Ep # 42: Estate Planning Ideas When Children Are Not The Heirs
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Benjamin Haas 00:03
Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Good afternoon, Adam.
Adam Werner 00:29
Good afternoon, Ben. How are you?
Benjamin Haas 00:32
Excellent. Excellent. Excellent. I hope you are well this fine Friday afternoon.
Adam Werner 00:38
Fantastic.
Benjamin Haas 00:39
Awesome. I'll be completely transparent. We just tried to record a podcast and I rambled the whole time.
Adam Werner 00:47
To be fair to you, it was a mess on either side. So yes, for those listening, these are not one take and done. Most of the time they are. Today was not.
Benjamin Haas 00:57
Yeah, that's okay. A little rusty, new topic. We're going to let that one go. I really like this one. I think we run across so many different situations. It's probably one of the most rewarding parts of the job for me, at least. I hope you would agree. Everybody's just different and I think we often talk on this podcast about general things for the masses and today, laser-focused. We have a couple different client groups that we love working for that are in the situation where either they're solo at this point in their life or they're married but they don't have specific heirs. Maybe they don't have children or this is the phase of life now where children are not their first heirs. So it leads to I would say, just a different kind of puzzle when it comes to estate planning. Let's talk about it that way if there are people out there that know somebody in this situation or maybe they're in it their own and they're listening to us, that's great. Let's give some tips and tricks by maybe talking through some of these clients' situations.
Adam Werner 02:06
I'll throw one out there to start. It's the, I don't say prototypical but it's husband and wife, did not have children but they still have family members that they want to take care of when they are gone. Whether it's nieces and nephews, just other family members that are not their direct descendants, which is the way a lot of estate planning and beneficiary designations default. So there are many things to keep in mind and to pre-plan against when it comes to leaving money to family that may be more of an arm's length.
Benjamin Haas 02:47
Here's the first one that comes to mind. The unintended consequences of what we kind of deem that “I love you” will. So again, husband, wife, husband says when I pass away, I want everything to go to my spouse. Great, that money is there to take care of her because in the situation that I'm thinking, they have their money separate but then they have beneficiaries that are underneath their own family lines. If he passes away and leaves everything to her, there's no mechanism then for whatever is left of that money when she passes away to come back to his nieces and nephews as it was the intention. So we started this conversation with them and it's like, oh, my gosh. Something needs to be in writing here. Whether it's differences in the will, whether it's bringing in marital trusts, there's many different ways that they could actually think about solving that problem but that is a situation where if what you really intend to have happen is care for one, then come back to my family, your beneficiary designation alone is not going to do that.
Adam Werner 03:56
Yeah, and it's a simple will, in and of itself, probably isn't enough to make that happen either. There's going to need to be additional language and additional provisions built into that to make sure that that actually happens. Another one that's in a similar vein, I know we're going to talk about some entities and want to talk about some charitable kind of inclinations but when it comes to leaving money to people, the difference between the pro rata designations and the per stirpes designation for beneficiaries is a key thing to keep in mind. We've talked about this before but just to reiterate for those listening now. The pro rata designation is the default. So giving the example - let's say, I guess going down this road of no kids. Let's say married couple, they're going to leave it to a niece and nephew on the wife's side and a niece and nephew on the husband's side. Equally, all equal shares. Pro rata, if one of those nieces or nephews passes away before the husband or wife, pro rata means it's just going to be evenly split among the three remaining nieces and nephews. The per stirpes designation would then follow the bloodline. So let's say the niece passes away but she has children, her share will then go to her children. We've often seen this with grandkids where the grandparents do have kids and grandkids, they want to make sure that the money continues to pass to the individual family members and doesn't exclude children of their beneficiaries.
Benjamin Haas 05:37
I think we would want people to be really cognizant of this, if they don't really have that default where I just want everything to go to my kids and then to the grandkids or anything of that nature, now we're including not direct descendants. Again, now we're kind of outside of the purview of default law and you really want to be very laser focused on how these beneficiary designations are listed because if it is one of those things, where you set it and forget it. You live a long and healthy life and a lot of things that kind of changed. We see it a lot with divorce, now we've got some fractured relationships and now money has the potential to go somewhere where you don't want it to go based on naming beneficiaries, versus going through pro rata, per stirpes, and other specifics. So that's a good one to bring up. In all cases pay attention to it. I think when you're in the situation where the default already isn't going to work, you got to pay closer attention.
