Legacy Planning…What Are You Waiting For? (S3 E6)

Transcript

The results are in, and it looks like one out of one of us is going to die. I know, it’s never a good idea to start a podcast with a real downer, but it is what it is, and we all know it. Despite this certainty, most of us are guilty of failing to prepare for the inevitable. For some, especially my younger listeners, death seems decades into the future —and as my adorable little niece likes to say, “that’s a long time!”—so we don’t feel legacy planning is important.

But, regardless if you are in your 20s or well past your 80s, we all know that none of us are promised tomorrow, so why do so many of us neglect something so important? This episode might not be a fun one to listen to, but if you care about your loved ones and want to make their suffering during a very difficult time go a little smoother, you need to pay attention.

Welcome to the third season of Invested Poorly: Sad Tales of FInancial Fails, now part of the Bold Departure Network. Invested Poorly is a short-form podcast designed to help everyday investors make wiser investment decisions by learning what NOT to do with their money. Host Jeff Harrell shares timeless stories from his former life as a financial advisor, about the poor—and irrational—choices he witnessed investors make that disrupted their journey to financial independence, or FI. Your ability to recognize, and avoid, similar mistakes could make all the difference for you along your path to reach FI.

Check out the “Introduction” episode for more background on Jeff, why he created this podcast, and how it can guide you to becoming the hero of your own investing story. Now, on with the show.

Nothing can wreck a family relationship more than the death of a loved one. It was just sad. I have a couple stories of families being ripped apart after a parent dies because the kids aren’t happy with the financial outcome they received. I mean, I get it, we are all human and have feelings, but the vitriol and pain I’ve seen family members inflict on one another under these circumstances is heartbreaking. So, while there isn’t anything you can do to know how your loved ones will react to your death, taking a proactive approach now is possibly one of the best gifts you can ever give if a positive family legacy is important to you.

Let’s start with some easy things. First, let’s talk about beneficiaries. One of the first things we would do when working with a new client is review the beneficiaries on all of their financial accounts to see if what was listed was actually what they wanted. I am not lying, it was definitely more than 50% of the time that we made at least one adjustment during our initial review.

If you don’t do anything else after listening to this episode, please, please, please, review your beneficiaries to make sure they are listed the way you want. In fact, it might not be a bad idea to set up an annual reminder to check these. They might not change frequently, but if you live a long life, you can bet they will change over time.

The next item to consider is an emergency binder. This is an organizational tool that is the first thing your loved ones should be able to locate upon your death or after an emergency leaves you unable to perform regular duties. I’ve included in the show notes a link to the one my wife and I used as our template. I absolutely love it because it has a table of contents that walks you through all of the need-to-know items you would want your loved ones to have access to.

There are things you probably wouldn’t even realize are important, like maybe how to unlock your cell phone or where you stored something of value that no one will find without your direction. If you think about it, I’ll bet you have a couple things you might take to the grave if you don’t leave someone a note.

This is the perfect place to keep all this information, as well as other things like house instructions, alarm codes, birth certificates, social security cards, passports, marriage certificates, medical records, financial account details, and so on. There are just a ton of things that will help your loved ones tremendously if you leave an emergency binder behind.

This is probably another item to put on your annual review checklist because, even more so than your beneficiaries, this information will change frequently. My wife and I store ours in a safety deposit box and have the digital version password protected. My advice is to make sure wherever you store yours, be sure it is well-secured and that your loved ones know how to access it.

So now let’s move on to more formal estate planning. If nothing else, you need to have a will. I don’t care how young you are and how small your net worth might be, there is no excuse for not having a will. I’ll mention this company now, TrustandWill.com. This is the company I used to create a will, and later the trust, my wife and I now have. Trust & Will makes it extremely simple to complete the process, as long as you don’t have an overly complex estate situation. Plus, their fees are way cheaper than hiring a local attorney to draw up the documents.

Their website also has a section called the Learn Center. It is a treasure trove of estate planning-related articles that I find amazing. The Learn Center section of their website is totally free. It is always the first place I look when I’m researching an estate planning question because their articles are written in a manner that is very easy to understand, which is saying something for a legal website. I can’t stress this point enough, if you have any outstanding estate planning questions, check out TrustAndWill.com because it’s likely they have an article to answer your question or point you in the right direction.

Okay, back to the estate planning documents. First, a will is probably adequate for most people. All it does is tell your heirs where you want your assets to go after your death. Pretty straightforward. However, there are a lot of reasons why a simple will might not be sufficient for you, which is where a trust comes in.

A trust is a more formal and flexible legal arrangement after death that appoints a third party to distribute your assets as you wish. If you need a better understanding of the difference between the two, Trust & Will has multiple articles you can access that get into the nitty gritty details, so have at it. But from a big picture standpoint, you really need to make sure you have one or the other.

If you decide to go with a trust, you need to make sure you understand how it works. Without question, this can be difficult because the legal speak in these documents will make your head spin. I will admit, when I read through every page of the trust created for us by Trust & Will, I had some questions about parts I didn’t understand. My wife and I spoke with one of their representatives to make sure we fully understood everything, which made us extremely comfortable completing the process with them. Unfortunately, I have a real-world example of where not understanding how your trust is set up could become problematic.

