Multigenerational Planning: Important Conversations to Have about Money
Q: If I tell my family what my wishes are regarding my money and property at death, can I make changes?
A: Whom you tell about your estate plan does not impact your ability to change your mind. Rather, it is the type of plan you create that will determine the possibility and difficulty of changing that plan. You can amend a revocable living trust or a last will and testament at any time up until you are incapacitated (unable to make decisions for yourself) or you die. On the other hand, there are irrevocable trusts that may be more complicated or problematic to modify in the event you change your mind.
Having an initial conversation with your family about your financial wishes can be nerve-wracking enough; meeting with them a second time to let them know you have changed your mind could be even more so, but it does not diminish the importance or the benefits of being open and honest with them. In general, we recommend that families hold an annual meeting to discuss the family wealth, just in case a change occurs, or if nothing more, to get together regularly and spend time together.
Q: If I leave money to my grandchildren and they know about it, will this disincentivize them to go out and work?
A: This is a common fear among clients. You have worked hard to build your wealth and you want your gift to be a blessing, not a curse that stunts the potential of future generations. The state’s plan for your money and property would give it all outright to your heirs, without any restrictions, unless the person is a minor. However, when you create an estate plan, you get to set the rules. You can choose to include provisions in your plan that would incentivize certain behavior, such as requiring that a grandchild graduate from an accredited college or university, or be employed full-time by the same employer for over a year, in order to receive money. If a grandchild meets such a standard, it can serve as a good indication that your grandchild is well on their way to being a productive member of society.
Q: Is it better to treat loved ones fairly or equally?
A: The answer to this question will depend on your unique situation and may take some soul-searching on your part. For some clients, it is crucial that they treat everyone in the same generation (children or grandchildren) equally to avoid family conflict after the client is gone. If this was the client’s parenting philosophy while raising their children, the client may consider it essential to ensure that each person receives equal access to the money and property after the client’s death.
Other clients believe that because everyone is different, the money and property left to the generations should be used to make sure that everyone has the same access to opportunities and advantages in life. One child may make more money than a sibling, or one grandchild may have special needs while the other grandchildren do not. The client may determine that someone who has paved their own way and is successful in their own right does not need as much as someone who is financially struggling.
It is important to remember that there is no right or wrong answer to this question. By considering your values and the type of legacy you want to provide to future generations, the answer will make itself known to you. We have walked many clients through the many available options to help them answer this question and craft a plan that matches their values, and we would love to do that for you as well.
Planning After Landing Your New Job
Q: What are my options when asked to name a primary beneficiary for my life insurance policy?
A: There are several options when it comes to naming a primary beneficiary for your life insurance policy.
First, you could choose to name just one adult. At your death, after providing the insurance company with your death certificate and completing any required forms, your chosen beneficiary will receive a check for the life insurance policy’s death benefit.
Second, you could choose to name multiple adults as the primary beneficiary along with the percentage or share that you want each to receive (not to exceed 100 percent or the total value of the death benefit). For example, you could designate 50 percent to Jack Jones and 50 percent to Jill Jones.
Third, you could name the trust as the primary beneficiary. At your death, the trustee of the trust will receive the check from the life insurance policy and will then manage and distribute the money according to the instructions you have left in the trust agreement.
Caution: It is not wise to name a minor child as the beneficiary of a life insurance policy. Because a minor is not a legal adult, the child is not allowed to manage the money on their own behalf. In the event a sum of money would need to be paid to a minor, the court may have to appoint someone as a guardian or conservator to manage the money on behalf of the child until the child reaches the age of majority (eighteen or twenty-one years of age depending on your state.)
Q: If my retirement account is meant to fund my eventual retirement, why do I need to bother naming a beneficiary? Won’t everything be gone?
A: Retirement accounts were created to give individuals the opportunity to set aside money from their wages, income tax-deferred, to fund their retirement. While the intent is that this money will be spent down over the course of your retirement, many people still have some money left in their account at death, and ultimately, this is what you want. The hope is that you do not spend all of your money in the retirement account before you pass away or else you will end up living on far less than you had budgeted for. Therefore, it is not only favorable but likely that there will be some money left in your retirement account at your death. And because everything you own at your death has to find a new home, a beneficiary designation gives you the opportunity to determine who will receive the remaining money.
