Sometimes the way to ease into a conversation with aging parents about money and their plans for the future, is to start by discussing your own. You want to know about their will or retirement finances? Start by explaining your own plan, how you’ve decided to set up your estate and then ask what they’ve done for themselves.
Fifty is a little on the late side to start taking care of these important life matters. However, it is better late than never. It’s easy to put these tasks off, since the busyness of our day-to-day lives gives us a good reason to procrastinate on the larger issues, like death and our own mortality. However, according to Charlotte Five’s article “For ultimate adulting status, have these 10 documents by the time you’re 35,” the time to act is now.
Here are the ten documents you need to get locked down.
As life changes, you need to periodically review your estate-planning documents and discuss your situation with your estate planning attorney.
WMUR’s recent article, “Money Matters: Reviewing your estate plan,” says a common question is “When should I review my documents?”
Every few years is the quick answer, but a change in your life may also necessitate a review. Major life events can be related to a marriage, divorce, or death in the family; a substantial change in estate size; a move to another state and/or acquisition of property in another state; the death of an executor, trustee or guardian; the birth or adoption of children or grandchildren; retirement; and a significant change in health, to name just a handful.
When you conduct your review, consider these questions:
- Does anyone in your family have special needs?
- Do you have any children from a previous marriage?
- Is your choice of executor, guardian, or trustee still okay?
- Do you have a valid living will, durable power of attorney for health care, or a do-not-resuscitate to manage your health care, if you’re not able to do so?
- Do you need to plan for Medicaid?
- Are your beneficiary designations up to date on your retirement plans, annuities, payable-on-death bank accounts and life insurance?
- Do you have charitable intentions and if so, are they mentioned in your documents?
- Do you own sufficient life insurance?
In addition, review your digital presence and take the necessary efforts to protect your online information, after your death or if you’re no longer able to act.
It may take a little time, effort, and money to review your documents, but doing so helps ensure your intentions are properly executed. Your planning will help to protect your family during a difficult time.
Reference: WMUR (January 24, 2019) “Money Matters: Reviewing your estate plan”
We’re all going to die someday. That’s one of the only certainties in life, along with taxes. However, a recent study by Budget Insurance found that 82% of millennials don’t know the purpose of life insurance—despite the fact they’re aging, starting families and dealing with more complex financial situations.
Forbes’ article, “Why Older Millennials Need To Start Taking Life Insurance Seriously,” notes that, although most millennials may not have given life insurance much thought before, it’s now time to begin taking life insurance and other estate planning more seriously. To help with this, more companies are starting to take millennials seriously, when it comes to financial matters. The result? It’s getting easier than ever before to get life insurance.
Life insurance is used to protect your family financially, in case of your death. That is important for millennials who are starting families that depend on them financially.
According to Pew Research, 60% of families depend on dual incomes and just 31% of families rely on a single income. A total of 91% of families in the U.S. require the income of at least one spouse to survive. However, what happens if one (or both) die? That’s where life insurance comes into play.
Because millennials are still relatively young, getting life insurance is very cost effective. In addition, for the vast majority of millennials, a simple term life insurance policy will do the job.
Term life policies are very inexpensive and can be a financial relief, if they’re ever actually needed.
It’s possible to get a $1,000,000 term life insurance policy for about $40 per month, depending on your age and health. That is quite a bit of insurance for little expense.
With the increase in millennials who require life insurance, many insurance companies are making buying life insurance very easy.
These companies have online or app-based solutions that focus on speed and ease of use. These companies leverage technology and keep human interaction to a level that most millennials like.
Reference: Forbes (January 26, 2019) “Why Older Millennials Need To Start Taking Life Insurance Seriously”
Increases in the estate tax exemption has an impact on how some people are thinking about life insurance, says ThinkAdvisor in the article “Estate Planning Is Still Important.” However, before making any changes, consider the larger picture and think long, not short, term.
Let’s start with why many people buy life insurance policies. As young parents, they buy life insurance so a surviving spouse and family will be able to continue to live in their home, pay the mortgage and send children to college. Another reason for life insurance is to cover the cost of estate taxes.
Remember the new higher estate tax exemption is federal. Your heirs may still have state estate taxes and inheritance taxes, depending upon where you live. Having an insurance policy will still help with the costs of settling an estate and paying any taxes that are due.
The new tax exemption also has a sunset date. The year 2026 may seem far away. However, it will arrive, while we are busy with our lives. It may be much harder and more expensive for an individual to purchase a life insurance policy in 2026 than it is right now.