Sadly, a client of mine passed away after a heart attack, and as devastating as this event was for the family, when we finally got into the details of their trust, we found out the way they set it up was to name his brother (so his widowed wife’s brother-in-law) a co-trustee. What this meant was that any distributions the spouse wanted to take from the trust had to be approved by her brother-in-law. Now, fortunately they have a great relationship, and it was never an issue, but I don’t believe this is what my client had truly wanted. So if you set up a trust, ask questions until you fully understand exactly how it will work.

I now want to return to the comments I made at the beginning of this episode regarding family relationships after your death. By no means am I going to tell anyone who they should leave their assets to, but I will ask you to think about how all of your heirs will feel about your decision. I saw numerous trusts that involved parents trying to control from the grave their financial desires for their children. Apparently, there is a formal term they use in the industry for this tactic: dead hand control. Basically, it is a method used to place conditions or stipulations that beneficiaries must follow to gain access to their full inheritance.

To be clear, I’m not saying this is a bad idea, but you have to realize that your heirs might not like your decision. And specifically, if any of your heirs think they got the short end of the stick as compared to another one of your heirs, they are more likely to be mad at that person since you are dead. I’m sorry, I know that isn’t fair, but it is the cold hard reality of how it will likely play out. I saw it more than once when siblings were left with materially different levels of assets.

I totally get it that there are tons of reasons why a parent might want to do this, but if you think it could create animosity amongst your children, I challenge you to really think hard about it. Or, if you think it is a good idea, maybe you need to talk it over with them before your ultimate demise, or at least leave a note in your emergency binder explaining your reasons for the decision. It could still cause some tension, but unless your goal really is to drive your kids or loved ones apart after your death, I personally think doing anything to avoid this is a good idea.

The last thing I want to put on your radar when it comes to legacy planning is taxes. There is a lot to unpack here and my intention is not to overwhelm you with tax strategies for estate planning, but there are a couple issues you should be aware of. First, in most cases when you die your heirs will get a step up in basis for all your assets outside of your retirement plan. What this means is they will only pay tax on these items when they sell them, but instead of realizing a gain based on the price you paid for it, they will get to use the price at the time of your death. This has major ramifications for those with large stock or real estate portfolios, so make sure you understand this when finalizing your estate plan.

Next, you should also be aware if you plan to give any of your assets away to charity, giving money from a traditional retirement plan account like an IRA or 401k is usually best because inheriting an IRA or 401k will result in taxable income to your heirs when they withdraw the money. However, a charity pays no tax on donations, so if you want to give away some money at your death, using your traditional retirement plan assets is definitely something to consider.

Lastly, I would be remiss if I didn’t offer my take on how much to leave to your heirs, very often your kids. As I’ve said multiple times in various episodes, if you are listening to this podcast, I’m assuming you are at least somewhat fiscally responsible. You are clearly interested in reaching FI and taking the necessary steps to save and create long-term wealth. If this is true, then in my opinion, you do not need to have any of your assets earmarked for inheritance. Let me explain.

I’m not saying you don’t need to leave your heirs anything. What I’m saying is, by definition, if you are striving to reach FI, then you must have a reasonable level of net worth. So, if you die prematurely in your 40s, 50s, or 60s, obviously you will have a nice nest egg to leave to the kids. However, if you make it well into your 70s, 80s, or 90s, your kids are going to be much older, so do you still feel the need to leave them a sizeable inheritance?

This is totally up to you, but my personal belief is the best gift you can give your kids as you age is to never be a financial burden to them. If you have to spend all your money in the last decade of your life to pay for a nice retirement home that may seem expensive but provides you a great quality of life, I’d like to think your kids would support you in that decision.

I know that is how I feel about my parents. I tell them all the time: Go spend your money, time is running out. I’m not sure my mom likes the second half of that statement, but I do think it helps her feel comfortable spending money. When they book a trip or do something especially fun, she enjoys telling me she is spending my inheritance. I tell her to spend it all. Ultimately, the decision is yours, but hopefully I’ve been able to make you think about whether or not intentionally leaving a sizable inheritance to your adult children is really necessary.

So there you have it: a host of reasons why you need to take the necessary steps to make sure your legacy planning is in order. It might not be fun to think about, but failing to plan will make the healing process for your family even harder when that day ultimately comes. You decide if that matters to you or not.

I sure hope you enjoyed this episode of Invested Poorly and will be able to take something from it to improve your decision making as you navigate the twists and turns of your personal investing adventure. Be sure to check out my website at AreYouFI.com (that’s A R E Y O U F I dot com) where you can find resources and show notes with the charts and graphs I mention during the episodes. These are like little treasure maps that can help you choose more wisely along your quest to reach FI, or financial independence.

Never forget, in the short-term the stock market is unpredictable, and as my mischievous little nephew likes to say, “things just happen!” So focus on the long-term, by controlling your emotions, simplify your investments, and always… ignore the noise.

I’m your host, Jeff Harrell. Thanks for listening.

Invested Poorly: Sad Tales of FInancial Fails was created for informational purposes only and should not be relied on for specific tax, legal, or investment advice. You should consider consulting a qualified professional to review your situation before engaging in any transactions. Investing involves risk, including loss of principal and past performance is no guarantee of future results.

This podcast was produced by Ted Cragg. Learn more about creating podcast mini-series like this by visiting QuickEditPodcasts.com.