Multigenerational Planning: Important Conversations to Have about Money
Myth: My estate plan is just for me, so I do not need to tell anyone anything about it.
False. While how much you divulge is up to you, being open and honest with your loved ones can help alleviate misunderstandings that could arise after your passing. Sharing this information is especially helpful in three instances:
1. You have chosen to treat individuals in the same generation differently.
2. You have placed additional requirements or restrictions on how your money and property are to be used.
3. You have skipped an entire generation or group or individual that would typically inherit from you (spouse, children, or grandchildren).
Also, if you want your estate plan to benefit multiple generations (some of whom may not even be born yet), it can be helpful to have your loved ones understand what money and property they will have access to and your intentions regarding access for future generations. With a clear understanding of your wishes, your loved ones can take the lead in carrying out these wishes after your passing and make the right decisions about the family wealth that will continue your legacy.
Myth: The reason there is no money left at the end of the third generation is because of bad investments.
False. While this may seem like the likely answer, a study by The Williams Group, a family wealth coaching company, revealed that unprepared beneficiaries are one of the major reasons why much of a family’s wealth is lost by the third generation, not bad investment strategies. If you want to leave money for multiple generations, it is essential to prepare your beneficiaries. They need to understand what they are receiving and what the ultimate intention is for the money and property you are leaving. You can also prepare your beneficiaries by teaching them proper money management. Not everyone is born with financial competency, and this skill may need to be taught. If a beneficiary does not learn how to manage their money, it should not be a shock when they spend their inheritance in a short period of time.
Planning After Landing Your New Job
Myth: When my employer hands me a beneficiary designation form for my employer-provided life insurance policy or gives me the link to complete the form online, it is optional and not a priority.
This is false. When you are asked to complete a beneficiary designation form, you need to fill it out as soon as possible. If you were to die without completing the beneficiary designation, the proceeds would either be distributed to your estate (requiring your loved ones to go through the costly, public, and time-consuming process known as probate) or directly to your closest living relative as determined by the terms of the life insurance policy. The specific rules of the life insurance policy determine which option would apply, but the ultimate outcome is the same: someone else would be choosing who gets the money, not you. You are given the opportunity through the use of a beneficiary designation form to determine who will receive the proceeds of your life insurance policy. Do not let someone take that choice from you.
Additionally, whoever is determined to be the rightful owner will receive a check for the full amount, unless the beneficiary is a minor, in which case the court will choose someone to hold on to the money for the minor until the minor reaches the age of majority (eighteen or twenty-one depending on your state). This leaves the money open to many vulnerabilities, like being spent on frivolous luxury items, taken in a divorce, or seized by creditors through a lawsuit or a bankruptcy.
Myth: If I need help paying my bills, I can just add my child to my bank account. Nothing bad will happen.
False. When you add a child or anyone else to your bank account, you are making that person a co-owner of the account. Your child can pay bills using the money in your bank account, but your child can also use the money for any other purpose. This is because your child now co-owns the account.
In addition, because the bank account would be deemed owned by your child, it would be susceptible to division in a divorce, seizure in a lawsuit, and theft by a predator.
Myth: Giving someone the power to manage my finances means I am giving up control.
False. If you name someone as an agent or attorney-in-fact under a financial power of attorney, you allow that person to handle the types of financial transactions that are listed in the document. However, just because your agent can handle these matters does not mean that you cannot also handle them. The only reason you would not be able to manage your own financial affairs is if you were mentally unable to (otherwise referred to as being incapacitate).
Standalone Retirement Trusts
Myth: Individual retirement accounts (IRAs) are exempt assets in bankruptcy.
Fact. The federal Bankruptcy Code protects up to $1 million of assets (adjusted for inflation every three years) held in IRAs. If you have a large sum of money in IRAs (both traditional and Roth IRAs), creditors may still take some of it. Inherited IRAs are typically not protected in bankruptcy.
Myth: My retirement plan is through my employer and is protected by ERISA (Employee Retirement Income Security Act of 1974).
