Baby boomers have a new worry: whether they can afford their aging parents. Many of the boomers parents do have their “affairs in order?” Do your parents have their affairs in order? After all, you are the one who will have to pay unnecessary taxes and endure time-consuming court procedures if your parents don’t have an effective estate plan. Without some forethought on their part and your part, you could be facing a lot of wasted time and money in addition to a lot of frustration.
Experts predict $10 trillion will be transferred in the next two decades from parents to baby boomers. The average inheritance will be $200,000. Most parents have spent all of their life saving to leave something to their family. For most boomers, their inheritance will be the largest single financial transaction they will ever handle. Depending upon the planning done today, the amount actually transferred could be doubled in many cases.
During the final years of a parent’s life, the family can lose a lot of the estate in rest home expenses or legal fees. All together too often, the family has to get a court order to have a parent declared incompetent and get permission to manage their affairs. If your parents die without the proper planning, probate will eat 2-5% of the estate, and estate taxes will take another 45-50%. Additionally, the estate mess will take days of time out of the boomer’s busy life. Not only money is lost, but life styles often have to be altered just to work through the mess.
Good planning is worth every effort made and every dime spent, not just in the money and time savings, but in the peace of mind it will give to both the parents and the kids. Boomers need to help get the planning done. However, discussing money, especially in this context, is very unpleasant for most families. The kids don’t want to appear grabby or look like they are just waiting for their parents to die, so they can get their inheritance. The parents don’t want to face their own mortality, and they don’t want the kids nosing in their financial affairs. The bottom line is nothing gets done.
The sooner this discussion takes place the better. Everybody has to recognize that planning is good business and financial management. The parents have an obligation to take care of it for the children’s sake, and the children have an obligation to help their aging parents. The discussion will take place at some point. The worst time to have the discussion is when a parent is in intensive care.
The following six tips will help protect your parent’s hard-earned money, transfer the maximum amount of inheritance to the family, and ease the family’s legal and emotional burden.
- Review current wills and/or living trusts. Do the documents reflect the parent’s current wishes? Have there been changes in family relationships, such as divorces, marriages, or new grandchildren?
- Look into living trusts. All wills that transfer property must go through a court process called probate. Probate eats time and money – lots of both. Today, many families use living trusts to avoid probate, reduce legal fees, and pay the least possible taxes. Living trusts work well, provided they are handled properly during the parent’s life. Is the living trust being used properly? Unfortunately, the majority of families with a living trust still face probate, because the trust isn’t used properly.
- Dodge family disputes. Make sure either the will or trust distribute personal items with a list describing the item and the intended recipient. Some state laws allow distribution of personal items through a “personal letter,” which is just a list of items and their intended recipient. The letter is not part of the will until death, and then it essentially becomes part of the will. Thus, the letter can be rewritten or updated as often as desired without a trip back to the attorney. The letter must be “authorized” by the individual’s will in order for it to be effective. If specific distribution of personal items like the shot gun, wedding ring, and the family stamp collection is made in the letter, family fights will be avoided.
- Split trusts to save taxes. If mom and dad have over a certain amount (the amount changes each year) in their estate, including the life insurance, retirement money, and the business, they should either have an individual trust for each or have a trust that “splits” into two trusts when the first one of them dies. The trusts can shield up to millions of dollars from estate taxes that eat away at a family’s wealth.
- Protect life insurance. Life insurance is taxed. The family doesn’t have to pay income tax on the money they get, but the money is taxed in the departed loved one’s estate and the IRS will routinely take up to 50% of it. A living trust can help in smaller estates, and an irrevocable insurance trust can totally eliminate the tax in bigger estates.
- Solve the incompetency problem. Use a durable power of attorney to transfer power to someone when the parent can no longer take care of their own business affairs. The power of attorney has to have language in it which states that it will endure the incompetency of the individual making the power of attorney. With the power of attorney, there isn’t any need to have the parent declared incompetent and have a court appoint a guardian. It removes a lot of frustration.
The parents need to soften up and realize that estate planning is something they need to talk about and be taking care of. If they cannot do it for themselves, they need to realize that their children are the ones that they have to turn to. The boomers need to take their parents’ estate planning very seriously. The boomers have a lot at stake – a lot of money, a lot of time, and a lot of frustration.