Too many assets a nice problem: Do like Warren Buffett and set up a philanthropic trust

IF you have a burning money issue, or want to win a fight, put your questions to Barefoot Investor.

06/02/2009 BUSINESS: Scott Pape. The Barefoot Investor. HWT staff.

QUESTION: When I was younger I was very tight with my money — much to my friends’ disgust. I worked several jobs and drove an old car. I’m now in my late 40s, with several million dollars in super along with other good assets and a business that produces income much greater than I need to live on. What do I do with my money from here? Given our situation I feel the need to help others, especially overseas aid organisations. Leaving too much to the kids seems counter-productive.

Basil

ANSWER: I totally agree with you. So does Warren Buffett, who said: “I still believe in the philosophy ... that a very rich person should leave his kids enough to do anything but not enough to do nothing.” Better yet, I’ve spent time with Buffett’s son and grandson, and they both appear to be well-adjusted, hardworking guys who appreciate the value of a buck. Like everything the Oracle of Omaha does, it didn’t happen by chance. In the early years his kids went to public schools and they lived in a modest suburban home that Buffett still lives in today. when they were older he charged them with the responsibility of funding worthwhile community projects. So on a practical level I’d encourage you to set up a philanthropic trust, the technical name for which is a “private ancillary fund” (PAF). You need about $500,000 to set up one, and it will be tax deductible. Then you can have a positive discussion with your kids about your family’s legacy, and the projects you’re passionate about.

 

IF IT SMELLS LIKE A SCAM ... IT IS

Q: Does this sound legitimate to you? Recently I received a phone call from someone selling software that, supposedly, predicts movements in the gold price. They promised that if I bought the software it would earn me 11 per cent every month by telling me when I should buy and sell gold. But it smelt quite fishy to me! The software costs $15,000 to buy and there was a lot of pressure to sign up for it there and then, as “only 1000 software packages are available”. Is this some sort of scam?

Troy

 

A: Yes, it is.

 

HARD TO HEAR, BUT STOP BEING A CHUMP

Q: My financial adviser had to let me go because ASIC stopped him from advising on margin lending. I have a margin loan from Commsec which is secured against my house, which I invested into a diversified managed fund from MLC. Then I used the MLC investment as security to borrow more money to invest directly in shares. So far, so good — the shares are growing at 10 per cent per annum and my interest and fees are tax deductible. Should I continue to fly solo, or should I hunt down a new adviser to help me?

Gary

 

A: It’s very unlikely you’ll find an adviser to take you on — because your strategy is stupid. In fact, it’s got a lot in common with Storm Financial, which wiped out many families’ entire life savings when the market took a dip. You’re obviously not a sophisticated investor, and that’s why your adviser is quite right to be running away as quickly as he can: you’re a lawsuit waiting to happen. If the market falls, and eventually it will, you’ll lose your investments and a big chunk of whatever equity you have in your home. I doubt you’ll listen to me, but my advice would be to sell your investments and pay down your loans. If you want to be adventurous, wait until the market has its next crash, and then use a line of credit on your home loan to gear in the market. History shows that’s how you’ll make big money. Until then, stop being a chump.

 

COP IT ON THE CHIN, PAY DOWN MORTGAGE

Q: Four years ago I paid $330,000 for a one-bedroom flat in southeast Melbourne. Now I would like to sell and move to a bigger place, but I’ve just been told by the real estate agent that it’s now only worth $310,000! What the heck was the point of being a homeowner for the past four years and paying more than $40,000 off my mortgage when I won’t get back what I paid for the unit? I am single with no debts, other than the mortgage, with a salary of $78,000 a year. What should I do?

Kelly

 

A: I expect to start getting a lot more questions like yours, though not until the market begins slowing down! It sounds like you may have purchased off the plan. If that’s the case, the developer’s profit margin was wrapped up in the price you paid (which is why I don’t advocate it, in most cases). Despite what you might read, houses aren’t lotto tickets: they don’t automatically go up each year, and there are significant upfront costs. That’s why property, like stocks, should be a 10-year plan — anything less than that is a gamble. As for what to do now, I’d say don’t sell just because the price has gone down. What you need is some independent advice from an independent valuer. If it turns out you’ve been sold an absolute dog (always a possibility), it’s unlikely it’ll lose any fleas as it gets older — so now might be a good time to flick it. But if your apartment is just acting like any normal long-term investment. I think you should act like a grown-up and cop the short-term paper losses on the chin. You’re single, living in the middle of the city, and can afford the repayments, so you should stay put for at least five years and pay down your mortgage.

 

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Originally published as Too many assets a nice problem: Do like Warren Buffett and set up a philanthropic trust