Fact. Just because your retirement funds are held in an account by your employer does not automatically mean that the plan is an ERISA-covered plan account. For example, IRA-based plans like SEP (simplified employee pension) and SIMPLE (savings incentive match plan for employees) IRAs do not receive ERISA protection.
Planning for Unmarried Partners
Myth: When I die, my partner that I am not married to can continue living in our home.
Fact: At your death, the only ways that your partner can continue living in the home are if 1) your partner’s name is on the deed, 2) you owned the home and you executed a beneficiary deed or ladybird deed giving the home to your partner upon your death, 3) you owned the home and you named your partner as the recipient of your home in your will, or 4) your home is owned by your revocable living trust, and you named your partner as the recipient of your home or allow your partner to stay in the home for the remainder of your partner’s life.
If the home you live in is in your name alone and you fail to do any of these options, your home will be given to your family according to state law, leaving your partner homeless. If your partner wants to keep living in the home, your partner would have to rent or purchase the home from your family during the probate process. This assumes that your family would want to rent or sell your home to your partner; they are under no obligation to do so.
Myth: To properly protect my partner, I should just add my partner to the title of all of my accounts and property.
Fact: While adding your partner as a joint owner of your accounts and property is an easy way to guarantee that your partner will automatically become the sole owner without any involvement by the probate court, this option is not without its shortcomings. Because your partner will become the sole owner at your death, your partner gets to choose what will happen to the accounts and property upon their death, not you. You have to trust that your partner will make a decision you would have agreed with. In addition, once your partner becomes a joint owner of the account or property, your partner’s debts become your problem. Should your partner be subject to a creditor claim or lawsuit, your jointly owned account or property could be seized to satisfy any outstanding judgment.
Preparing a Successor Trustee
Myth: A family member acting as successor trustee does not receive compensation.
This is false. The relationship between the trustmaker and the successor trustee has no bearing on whether the successor trustee can be compensated for managing, investing, and distributing the trust’s accounts or property according to the trust agreement. To determine if the successor trustee is entitled to compensation, it is important to review the trust document to see if there are any provisions regarding trustee compensation. If the trust does not contain any trustee compensation provisions, you can check your state’s statute to determine if the successor trustee is entitled to compensation and how that compensation is calculated.
Myth: A successor trustee can do whatever he or she wants.
This is untrue. Although the successor trustee has a great deal of power when managing the trust’s accounts and property, the successor trustee’s authority is not absolute. As a fiduciary-a legal term used to express a role that requires a higher level of care and is therefore under greater scrutiny-the successor trustee has a duty to administer (manage) the trust solely in the interest of the beneficiaries and to deal with them without bias. Additionally, the trustee cannot use any of the trust’s accounts or property for the trustee’s own personal benefit (unless the trust explicitly allows for self-dealing) or for any purpose not expressly listed in the trust. The trustee also cannot enter into any transaction that would create a conflict of interest between the trustee and the trust or a trust beneficiary. Failure to carry out the trustee’s duties and responsibilities may result in removal of the successor trustee, and the trustee may be required to reimburse the trust for monies that were mismanaged or for any damages that were incurred.
Estate Planning for LGBTQ Clients
Myth: Because same-sex marriage is recognized in all fifty states, I do not need to worry about estate planning, as my spouse will receive everything when I die.
It is true that, absent proper estate planning, the law will distribute most (if not all) of your money and property to your spouse. However, this may not be the best way to pass on your money and property. If everything passes to your spouse outright, there is no protection for the property or money your spouse receives. Even if you want your spouse to be free to spend their inheritance from you as they please upon your death, your money and property would become 100% your spouse’s, and they could do whatever they want with it–including lose it to creditors or to an anticipated lawsuit. By creating a trust, the money and property can be available for your spouse’s use, but you can provide protections to ensure that creditors, or a second spouse, do not have access to what you have worked so hard to earn.
Additionally, without estate planning, including the creation of a trust, your money and property may have to be distributed through the probate process. Probate is a court-supervised process where an appointed individual gathers your money and property, pays all of your outstanding bills, and then distributes the remainder to the appropriate individuals. Depending upon the situation, the level of court involvement can vary, but no matter what, the details of this process can be found out by anyone because probate is a very public process.