Having a financial conversation about your estate plan and intentions with loved ones can help benefit your legacy and bring peace-of-mind for all.
Many baby boomers may hesitate to discuss money with their kids, but the reality is a massive amount of wealth will be transferred in the next couple of decades.
Staying on top of your estate plan and sharing your plans with your kids could make a big impact on your legacy — and the amount you pay in estate taxes.
Here are three reasons to consider talking to your children about estate planning.
1. The money gets transferred the way you want.
Many people create an estate plan, naming their child as trustee or executor, but they never discuss the role and what is involved with their child. An effective starting place would be to ask your kids if they are comfortable acting as the executor, trustee or power of attorney.
You can review what each of the roles entails and explain their responsibilities. The estate documents spell out some critical responsibilities but do not lay out all the details. Having your kids involved in the process and getting their buy-in will pay huge dividends down the road.
For example, you can share information about valuables stored in a fireproof safe or add their name to the safety deposit box. Sharing details about financial institutions you work with, and the titling of the various accounts ensures accounts are not overlooked and bills get paid when you are not around.
As you age, you may forget about insurance bills or lose track of investments for tax purposes. If your kids have a working understanding of your situation, wishes and estate, they can step in and as a fiduciary on your behalf.
Parents can get children involved through an introduction to their estate planning attorney or financial advisor. A financial advisor can facilitate a meeting with family members and the estate attorney to review the estate plan and pertinent duties of each child. If children have questions, the experts can answer them in the context of the overall estate plan. If children are minors, having a successor trustee be part of the meeting is valuable.
2. Minimizing unnecessary taxes and expenses.
Many adult children do not have the same experience dealing with issues that wealthy retirees face. Concepts such as non-qualified accounts, individual retirement accounts, Roth IRAs, step-up in cost basis and life insurance proceeds might be confusing for an adult child who is handling your estate. There were likely specific reasons for why you have all these different types of accounts and investments, which may not be relevant to your current situation.
It is critical to explain what you own, what type of accounts you have and how they are treated from a tax perspective. By explaining things like tax-free distributions from a Roth IRA or step-up in basis, you increase the chances that your hard-earned savings will not be consumed by taxes. For example, many people do not realize that withdrawing $100,000 from a traditional IRA is taxable while withdrawing $100,000 from a Roth IRA is tax-free.
3. Ensuring your kids know you cared.
Discussing your estate plan with your children provides a valuable opportunity to connect with your loved ones, even after you are gone. A person’s attitudes about money say a lot about his or her values.
Sharing with your kids what your money means to you, and why you are speaking with them about it, will help guide them to honor your memory. Knowing the purpose behind a life insurance policy was to fund a grandchild’s home purchase, for example, can provide a lasting legacy.
Imagine your adult child sitting down with your grandchild after you are gone and saying, “Grandpa and Grandma took out this life insurance policy because they wanted you to have a down payment for your first house.” The meaning behind the money only exists if the conversation about your estate plan takes place.
In closing, there are endless personal reasons to discuss your estate plans with your kids. While it is a simple step, it is not easy to have the estate conversation.
The pandemic highlighted the need to not procrastinate estate planning any longer. It also has provided an opportunity to discuss these estate plans with your children. The benefits can help solidify your legacy.