Note: Depending on the type of retirement plan you are participating in and the rules in your state, you may be required to designate your spouse as the primary beneficiary, if your spouse survives you. In the event you want to leave the account to someone else, you may be required to get your spouse’s written consent.
If there is no money left in the retirement account, then the person you have named as the beneficiary will receive nothing. This is an important reason to keep an eye on your retirement account balance. If your intent is to leave a specific amount of money from your retirement account to a beneficiary, you should have a back up plan to fund this amount from another source in the event you spend through your retirement account.
Q: What can I do to protect myself from scammers?
Proactive planning can prevent you from becoming a statistic of elder financial abuse. The first step is to make sure that, while you are mentally able, you put your wishes regarding the use of your money and property into a legally binding, written document such as a financial power of attorney, last will and testament, or revocable living trust. This way, should you lose the ability to manage your finances, your explicit wishes are already expressed in these valid documents, eliminating a loophole that someone could use to take advantage of you.
The second step is to make your wishes known to your loved ones, especially if you have decided to add someone to or leave someone out of your estate plan. By having an open conversation with your loved ones while you are alive and well, you can answer any questions and clear up any misunderstandings that they may have before it is too late. This includes updating your loved ones periodically if your wishes change. This will ensure that everyone is on the same page and can keep a watchful eye should suspicious changes occur down the line.
Q: Why shouldn’t I just give my money outright to my children? What could go wrong?
If you give money or property outright to a child, the money or property will automatically be theirs. This means it can be spent as the child wants, used for calculating and paying a divorce settlement, seized as part of a lawsuit, or stolen by a financial predator.
Alternatively, if you place the money and property you want your child to receive into a trust, you can protect it from some of these issues. First, you can determine how much and when your child will receive the money or property. This can allow you to spread the money and property over a period of time—for example, one-third at age forty, one-half at age forty-five, and the remainder at age fifty). This can also incentivize desirable behaviors, such as requiring that the child graduate from an accredited college or university to receive the money or property, or offer maximum protection by giving the trustee the absolute discretion as to when or if your child receives the money and property from the trust.
Q: What is an SRT?
A standalone retirement trust, or SRT, is a special type of trust designed to be the beneficiary of your qualified retirement accounts like IRAs, 401(k)s, etc. During your lifetime, your ownership of and access to the accounts do not change. Upon your death, as long as you have properly named the SRT as the beneficiary on the appropriate beneficiary designation form, the trust will become the beneficiary. The trustee of the trust will then be in charge of withdrawing and managing the money received from the inherited retirement account according to the terms of the trust document.
Q: Why would my loved ones need asset protection?
In the United States, lawsuits are filed every few seconds, all year long, every year. We all have a bullseye on our back. Lawsuits commonly stem from car accidents, business failure, divorce, malpractice, tenants, slip-and-falls, bankruptcy, and the like. Without proper protection, inherited property and accounts can be seized for any number of reasons. Because retirement accounts are often one of the most valuable accounts that people own, ensuring that these special accounts are protected for your loved ones and beneficiaries is essential.
Q: What if I use up my retirement account during my lifetime?
By all means, use your retirement funds as you think best. Even after you set up an SRT, you will have full control and the right to enjoy your retirement funds for years. The SRT is named as the beneficiary of your retirement account and will therefore receive funds only once you have died, leaving you free to spend the money as you see fit. However, if you are like most people, you will still have money in your retirement account when you die; that is when the SRT will protect your loved ones and their inheritance.
Updating Your Estate Plan After the Death of a Loved One
Q: What should I do if my chosen successor trustee dies before me?
A: If the successor trustee of your revocable living trust (RLT) dies before you, nothing will happen immediately with respect to how your trust is managed. If you named a backup to your successor trustee in your trust document, it is important that you speak to that person and reconfirm that your chosen backup is willing to serve as your trustee when the time comes. Because this person was the backup to your successor, this person may have assumed that he or she would never actually have to act.
