Most baby boomers were taught that financial affairs are private matters, and you should not talk with your kids about your money situation. In most circumstances, keeping estate matters private is prudent. However, when it comes to the transfer of wealth, conversing with your adult children can have profound impacts on your legacy.
With today’s ever changing tax and estate tax climate, and with the Biden administration at the helm, these conversations are relevant now. Money is a highly personal thing, and it makes people do funny things.
The reality is that if you have prepared well for retirement, there is a reasonable likelihood that you are going to die with money left over. Why bother talking to your offspring about the money they’ll inherit?
Here are 3 top reasons to discuss the matter.
The Money Gets Transferred the Way You Want
Take a situation where you have all your documents in place and your child is your power of attorney for healthcare and financial decisions.
If you never spoke with your kid about the type of care you might want or where various accounts are and their purpose, how are they going to know what you would have wanted? The documents spell out some critical decisions, like being kept alive artificially, but don’t lay out all the details.
Discussing with your adult children the responsibility of being a power of attorney, executor, or trustee and getting their buy-in on their willingness to take on that role will pay huge dividends down the road.
For example, you can share information about valuables stored in a fire safe or ensure their name is listed on the safety deposit box. The knowledge about accounts at financial institutions and their titling can ensure accounts are not forgotten and bills get paid.
The easiest starting point is just to ask your adult child if they are comfortable serving as the executor or discussing the responsibilities of being a power of attorney. Naturally, more details about your estate will follow in a natural and organic way.
Minimizing Unnecessary Taxes and Expenses
Part of discussing your estate with your kids will concern educating them on the different types of accounts and insurances you have and their purpose. Many adult children don’t have the same experience dealing with issues that accompany wealthy retirees.
As easy entry point to start this discussion is to ask your adult child if they have a Roth IRA, or if they have life insurance through their employer. If they do not or are not familiar, you would have an opportunity to explain how the account works.
When you ultimately sit down and have a comprehensive discussion on the details of your estate, you should explain to them not just how much you have, but exactly what type of account it is and how it is treated from a tax perspective.
You should also explain to them, if they need money for an expense, which account makes the most sense to take it from based on the tax consequences. 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 won’t unnecessarily go to the Government.
Many people do not realize that withdrawing $100,000 from an IRA has totally different tax implications than using the same amount from life insurance proceeds.
Ensuring That Your Kids Know You Cared
People who never sit down with their children and discuss what will happen when they’re gone are missing a valuable opportunity to connect with their loved ones, even after they’re gone. Remember, a person’s attitudes about money says a lot about their principles and values.
Sharing with your adult children what your money means to you and why you are speaking with them about it, will help guide them to honor your memory. Knowing that the purpose behind a particular account was to fund a grandchild’s education can provide an incredible legacy.
Imagine your adult child sitting down with your grandchild after you are gone and saying “Grandma started this account when you were born because they wanted to make sure you went to college since they never had the opportunity.”
That grandchild will remember that fact for the rest of his or her life, and may even create a scholarship fund one day, or do the same for their grandchild. It’s amazing to think that a simple conversation has those ripple effects.
There is never an easy time to have the estate conversation with your kids. It can be uncomfortable and even feel like a mistake, but if it is done thoughtfully, it can yield benefits.
Have you discussed your estate plans with your adult children? How did the conversation go? Have you chosen your power of attorney? Did it take long to explain your financial situation? Do you consider it a wise decision? Please share with the community!