The financial meltdown has forced many wealth individuals to reevaluate how they finance their children’s future.

They don’t want to create trust fund babies or raise financially irresponsible adults.

This is especially true since the financial meltdown, said David Keator, a partner at the Keator Group in Lenox, Mass., who works with high-net-worth individuals.

He said that the spending spree is over. People have to be more careful about their budgets and their savings rates. In light of this, Keator has been helping his clients find creative solutions that demand that the children of affluent individuals take some responsibility for funding their own educational needs.

“How do we take care of children’s education without enabling them?” asked Keator. “You want to make sure they’re being fiscally responsible to themselves and their future.”

For example, Keator mentioned a single mother who had been widowed at a young age. She put her three children through college, but decided they should pay for graduate school themselves.

One of her sons went to medical school and got as many loans as possible, but wound up graduating with $50,000 in credit card debt. “I would never advocate credit card debt but there was no other solution,” Keator said. “He got as much loan money as he could.”

Keator helped the mother and son come up an arrangement. The mother agreed to lend her son $50,000 at 5% interest to pay off his credit card debt. The son paid a lot less in interest and saved about $1,000 a month, and she earned a better interest rate in a low-interest rate environment.

“She provided him and herself with a better cash flow and hasn’t enabled him or created a moral hazard by just paying for his med school,” Keator said.

Another example Keator mentioned was of a wealthy couple who had no children, but lots of nieces and nephews, for whom they set up an educational trust, but there were strings attached.

If after the first semester, the children scored all B’s or better, the aunt and uncle would pay for the next semester. If the child had only four out of five Bs or better, the aunt and uncle would pay only 80% of the next semester and so on.

One of the nieces failed out of college, but when she worked through her issues, she wanted to go back to school and asked the aunt and uncle for help. Not only did they agree, but after the niece went to a community college and got all As, her aunt and uncle paid for her to attend an Ivy League school the next year.

What’s so significant about this strategy is that the couple were holding their nieces and nephews accountable for their actions and decisions without being punitive, Keator said. “They didn’t penalize her for dropping out, but they said if you get your act together and we will help you again,” he said. “She was empowered to make good decisions but not enabled to point where it all falls apart.”

Another of Keator’s clients had a son-in-law who lost his job about a year ago and decided to go back to school to get additional training and become more marketable in his field. He took out a $30,000 Sallie Mae adjustable rate loan at 15%. Fortunately, as interest rates fell the loan interest rate also fell, to 7%.

When he finished his training, the son-in-law wanted to pay off the debt and was thinking of selling his Roth IRA to do so. The client wanted to help but wanted the son-in-law to exhaust all other avenues first because they wanted to teach the kids to be as independent as possible.

Keator’s office reviewed the situation and found that the children had a chunk of equity in their house and a 5.5% adjustable-rate mortgage. They advised him to leave his Roth IRA alone and refinance the house instead. This way, the son-in-law was able to pay off the loan from equity in the house and restructure that portion of the debt. In the process, they reduced their mortgage from a 5.5% adjustable to 5% fixed rate mortgage and effectively reduced his interest payments from 7% adjustable to 5% fixed. The wealthy covered the closing costs.

“They could have written a bigger check,” Keator said, “but they were more concerned about teaching the children to take responsibility and not become used to getting bailed out financially.” The upshot? The son-in-law got a better job.


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