Adam Werner 06:35
It takes a little bit of additional forethought and some planning in advance just to make sure you're thinking about some of those potential scenarios.
Benjamin Haas 06:45
So let me go to another situation there that's kind of piggybacking off of that. What if it's a situation where your heirs are not going to be your children? And of course, this may be a little more uncommon but we certainly know people where what they've wanted to do for their children has been in their lifetime. I gifted them in education or I helped them get that first home. I'm thinking about a couple that's incredibly philanthropic and now everything needs to be centered around saying, this is not going to my children because the defaults are there. If I don't have a beneficiary designation, I pass away, where's it going to go? It goes to my next of kin but this situation where, I think you hinted at it, leaving money to entities takes some work but there's absolutely a really good reason to do that work if your intention is to be charitable. Because why? When you pass away and leave money to charity, you get no tax deduction for doing that. You start to give to an entity that ultimately gives to a charity when you pass away, you got some tax deductions on the front end here.
Adam Werner 07:58
We love those because in the end, if the intent is to leave money to a charity, the end result is no different. As just naming the charity in the will or kind of creating this entity that can then leave the money to the charity. The difference being if you're using some sort of an entity, a charitable remainder, trust Foundation, whatever that may look like and maybe we'll get into some of those details. You're at least getting the tax deduction during your lifetime, which then theoretically means you may be able to pass on more to the charity over time or even during your lifetime.
Benjamin Haas 08:38
I understand that we are a small sample size in this big world that we live in. Is there anybody, Adam, that you know, that we have associated with that does not have direct descendants? So it's not leaving money directly to children. Is there anyone that you can think of that's not including charity in their estate in some way, shape, or form?
Adam Werner 09:02
No.
Benjamin Haas 09:03
Yeah, they all do. So I would hope that if there's anybody out there that's looking to develop some sort of estate plan that is going to include charity that maybe doesn't want to leave money to kids or doesn't have children to please, please, please have the conversations on the front end because whether it's charitable entities, whether it's a foundation, whether it's just a donor advised fund, there's many different ways for you, even some ways for you to retain some income from those assets to support you later in life while still making sure it goes to charities at your death.
Adam Werner 09:37
I think, oftentimes, that even just hearing you say that, I can see people starting to glaze over and think, oh, that sounds really complicated. That sounds really expensive. It sounds very time consuming and maybe some of those things are true but there is absolutely the cost benefit to doing those things. The benefits far outweigh, I think, some of that initial effort. Again, if that means maximizing or at least increasing what you can give to charity while you're living, what goes to charity when you pass. The fact that you're going to get the tax deduction while you're living, there are so many positives that in your scenario, those people should be doing those things.
Benjamin Haas 10:23
I think it's gotten way easier though too, I think, as information becomes more abundant and cheaper as these things become a little bit more common to use. I would hope that we would kind of take some of the burden off of people if they are feeling like that's just going to be a heavy, time consuming, and expensive thing.
Adam Werner 10:44
I don't know that any, we would not probably advocate for anybody to go out and start their own foundation without enlisting some professional help.
Benjamin Haas 10:55
Let's be honest, that one is big and huge and, yeah, we'll leave that where that is. But I'm thinking of another situation where we have two clients, sisters, who've gone through this exercise over many, many different years to identify what is really meaningful for them to leave behind and they've done an awesome job deciding who is going to get what assets based on age and taxability. What entity am I going to set up that my charitable itch is being scratched and at the same time, I'm retaining some interest. They even included insurance in a way that, honestly, their whole tax plan is going to leave the government with nothing like $0 because IRAs are going to charity and families getting insurance but I wanted to bring that up because, yes, it may have been daunting to think about on the front end but here we are, 10-15 years later and they've massaged this thing into feeling, I hope, like they have just such a great legacy plan to leave behind even though it wasn't spouses and children.
Adam Werner 11:59
Maybe we should have led with your pitch there on leaving the government $0 in estate tax revenue. That would have caught some ears right off the bat but yeah, there's a lot of moving pieces and it takes some thought. One of the things I wanted to point out there and you said it, is that not all financial assets are created equal when it comes to the inheritance process. There's the estate tax process, obviously but then there is the income tax side of what either a person or an entity actually inherits. Even just taking that full picture and putting those pieces together so that the retirement accounts that are taxable to a person, those go to the charity, when they are not taxable. The charity is exempt from that process but leaving non-retirement assets, if you have them, to actual human beings, that can limit the amount of taxes owed. Wrap in some life insurance. Putting all of those pieces together to really, really maximize your estate but then minimize what the government actually takes as portion of that. We enjoy that.
