Money and the Family Dynamic

Money is an incredibly sensitive topic. For most people, their “success” or “failure” in life is gauged by how much they make. Now many people, myself included, feel that there’s more to success than just money, however, we can’t escape the fact that many others don’t feel the same.

Money, in a family dynamic, can cause more strife than any other single topic. As I’ve said many times, money does not cause family dysfunction, it merely amplifies any underlying dysfunction that was always lurking below the surface. Add to this the fact that, in the next 20 years, we’re going to experience the largest transfer of wealth ever and the implications are huge.

The easiest way to avoid future conflicts over money is to do proper planning before it ever becomes an issue. When starting the estate planning process, it’s important that all interested parties be aware of what’s going on so that there are no nasty surprises when the transfer of assets actually happens. By doing proper planning ahead of time any issues can be addressed and hopefully, minimized with much less pain. I can’t tell you the number of times I’ve heard potential heirs complain that their parent/grandparents are frittering away “their inheritance.”

If you are a business owner with family members involved, if you’ve accumulated enough wealth to have a family charitable foundation, or if you simply want to give it all away when you die, it’s critically important that you let your heirs know what you intend to do with your estate when you pass away. There’s nothing worse than having a child that thinks they’re going to inherit a fortune, only to find out that you intend to give it all away to your favorite charities. Many baby boomers are counting on their inheritance to finance their own retirement so imagine their surprise and anger when they find out their own retirement plans have been derailed. At a minimum, not involving your heirs in this discussion could lead to incredible animosity, years of therapy and, most likely, legal wrangling in an attempt to undo your wishes. That’s why, long before it becomes an issue, you need to ask yourself the following questions:

• While I’m alive and in my twilight years, who’s responsibility is it to take care of me when I can no longer take care of myself?
• When I do die, what do I want done with my estate?
• Are my children capable of carrying on the visions and goals of my business?
• Will my heirs use the money in our charitable foundation the way I intended, or will they change its mission to something completely different?
• If you plan to give it to your children or grandchildren, and they inherit a large sum of money, will they be able to handle it responsibly or will they “blow it” on, as the saying goes, wine women and song?

One of the trends we’re seeing is inheritance based on reaching certain personal milestones. For example, instead of giving your beneficiary a lump sum inheritance when they turn 21, the trust will dictate that a certain amount will be distributed upon reaching certain milestones i.e. graduation from college, marriage, starting a new business, etc.

The wealth transfer process, by its nature involves many parties including family, charities, attorneys, accountants, wealth managers and a host of others. By having open, honest discussions with your family and advisors regarding the transfer of your own wealth, you can have your estate go where you want it and in the amounts you want and, hopefully, all those involved will be on board so that the process is as painless as possible.

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The Importance of Naming the Right Beneficiary

Quick, who is the beneficiary in your IRA, how about your 401(k) and life insurance? The truth is that most people, depending on how long it’s been since they designated the beneficiaries on their accounts, probably don’t know off the top of their heads. What they don’t know is that an incorrect or non-existent beneficiary can cause you and your heirs a lot of trouble.

Review Beneficiaries When Your Life Changes

Most people give considerable thought to who they’ll name as beneficiary when they originally establish their retirement accounts or purchase their life insurance. The problems arise when, over time, those designations are no longer valid. You may have named your spouse at the time you signed up for your 401(k), but she, unfortunately was 2 spouses ago. How do you think your current spouse will feel when she finds out your ex is entitled to your 401(k) and not her? Granted, you won’t be around to deal with the aftermath, but your passing is already stressful enough, without the added stress of a court fight over your estate.

So how often should you review your beneficiary designations? At least annually, and certainly when you have a life change such as a job change, birth of a child, divorce or re-marriage. In this way, you’ll be sure your beneficiaries reflect your current circumstances.

Why Name a Beneficiary At All?

Naming a beneficiary on your retirement accounts and life insurance policies allow those assets to pass to the beneficiary outside of probate. As we’ve discussed before, probate is a long, slow, expensive and PUBLIC process of determining where your assets go upon your death. With a beneficiary designation, no matter what your will says, the beneficiary designation takes precedent. So, even if you’ve changed your will to cut out your estranged son, if he is still listed as beneficiary on your life insurance policy, he will receive the money, regardless of what the will says.

The last thing you want to do is to have where your assets go determined by a judge that has little or no idea what you really wanted.

Estate Taxes and Beneficiaries

Correct use of beneficiaries can greatly reduce or eliminate estate taxes when you die. If you name your spouse the beneficiary of your IRA or 401(k), those accounts WILL NOT be counted in your estate and are therefore not subject to estate tax on your death. Be aware, however, that the government eventually gets their pound of flesh when your spouse passes away.

If you have more than one child and you want to have them split the proceeds from your IRA equally, you can reduce their tax burden by actually splitting your account. If you have three children, you split your IRA into three individual IRA’s naming one child as beneficiary of each IRA. By doing this, your children will have to take regular distribution from their inherited IRA, but they can spread those distributions over their longer individual life expectancies, not yours.

Finally, if you name a charity or other 501(c)(3) as beneficiary of your account, the asset will pass to the charity tax-free and your estate will also be entitled to a charitable deduction, which may reduce or eliminate taxes on the rest of your estate.

If you haven’t reviewed the beneficiary designations on your account in a long time, don’t guess, or hope they’re still valid. Take the time to talk to your trusted estate planner or financial advisor to ensure that your assets are disposed of the way YOU WISH, and not leave it up to the courts to decide.