If someone is very old or in ill health, they have a different window of time for planning. However, if you are in your middle years or relatively healthy, now is not the time to put off purchasing life insurance or to let an existing policy lapse.
We know that political landscapes change. If they do, and you want to buy a policy, there may be additional obstacles in the future.
Life insurance also serves as a tool for your estate. If your estate plan seeks to distribute an inheritance equally from assets in a traditional IRA, life insurance can become an equalizer. Let’s say one child is in a much higher tax bracket than the others. Upon receiving the IRA, they will have to pay more in taxes than the others. The child in the lower bracket will end up with a larger sum of money, having lower taxes on their inheritance. This could lead to sibling arguments, which are not uncommon when brothers and sisters become heirs. The insurance policy proceeds can be used to make up the difference.
Another point to consider is who owns the insurance policy? If it is owned by a trust, you may not have the legal right to make a change. If the trustee does not agree that the policy should be liquidated or cancelled, they may not allow the change to go forward.
Your estate planning attorney will be able to review your life insurance policies, when she reviews your overall estate plan. Each part of an estate plan works best, when all parts work in concert.
Reference: ThinkAdvisor (Jan. 11, 2019) “Estate Planning Is Still Important”
There are some individuals who just aren’t interested in handing down their assets to the next generation when they die. Perhaps their children are so successful, they don’t need an inheritance. Or, according to the article “Giving your money away when you die: 10 questions to ask” from MarketWatch, they may be more interested in the kind of impact they can have on the lives of others.
If you haven’t thought about charitable giving or estate planning, these 10 questions should prompt some thought and discussion with family members:
Should you give money away now? Don’t give away money or assets you’ll need to pay your living expenses, unless you have what you need for retirement and any bumps that may come up along the way. There are no limits to the gifts you can make to a charity.
Do you have the right beneficiaries listed on retirement accounts and life insurance policies? If you want these assets to go to the right person or place, make sure the beneficiary names are correct. Note that there are rules, usually from the financial institution, about who can be a beneficiary—some require it be a person and do not permit the beneficiary to be an organization.
Who do you want making end-of-life decisions, and how much intervention do you want to prolong your life? A health care power of attorney and living will are used to express these wishes. Without these documents, your family may not know what you want. Healthcare providers won’t know and will have to make decisions based on law, and not your wishes.
Do you have a will? Many Americans do not, and it creates stress, adds costs and creates real problems for their family members. Make an appointment with an estate planning attorney to put your wishes into a will.
Are you worried about federal estate taxes? Unless you are in the 1%, your chances of having to pay federal taxes are slim to none. However, if your will was created to address federal estate taxes from back in the days when it was a problem, you may have a strategy that no longer works. This is another reason to meet with your estate planning attorney.
Does your state have estate or inheritance taxes? This is more likely to be where your heirs need to come up with the money to pay taxes on your estate. A local estate planning attorney will be able to help you make a plan, so that your heirs will have the resources to pay these costs.
Should you keep your Roth IRA for an heir? Leaving a Roth IRA for an heir, could be a generous bequest. You may also want to encourage your heirs to start and fund Roth IRAs of their own, if they have earned income. Even small sums, over time, can grow to significant wealth.
Are you giving money to reputable charities? Make sure the organizations you are supporting, while you are alive or through your will, are using resources correctly. Good online sources include GuideStar.org or CharityNavigator.org.
Could you save more on taxes? Donating appreciated assets might help lower your taxes. Donating part or all your annual Required Minimum Distributions (RMDs) can do the same, as long as you are over 70½ years old.
Does your family know what your wishes are? To avoid any turmoil when you pass, talk with family members about what you want to happen when you are gone. Make sure they know where your estate planning documents are and what you want in the way of end-of-life care. Having a conversation about your legacy and what your hopes and dreams are for family members, can be eye-opening for the younger members of the family and give you some deep satisfaction.
Reference: MarketWatch (Oct. 30, 2018) “Giving your money away when you die: 10 questions to ask”
Research shows that about 60% of U.S. adults don’t have a will.
However, not all of your possessions pass through a will. 401(k)s, life insurance proceeds, pensions, and annuities pass by beneficiary designation.
The (Washington, PA) Observer-Reporter’s recent article, “Improper estate planning can lead to familial conflict” explains that some of your possessions will pass through probate. If you own property in several states, the process could become more difficult for your loved ones. A way to simplify the process for them, is by having an updated will.
