Jun 29, 2021
Where will your money and material possessions go after you’re gone? Most people leave nearly everything to their spouse, and if no longer alive to their children. But some want a portion of their estate to go to charities that support the causes and values that are important to them. How can you do this?
The financial part of a legacy has complicated rules. Your money passes to your surviving beneficiaries through a combination of beneficiary designations on insurance and retirement plans, your will or trust, and the intestate (succession) laws of your state of residence upon your death if you have no will.
Planning can get particularly challenging if your assets themselves are complicated (a business, real estate), if your beneficiaries’ health is complicated (care for a dependent, drug dependency), or if your family situation is complicated (multiple marriages, very different situations for the different beneficiaries.) When you add in wanting to minimize taxes and having preferences as to when money is to be released to different beneficiaries, you can see that there is both an art and science in figuring this all out.
It’s frequently critical to work with a variety of professionals in your estate planning. Your estate planning attorney can put together a plan and then construct the appropriate legal documents. Many financial planners are familiar with a variety of planning approaches and can help with the process. They will need to compile your list of assets to give to the attorney. Insurance agents sometimes get involved because life insurance might be an approach you decide to use. In my experience it’s important to work with very high caliber professionals in each of the appropriate areas.
Until a couple of years ago I was a financial planner. Here is an estate planning strategy that I frequently recommended to my clients. Let’s assume that there is some cause (charity) that is important to you. While you’re alive, you make annual contributions to support their efforts. Those contributions will stop upon your death. You want them to also inherit some of your assets.
Let’s assume your estate totals $500,000 including a $100,000 retirement plan and you have two children whom you want to inherit equally. Each child would then receive $250,000 including half the retirement plan ($50,000 each.) If your children would be in the 20% marginal tax bracket when they inherit, they would each owe 20% of the $50,000 or $10,000 in income taxes. Their net after-tax inheritance would be $240,000.
What if you changed only the beneficiary of your retirement plan to your favorite charity? Then the charity would receive all $100,000 free and clear. It wouldn’t have to pay any income tax on it (it’s a nonprofit.) This is an efficient way to leave a legacy to your favorite cause. You could set it up so that the charity received and used the lump sum all at once, or you could leave the money to their foundation to stretch out the time period for its use.
Here’s the critical question – how would leaving some money to charity affect your children? If each child received $200,000 instead of $240,000, would it make a critical difference in their lives? If not, where would you like your $100,000 to go to make the world a better place? In any case, review your situation and goals with your professional advisors to find strategies that are appropriate for you.
What would you like your legacy to be? Are your estate planning documents and retirement plan beneficiaries set up to do what you want them to do?
Aug 20, 2019
The following is an excerpt from my book Serious About Retiring, Temuna Press, 2019. It is available at Amazon.
There are many reasons why now, as you plan for retirement, may be the right time to review and perhaps make changes to your estate planning.
- You may originally have done your estate planning long ago.
- Your family, health, and/or work circumstances may have changed.
- You may have very different ideas about how you want your estate handled after your death.
- You now likely have a realistic attitude toward mortality and an acceptance of the fact that “you can’t take it with you.”
- You may have witnessed the results of successful or unsuccessful estate planning for your parents or other relatives or friends.
- If you have successfully managed your money so far and continue to do so during retirement, you may well have a considerable amount to pass on. A larger estate may be the result of
- the growth of your savings and investments over time,
- an inheritance,
- funds remaining in an emergency buffer built up to deal with, say, healthcare expenses, and
- your house, if you still have one.
A challenge in working on your estate plan is deciding how best to distribute the funds. What if you have more than one offspring and their circumstances are quite different from one another? For example, one child or grandchild might have serious health problems and future expenses but not the other children. Do you give more to the individual who needs it the most? Or what if one child is far more financially successful than the others? Do you give that one less? Or if you have already made substantial monetary gifts to one child, do you give more in your estate to the others to make up for the share they missed? Or what if you like one child less than the others? Do you arrange to leave him or her less of your estate or even nothing at all?
Answers to each of these questions have financial ramifications as well as psychological ones. Is an equal distribution the same as a fair one? There is no single right answer to any of these questions, and you may well have different ideas from others you know. You must decide what is right for you. As the circumstances for you and your beneficiaries evolve, you can imagine working quite closely and productively with your estate planning attorney.
The author does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal, accounting and financial advisors before engaging in any transaction or taking any actions regarding the content discussed above.
If you have comments or questions, contact me at Mark@SeriousAboutRetiring.com
Jun 26, 2019
In Minnesota and many other places, families sometimes own a cabin on a lake. That cabin becomes a vacation destination and even a refuge where the family can spend quality time together. They may do that for many years.
The parents might decide to leave the cabin to their children in equal shares as part of their estate. The hope of the parents may be that the next generation will use the cabin as a place for the family to continue to meet and continue to support each other. The ultimate goal may be to keep the next generation together.
Sometimes this works out well for part or all of the next generation. Other times the inherited cabin is a disaster waiting to happen. Consider what has to happen for everyone to be happy with this arrangement:
- All of the children must agree on a system of sharing access to the cabin – who gets to use it and when.
- All of the children must agree on who will manage and pay for maintenance costs.
- If some of the children are unhappy with the arrangement and want to be bought out, then the buyer(s) must have the resources to buy the siblings out at a fair price.
- None of the children can get into a financial difficulty or get a divorce that would force the sale of the cabin. Remember that creditors or (ex)spouses of the children may want a say in what happens, even if they are not owners.
- If there are disagreements, the children must be able to settle them amicably.
If the cabin survives the ownership of the children, then the children’s beneficiaries will become the owners. These may be the children’s spouses and eventually the grandchildren. This will happen not all at once but generally over an extended time.
If something goes wrong, it will all be settled eventually by the family or the courts, if necessary.
Here is another cabin scenario that can backfire. Ruth paid $100,000 for the family cabin years ago. It is now worth $220,000. She wants to be free of the maintenance, so she offers to sell it to her four children. Only one has the money to buy it and offers $100,000 for the house. Ruth figures that this is one way to get her money out and avoid capital gains tax on the sale of the property.
What Ruth does not realize is that she is in essence gifting the difference (i.e. $120,000 of value) to the buying child and nothing to her other children. This could cause substantial resentment from her other children.
If Ruth wanted to gift money to her children equally, she could sell the cabin at full value to a third party, pay taxes on the gain, keep her $100,000 original investment, and split the rest of the profit equally among her children.
These scenarios can play themselves out over a variety of indivisible assets besides a cabin, including a home, a valuable piece of art, and even smaller items like grandma’s yellow pie plate. Farmland is a common asset that can in theory be divided into parcels for distribution to different beneficiaries. It might lose some of its value, however, from being subdivided.
What can you do to improve the odds of this working out satisfactorily for your children and your family? You can make up the rules yourself about what you would like to happen after your death. However, your children might perceive this as your effort to reach out of your grave and control them.
If your children will be affected by your gift, why not let them have a say in what happens? One mechanism for accomplishing this is a family meeting, where family members, and sometimes an outside mediator, can discuss the challenges and opportunities as a group. This is sometimes done around Thanksgiving when the whole family may be together – if it does not conflict with the football games!
The author does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal, accounting and financial advisors before engaging in any transaction or taking any actions with regard to the content discussed above.
