Preparing Your Loved One to Manage Their Inheritance and Protect Your Legacy
Are you ready for the Great Wealth Transfer?
Financial analysts estimate that older Americans will pass on as much as $124 trillion of personal wealth to their spouses, heirs, and charities over the next 25 years.
And, unfortunately, much of that wealth won't survive for another transfer. According to one study, 42% of heirs fall back to their pre-inheritance net worth in about 12 months. Meaning that, due to poor planning or poor fiscal discipline, the money is gone.
Whether you're a senior fine-tuning your legacy plan, a potential beneficiary, or a caregiver who might be tasked with settling a loved one's estate, folks have to plan ahead to make sure that wishes are honored and wealth is preserved, potentially for generations to come.
On today's show, we discuss some best practices for managing inheritances at both ends of a family's wealth transfer and taking a generational approach to comprehensive financial planning.
Avoid the “Easy” Option
One of the reasons that so many generational wealth transfers fail is that proper estate planning requires difficult conversations and decisions. No one likes to imagine the world without them or their loved ones in it. And no matter what size your estate or your family is, money touches on complicated feelings and dynamics.
So, folks often default to what they think is the easiest solution: leave everything to "the good kid" and trust them to settle everything.
Unfortunately, this kind of outright bequest to one person is rarely the best option, especially for affluent seniors with large estates. And it's often not the best option for the beneficiary either. The tax and legal issues are often far more complex than families and individuals are prepared for. Years later, an unprotected inheritance could be subject to creditors or divorce proceedings. Dropping a large sum into one person's lap with no strings attached might also lead to bad management of that wealth, even if the inheritor approaches the task with the best intentions.
And if that inheritor's ideas of the "best" or "fairest" way to distribute wealth aren't shared by other family members, bad blood could boil over into years of legal disputes.
A Legacy Plan You Can “Trust”
A Revocable Living Trust places some guardrails around your money, working in tandem with the other parts of your estate plan to establish clear legal rules for when, how, and to whom your assets are distributed. You can even appoint a third-party corporate trustee to oversee the trust, which can keep family friction from interfering with your wishes.
Some options include:
Staggered Distributions: Instead of passing on your money all at once, distribute it in increments. This might be an especially important provision if your heirs are children or young adults who are still building their money management skills.
HEMS Provisions: Restrict the trust to only pay for Health, Education, Maintenance, and Support. In addition to limiting the potential for frivolous spending, this can also protect money from creditors and ex-spouses.
Individualized Plans: You do not have to treat all your beneficiaries the same way, even if they're all your children. Tailor your giving to each beneficiary's personality, maturity, responsibility, and needs.
A key word in this process is "revocable." Another reason folks often put off their estate planning is they worry about making the "wrong" choices or they are trying to “solve for forever”. We strongly encourage thinking in 5-year increments knowing you can revisit and amend the plan as life changes over time. And as long as you're alive and mentally fit, you can always make changes to your trust, your beneficiaries, and any other aspect of your estate plan.
In fact, the only truly "bad" choice you can make with estate planning is not having one. In that situation, once you pass, settling your estate falls to the court in your state of residence. Those situations can be very messy and very public.
A Lifetime of Giving
Your legacy is about more than just your money.
And your legacy doesn't have to be locked away in documents that don't activate until after you're gone.
If you start passing on what you have, what you've learned, what kind of a lasting impact you hope to make while you're still living, you can model the very care, generosity, and stewardship you want your heirs to carry out.
Under current law, individuals can gift up to $19,000 annually to any individual without triggering any tax consequences. That means, together, you and your spouse could gift each of your children, or grandchildren, or anyone else you want to support $38,000, year after year, tax-free. This can be a great way to "test drive" how your loved ones handle an inheritance. Gifting can also spend down your estate and minimize taxes in the future.
Planned giving can also be a source of great joy. Even if your heirs are well off, some of them will never need or appreciate financial assistance more than they will right now. Imagine helping a young family member realize their dream of owning a house or supporting your grandchild as they progress towards a college degree. Think of the pride you'll feel if you and your loved ones create a family charity -- protected by your trust -- that will continue to improve your community in perpetuity.
A Legacy of Planning
Seeing your financial plan in action can also teach your heirs about the value of having a plan and building strong money habits.
Those are lessons I learned from my Great Aunt Nina, who lived to 100. Her lifetime of hard work and prudence made a big impact on me when I was growing up. And helping her use her assets to manage her final years with dignity and grace, according to her final wishes, was an honor that still informs how my team and I approach retirement planning at Keen Wealth.
Let’s review your estate plan and discuss how we can help strengthen your legacy both today and in the future.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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