It is important to note that because the trust is revocable, you can name a new successor trustee-your backup does not necessarily have to move ahead in line. If you choose to revise your trust document, it is advisable that you name not only a successor trustee but also a backup to your successor trustee to ensure that there is always someone available to step in no matter what happens. As always, it is vital to discuss this selection with the person you have chosen before you finalize your documents to make sure that this person will act when the time comes.
If you pass away and no one is able to serve as trustee, your beneficiaries will need to look to your trust agreement for guidance to fill this vacancy. Your trust might provide that a certain number of your beneficiaries can appoint a new trustee without court involvement. Or your trust might require that the court approve any potential trustee. The outcome will depend upon the wording of your trust and your state’s laws.
Q: What should I do if my child dies before me?
A: As part of their estate planning, many parents choose to leave some or all of their accounts and property to their children. If your child passes away before you, you will want to review your last will and testament (also known as a will) and your RLT to see what you were planning to leave to your child. You will also want to check your other accounts and property to see if you named your child as a beneficiary or co-owner.
If your child was going to receive something, you need to check your will or RLT to see if these documents address who will receive the money and property if your child passes away before you. If you have already planned for this contingency, the next person in line will receive the accounts and property. Even if you have a plan in place, you should review the plan and your documents to ensure that they still reflect your wishes. A lot can happen in a few years, so it is always good to remind yourself of what your documents say. If your documents do not provide for a backup recipient, you need to update your documents to reflect who should receive these accounts and property.
You will also want to check any accounts or pieces of property you own to see if your child was named as a beneficiary through a beneficiary designation, transfer-on-death designation, or pay-on-death designation.
In addition to reviewing your estate planning documents to identify any money or property your child was going to inherit, you will also want to check your estate planning documents to see if you named your child as one of your trusted decision-makers (personal representative, co-trustee or successor trustee, agent under a financial power of attorney, or agent under a medical power of attorney). A vacancy in one of these important roles may require additional court involvement, which can cost your family time and money, as well as a loss of privacy.
Q: My spouse just died. What estate planning concerns do I need to address?
A: You and your spouse probably owned some, if not all, of your accounts and property jointly. This may have been because you acquired the money and property during your marriage or because by owning the accounts or property jointly with rights of survivorship, you could avoid the probate process at the death of the first spouse. While you were able to avoid probate at the death of your spouse, you now own the accounts and property individually, and they will now be subject to probate at your death if you do not do any further estate planning. If avoiding probate is a priority for you, we can meet to discuss the various options available to you.
You will also want to review the beneficiary designations on your life insurance and retirement accounts. Most married individuals automatically list their spouse as the beneficiary because the intent is for the money to be used to continue the spouse’s current lifestyle. When considering other beneficiaries, the decision can be a little more complicated, which is why people sometimes avoid listing a contingent (backup) beneficiary. However, now that your spouse has passed away, you will need to confirm who is listed as the primary beneficiary and make sure that a contingent beneficiary is listed. We can help you walk through your options for leaving these accounts to other individuals and advise as to how they should be left.
Lastly, review your selections for your trusted decision-makers. Because of the close relationship you shared with your spouse, you likely named your spouse to serve in one or all of the following roles:
- personal representative under your last will and testament
- co-trustee or successor trustee of your RLT
- agent under your financial power of attorney
- agent under your medical power of attorney
Because your spouse is now deceased, you should review these documents and your selections to ensure that you have named a backup. You may also want to consider naming a backup for your backup.
If you have minor children, you will also need to consider who should serve as your children’s guardian if you are unable to care for them. If your spouse was the other legal parent, it is incredibly important that you name a guardian because your automatic backup is no longer alive.
Planning for Unmarried Partners
Q: Can my partner inherit from me if we are not married?
A: If you are not married, your partner can inherit from you, but only if you proactively create an estate plan. If you do not do any estate planning, your state’s intestacy statute will determine who will receive your money and property, as well as the amount each legal heir will receive. Generally speaking, because the exact scheme is very state-specific, your money and property will go first to your surviving spouse (if you are married), then to your descendants (children or grandchildren), your parents, your siblings, and your siblings’ children, in that order, depending on who survives you. If the state law governs your estate plan, your partner will receive nothing because the state law does not include unmarried partners in their plan.
