For parents, striking a balance between the desire to avoid burdening your children with adult money concerns and instilling the skills they'll need to successfully budget their own lives is not easy. My wife and I always took pains, as many parents do, to avoid involving our children in adult dramas when they were young. Now, well into adulthood, our children continue mostly in the dark when it comes to family money matters.
That's not good—and we're not alone.
A recent Fidelity study found that 90% of parents and adult children believed having clear conversations about money was important and seven in 10 parents believed they had this talk. However, the same study reported that more than half of adult children don't really know what assets their parents own, and one in three adult children didn't know where to find wills and other estate planning documents.*
Clearly, the way we currently communicate with adult children about wealth, health, and legacy can be improved upon. But how?
Start with the basics
It all begins with a will, the most basic of three documents virtually all Americans should have squared away—though, as Gallup discovered after the death of the will-less rock icon Prince, less than half of us do. That's a problem—even for those of us who don’t possess a $300 million net worth.
My wife and I have had a will for some time, but I'm sure my daughters don't remember where I told them I stored a copy. Unlike many other adult children, however, the attorney who helped us with our will is a family friend, so they'll know enough to call him for his copy.
Two other important documents to consider drafting are a durable power of attorney and healthcare proxy. By granting powers of attorney, you designate a person to make financial decisions when you can no longer make them yourself. Death and a permanent cognitive disability are two common triggers often included in this document. But you can also trigger powers if, for example, you are out of the country and unavailable for a lengthy period of time. If that's what you want, put it in writing. A healthcare proxy, also known as a healthcare power of attorney, designates a person to make decisions for you if you're unable to reasonably make those decisions for yourself—this time about your health.
Consider an estate plan
The next step in our work towards giving our family the gift of a financially settled, secure future—after talking about it with our kids—should be exploring estate plan options. Although our daughters won't have to worry about federal estate taxes, assuming current law remains as-is, our state still has a very low estate tax threshold plus additional inheritance taxes. Even without estate or inheritance tax considerations, you may want to consider how states probate wills publicly—that is, to what degree your private affairs will become public. An estate plan keeps your affairs private, and could offer the degree of control often necessary for complex estate planning situations, such as these:
- You want to pass business ownership to one child while leaving other assets to another child who will not participate in the business. A person in this scenario might equalize the estate by transferring non-business assets to the second child, including investments and life insurance.
- You are among the numerous blended families around the country, where taking care of the needs of children from multiple marriages requires careful planning. A common consideration in this scenario is income for the surviving spouse, followed by the transfer of assets to children from a previous marriage at a later date.
- Families with special-needs children need a unique approach as well. An estate plan might dictate assets that will support a special-needs adult child's independent living. Planning that ensures all possible government healthcare benefits are maximized is also common.
Future education needs
You don't need to create an estate plan to begin planning for the distribution of your assets. If you have children, you might consider transferring some assets now by contributing to a 529 plan for the benefit of grandchildren. You would still own this account, and can even name another beneficiary should circumstances change. Earnings grow federal income tax-deferred and could qualify for a state tax break. Best of all, withdrawals used for qualified education expenses are tax-free.
Even if your estate is small, you'll still want to decide who gets what—down to the most detailed item of value. Some keepsakes, such as a grandmother's wedding ring, might have more sentimental than monetary value. My daughters already talk about which items they want some day—and it's a subject we'll need to discuss in detail sooner rather than later. Then, we'll document who gets what in writing.
Two-way communication with family is perhaps the most important step you can take to prevent unanticipated, potential discord over your assets when you're gone. Sit down with loved ones and make decisions that will cover everything from transferring your assets to end-of-life decisions. You'll find it's amazing how difficult decisions become easy when you talk them over.
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