Benjamin Haas 13:17
Yeah, clearly I'm not in a situation to put myself in somebody's shoes. I can't know what they're thinking at that given time but I can imagine that when you don't have people with an expectation. If I'm going to pass away, my kids should probably expect that they're going to get something. If that hasn't been a conversation, that's the default. When there isn't that, I hope it gives somebody the freedom to really think creatively about what would be meaningful for them to be leaving behind and to whom? And I think that's why charity comes into play for people in this situation. So the sky's the limit, I just hope that people would feel empowered to go through that process and really, really think about it. I made a list of three suggestions that we'd give based on these types of situations. The first is that, we're really at the beginning stages of offering something that we would call a final financial plan and I think this would be really important. We thought of, we unfortunately work with a bunch of widows who have lost their husband and now have really had to take on all the organization themselves. The final financial plan was our idea of organizing, where all their documents are, who the key people are, all the way down to, what are the valuable things in the house and where can they be found. Helping somebody settle the estate is really what it was about. I think it's really to this group of people that may not feel like they have that default child to take care of things for them. Understand that will help you organize these things.
Adam Werner 14:58
Yeah. Am I supposed to do something else there? Yes, I agree.
Benjamin Haas 15:05
Second thing because there are defaults in the Commonwealth of Pennsylvania and really in any other state. If you do not have default heirs, you really do need an estate attorney, like more than anybody else that we think should have it. Make sure you have those conversations.
Adam Werner 15:27
Yeah, I think we did say that earlier, too. I'm not sure if that was before or after we hit the record button. We firmly believe that everybody should have a well thought out estate plan but when it comes to this where defaults are not going to be sufficient, yeah, absolutely. You need to go through this process.
Benjamin Haas 15:48
Third thing completely seems like it's off topic. You really ought to think about long-term care insurance. I think we unfortunately get ourselves in the spot where we have to have those tough conversations on, okay, if this happens, who are you relying on for care? And at what point is that not going to be somebody that you would want taking care of you. Again, this is, I would say for people that maybe don't have children or now that people live all over the country. I got my education on the east coast and living on the west coast. It may be something to consider early in life, making sure that you have set aside the money or that you are transferring the risk to some company to make sure that you are cared for, your assets are protected if you don't have somebody close by that's going to be able to do that for you.
Adam Werner 16:39
Yeah, we actually just met with a new client this morning that shared the experience. Father passed away at a very young age. At some point shortly thereafter, the mother bought a long-term care policy. Back when long-term care policies were fairly new and now here we are, flash forward, however many years, 30 some plus years and now she's in an assisted living facility and has cognitive difficulties but is otherwise healthy. Now by the way, this insurance policy or this long-term care policy is there to essentially take care of her for a very long time and not feel like you're really draining your assets and then you become a ward of the state at some point, if you have to spend down all your assets and if there’s not somebody there, if there is not a child who can step in and actually help handle these affairs. It checks another one of those boxes of just making sure that you're at least taken care of physically and financially.
Benjamin Haas 17:41
Yeah, that wasn't meant to be a pitch for like, hey, if this is your situation, you need to go get it. It's more make sure you have the conversation and I think more than anything else, we just want people to have confidence that something is going to work out. Even if these are the bad dominoes that may happen.
Adam Werner 17:59
Yeah, I mean, we certainly approach planning oftentimes is what's the worst-case scenario, let's plan for that. We're not going to hope that any of that ever occurs, right. It's planned for the worst, hope for the best but if anything should happen negative, you've at least had the plan in place to be able to adapt to it at that time and not feel like you're just completely caught off guard. Planning in a nutshell.
Benjamin Haas 18:28
Well said, well done. Looking at my cheat sheet. I think we hit on it, at least the big things that I would want to mention. I know this is again, a little bit more specific to potentially a smaller group of people but hopefully, you can see there's still a lot of conversations that should be had around this situation. Don't just brush it off.
Adam Werner 18:52
Come talk to us.
Benjamin Haas 18:58
Let's call it a week.
Adam Werner 19:02
Sounds great.
Benjamin Haas 19:04
Thank you again, estate planning for non-specific heirs.
Adam Werner 19:11
Thank you. Take care.
Benjamin Haas 19:13
Bye. Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant, and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!
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