfalls can be dangerous and lead many to “reckless living.”
Priceless Lessons
As I have stated here on TOM countless times, most of the clients I serve have a financial plan that represents a meaningful surplus at the end of life. For many of these clients, we have spent hours devising the most suitable and fitting estate plans to match their legacy wishes. For their heirs, there is a windfall on the horizon.
When I zoom out and I study the prodigal son, Antoine Walker, and the general fate of lotto winners it seems like a common theme does surface – a lack of education and a lack of experience. The foundation of financial wisdom is paved with some basic financial education and the opportunity for one to practice that education with actual money. Why does the “having some money” part matter? Because everything is well and dandy when studied within the vacuum of a textbook, but as we all know, you need some financial mistakes under your belt to learn some of these priceless lessons. It’s best to make those mistakes with a little bit of money versus a lot of bit of money.
What Then Shall We Do
So, if you are an investor that has saved well and planned well, and you are forecasting some leftovers on this side of heaven – what should you do to equip the next generation?
- Give Now
The current tax code allows you to give a certain amount each year to an individual without any reporting requirements, tax consequences, or needing to dip into your lifetime giving exemption. For 2025, this amount is $19,000. To me, this is low-hanging fruit. You can give to your heirs today in smaller bite-sized increments to allow them to get some experience with money – let’s call it a “breezefall.” To even give them some room to make some mistakes and to learn how to manage their money wisely. Note, one individual can give to one other individual that $19,000 figure, so based on math, a married couple could give another married couple $19,000 x 4, which is $76,000. You can do the math beyond this with grandchildren, etc. - Direct Payments
Again, those gifts described above are a great opportunity to build familiarity, responsibility, and general experience with money. The IRS gives you another generous freedom (rare statement, right?) when it comes to covering education or medical expenses. Qualified expenses in these two categories – education and medical – can be paid directly to the institution without using any of your annual or lifetime exemption limits. To me, this is a great opportunity to pull some of that future windfall into today and to be able to direct those funds to key expenses without limits. A reminder here: one needs to pay these institutions directly to avoid this being categorized as part of the annual gift. - Introduce Your Advisor
The first two ideas were related to modest ways to move some of that future inheritance into something accessible but not excessive today. We also want to remember to equip the next generation with education. My encouragement here is simple – introduce your heirs to your advisor. Your advice relationship should include education, advice, and guidance for your whole family. Your advisor can help to build some of that foundational education for your heirs. This education, in concert with some experience, will give them the best shot at financial success. Also, as we all know, advice coming from someone who is not mom and dad sometimes has a higher adoption rate 😊.
Set Expectations
I will close out with one last piece of advice, and that is around the importance of setting expectations. If you plan to implement any of the ideas I have described, I want to encourage you to set a timeline for your commitments. Use phrases like, “Your mother and I have decided to give you $19,000 for 2025 – I am not sure we will do this in the future, but we know we want to make this gift for this year.” Sometimes your financial circumstances will change, and sometimes you will want to pivot based on how you want to equip that particular heir. There are a lot of variables at play here, and you don’t want to build a perpetual expectation behind your gifts.
I remember being 18 years old and having an “emergency” credit card my parents gave me. My mom covered the monthly bill, and this card created a nice little safety net for gas, food, etc. One day, my parents said they couldn’t help out in this way anymore, and I felt like the rug had been pulled out from under me. I had built an expectation that this card would always be there for me, and I started to feel some financial anxiety. My reaction and bitterness toward this change was immature, and looking back, I realize it would’ve been better if we set some better guidelines and timelines around these training wheels I had become dependent on.
So, be sure to overcommunicate, give the reason and heart behind these gifts, and set the right expectations. As you might know, money has a reputation for creating rifts between family and friends.
With that said, this is the conclusion of my Thoughts On Money for today. Feel free to email me any follow-up questions or comments.
Until next week…