For instance, even if your will states that all of your possessions are to be split equally between your two children, this may not be what actually occurs. If your life insurance lists only Bob as the beneficiary, he’ll walk off with 100% of the death benefit. Your younger son Doug will receive only half of the assets that don’t have a beneficiary designation. Assets that pass by designation are not controlled by the will. That is why Bob gets all the money from the insurance. As you can see, it’s vital that you review your accounts’ beneficiary designations regularly, to make certain they’re up to date. Check on them every few years or when there’s a family divorce, birth, or death. Once you’re gone, they can’t be changed.
In addition, your estate plan should include two powers of attorney (POA). The first POA is to make health decisions. The second POA is to make financial decisions, if you don’t have the capacity to do so. Your POA agent has your authority to make decisions, only when you do not have capacity and she can only exercise it for your own benefit. POAs end at the drafter’s death.
It’s common today for families to have blended elements. Many people were married before and may have had children. Here’s an example of a famous father who made his third wife executor of his estate, giving her control of his business. In this case, his equally famous son was the principal player in the father’s business. The son didn’t understand the implications of his father’s estate plan. When the father died, there was a long and expensive legal battle between the son and the third wife.
Who was it? It was Dale Earnhardt Jr.
Work with an experienced attorney and don’t let this happen to your family.
Reference: The (Washington, PA) Observer-Reporter (December 7, 2018) “Improper estate planning can lead to familial conflict”
It’s not uncommon for an elderly parent to go to the bank to add a child to his or her bank account “in case something happens to me.”
The reason why most parents do this, is to give their child access to their money during an emergency. It sounds like it should be a pretty easy process. With proper planning, it can be. However, parents should know that simply making a child the joint owner of a bank account (or investment account or safe deposit box) can have unintended consequences. Sometimes this isn’t the best solution during a family crisis.
As Kiplinger’s recent article, “The Trouble with Joint Bank Accounts ‘Just in Case’” explains, the vast majority of banks set up all of their joint accounts as “Joint with Rights of Survivorship” (JWROS). This type of account ownership typically says that upon the death of either of the owners, the assets will automatically transfer to the surviving owner. However, this can create a few unexpected issues.
If Mom’s intent was for the remaining assets not spent during the family crisis to be distributed by the terms of a will, that’s not happening. That’s because the assets automatically transfer to the surviving owner. It doesn’t matter what Mom’s will says.
Remember that adding anyone other than a spouse could create a federal gift tax issue, depending on the size of the account. Anyone make a gift of up to $15,000 a year tax-free to whoever they wish, but if the gift is more than $15,000 and the beneficiary isn’t the spouse, it could trigger the need to file a gift tax return.
For example, if a parent adds a child to their $500,000 savings account, and the child predeceases the parent, half of the account value could be included in the child’s estate for tax purposes. The assets would transfer back to the parent, and, depending on the deceased’s state of residence, state inheritance tax could be due on 50% of the account value. In some states, the tax would be 4.5%, which would mean a state inheritance tax bill of more than $11,000.
However, if Mom’s intent in adding a joint owner to her account is to give her son access to her assets at her death, there’s a better way to do it. Most banks let you structure an account with a “Transfer on Death,” or TOD. With a TOD, if the beneficiary passes before the account owner, nothing happens. There’s no possibility of a state inheritance tax on 50% of the account value. When the account owner dies, the beneficiary has to supply a death certificate to the bank, and the assets will be transferred. These assets are transferred to a named beneficiary, so the time and expense of probating the will are also avoided, because named beneficiary designations supersede the will. This is the same for pensions, IRAs and life insurance policies.
Setting up an account as TOD doesn’t give the beneficiary access to the account, until the death of the account owner. Therefore, the change in titling isn’t considered a gift by the IRS, which eliminates the potential federal gift tax issue.
There’s no such thing as a joint retirement account because IRAs, 401(k)s, annuities, and the like can only have one owner—it’s not possible to make someone a joint owner. However, if a parent becomes incapacitated, they still often would like their child to have access to all their assets, in addition to their bank accounts. The answer for these is a financial power of attorney. This is a document that lets one or more people make financial decisions on your behalf. This document should be drafted by a qualified estate planning attorney.
It is important to understand that many financial institutions require a review process of a financial power of attorney appointment. The bank’s legal department may want to review the document before allowing the designated person to make transactions. This can take several weeks, so be sure that all financial institutions where you have accounts have a copy of your executed financial power of attorney. Have it in place before it’s needed.
Talk to your estate planning attorney about what you’re trying to do and let her guide you. Planning in advance will make things much easy for your loved ones, in case of an emergency.
Reference: Kiplinger (November 14, 2018) “The Trouble with Joint Bank Accounts ‘Just in Case’”