Preparing a Successor Trustee
Q: Who manages the other accounts and property I own if my successor trustee is only authorized to manage the property owned by my trust?
A: As the term implies, a “trustee” is responsible for the accounts and property owned by the trust. Ownership by the trust occurs when the trustmaker changes ownership of the accounts and property from the trustmaker’s name individually to the name of the trust. However, there are several reasons why certain accounts or pieces of property may not be transferred to the trust.
During your lifetime, you continue to manage accounts or property outside of the trust and in your name only. If you are alive but unable to manage your own affairs, an agent under a financial power of attorney will have the authority to manage those accounts or pieces of property. If you do not have a financial power of attorney, your family may have to go to court and have a guardian or conservator appointed to manage your accounts and property.
At your death, some accounts or property that were in your name only may be subject to the court procedure known as probate. Probate is the court-supervised process of transferring accounts and property from a deceased individual to the appropriate heir or beneficiary. During this process, the court will officially appoint an executor or personal representative who was nominated in your will and give that individual or entity the authority to settle your affairs, manage your accounts and property, and distribute your accounts and property to the people you have named in your will. If you do not have a will, the court will appoint someone to act as executor or administrator based on state law. Your accounts and property will then be given to individuals-typically your parents, siblings, or other blood relatives-based on the state’s rules.
Alternatively, some of your accounts and property will not need to be managed at your death because ownership will transfer automatically. These include accounts or pieces of property owned jointly with right of survivorship and those with a valid beneficiary designation, pay-on-death designation, or transfer-on-death designation.
Q: As successor trustee, what happens if I need help understanding the trust and financial accounts or managing the trust’s accounts and property? Can I hire someone to help me, and do I have to pay for this help myself?
A: Being a trustee can be time-consuming. Also, depending on the types of accounts or property requiring management, you may need some help navigating the complexities. This is why we, along with the other members of the advisory team, are here to help. Although you are the trustee, you cannot be expected to know everything. As long as you are acting on behalf of the trust and in the best interest of the beneficiaries, the expenses you incur in connection with managing and investing the trust’s accounts and property can be paid by the trust, not by you personally. However, it is important that you act reasonably when hiring someone to assist you, meaning you must use someone who is knowledgeable and skilled in the area in which you are seeking assistance. Additionally, the expenses must be clearly reflected in any trust accountings or records that you are required to provide to the beneficiaries.
Estate Planning for LGBTQ Clients
Q: My family and I have not spoken in years. How do I prevent my family from causing problems for my spouse after I die?
A: One solution is to create a trust and title all of your accounts and property in the name of the trust. This will allow you to have access to and enjoyment of your money and property, as you can name yourself as both the current trustee and the current beneficiary. However, in the trust, you can designate what will happen to all of the accounts and property once you have passed, as well as who will be in charge of carrying out your wishes. Then, upon your death, the terms of the trust will be carried out and the accounts and property will be distributed to the named beneficiaries by the person you have selected, without court involvement.
In addition, if you are worried about your family contesting your wishes, memorializing them in a proper legal document such as a trust and will is critical. Be sure to express your concerns to your estate planning attorney who can discuss whether your state recognizes a “no-contest clause.” A no-contest clause can be included in your will and trust, creating a penalty for any beneficiary challenging your wishes and helping lessen the chances that a family member or beneficiary could legally challenge your estate plan.
Q: My partner and I have been together for 20 years but have never gotten married. Should we get married? If we don’t get married, how can I ensure my partner is taken care of?
A: Whether to get married is a personal decision. In addition to the emotions involved in making the decision, there could also be tax implications. Consider sitting down with an experienced estate planning attorney and an accountant or CPA to analyze the tax or financial impact this decision would have on your planning.
If you choose to remain unmarried, a properly executed estate plan will ensure that your partner is taken care of. A will or trust will allow you to designate the money and/or property that you want to go to your partner. A financial power of attorney will allow your partner to act on your behalf for financial matters and a medical power of attorney will allow your partner to make medical decisions for you if you are alive but not otherwise able. Additionally, if you have a retirement account or life insurance policy and would like those amounts to go to your partner, make sure that you have properly named them on the appropriate beneficiary designation forms.