Three Steps to Take For Your Family This Holiday Season

As we begin another holiday season with our families, I can’t help but think about two of the most passionate desires expressed by our Relaxing Retirement members during hundreds of discussions over the years:

  1. I don’t ever want to be a burden to my spouse, children, and grandchildren, and
  2. I want to make everything is as easy and seamless as possible when I’m no longer able to help.

It’s never a “good” or “convenient” time to think about these challenging issues.  There’s only a “right” time.  Let that be right now. 

Simply take a few moments during this holiday season to verify that you’ve “dotted all your I’s” and “crossed all your Ts” in three very important areas you’ve heard me discuss many times. You may very well have everything in order already.  If so, then this will provide you with another much-deserved jolt of confidence that you have your house in order:

  1. Estate Plan: Colleen and I recently updated the estate plan we first established twenty years ago, and it reaffirmed how critically important it is to have the four documents I outlined on page 134 of my book, The Relaxing Retirement Formula current and in place:
    • Will (“Pour Over” for everything you haven’t re-titled to your trust)
    • Durable Power of Attorney
    • Health Care Proxy
    • Revocable Living Trust  (And, that you have re-titled your assets to your living trusts to avoid probate)
  2. Long Term Care Insurance: There are elder care attorneys running scare tactic ads on the radio daily warning you not to let nursing homes “take” your home and your life savings, and implying they have a magic pill solution. There is no such magic pill that doesn’t have extensive negative consequences, i.e. giving up ownership of everything you’ve built. 

If you haven’t already done so, take the time to proactively evaluate your personal risk level so that you can make an educated decision about long term care coverage.  It remains the best tool I’ve seen to mitigate this risk.

  • What To Do When You’re No Longer Here Instructions: Statistics confirm that it’s unlikely your spouse, children, and/or grandchildren know exactly what to do with everything you’ve accumulated when you’re no longer here to help them.  A horror story we experienced with the best friend of one of our members many years ago led us to create The What To Do When I’m No Longer Here Program

If you don’t have a copy, please let us know and we’d be happy to get a copy out to you.  If you do, please commit to spending just one hour making sure your current information is available for your family.  After speaking with several family members at the funeral services of our Relaxing Retirement members, I can confirm that your family will be extremely grateful and appreciative that you took the time to do so.

Enjoy your holiday season with your family!

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Before You Help Your Grown Children

One of the most difficult challenges I have seen some of our Relaxing Retirement members embroiled in is the anxiety surrounding helping their adult children transition to becoming fully financially independent.

This is a very delicate subject and one that I have spent a lot of time discussing with several members.

If you’ve had to deal with this, you already know that you have to walk a fine line between your desire to help them avoid the struggles you went through when you were younger vs. helping them learn financial self-sufficiency.

It’s a very precarious situation, and as a father of a soon to be high school senior (son) and college junior (daughter), I sympathize completely. 

Helping them with month-to-month expenses….to paying off school loans, car loans, and credit card debt….to helping them with the down payment for their first home…all the way to bailing them out of challenging financial times if and when the need arises.

Whether or not you choose to help your grown children financially, and to what extent you choose to do so, will definitely have two extremely important outcomes you can count on:

  • It will affect your long-term relationship with them, and
  • It may very well shape the way they handle all their finances for the rest of their lives.

For starters, after creating your Retirement Blueprint™, and knowing your numbers as well as we all do as a result, we can confidently clarify to what degree you are in a financial position to help your children  

However, that’s very different than suggesting that you should help them financially.  Everyone’s situation and background is so unique that no one stock answer will suffice.

However, with that said, if you choose to help, here are some thoughts I recommend considering before you do.

Before You “Help”

To the extent that you can, given that you’re dealing with your children, and potentially your grandchildren, my first recommendation is to de-emotionalize yourself from the situation and try to think as rationally as you can. 

I recognize how difficult this is given the circumstances.  After all, we’re talking about your children and your grandchildren!  I know from experience how hard it is to resist going to every length to make things easier for them at every turn. 

However, I also recognize that all of our good long-term decisions are based on rational thought, and not on spur of the moment emotions.  So, as difficult as it may seem at the moment, try to make these decisions after careful thought.  (No different than any other significant financial decision.)

Questions To Ask Yourself

Ask yourself a few very important questions:

  • What is my goal in giving this money to them?  And, what is the most likely outcome once I do?
  • Do they really need the help, or are there areas in their lives where they could prioritize a little better and free up the necessary money?  This is extremely difficult in today’s “I want it right now” world that we live in.  Things that were luxuries years ago, or that didn’t even exist, are now absolute necessities. 
  • Does this help them become more independent and self-sufficient, or does it increase the likelihood that they will be back for more later?
  • How will this affect my relationship with my other children?

The most important factors are clear communication and expectation.  It’s never easy to engage your children in financial conversations.  However, the more explicit you are from the beginning, the more likely you are to get the outcome you’re looking for.

You want them to understand your reasons for assisting them, your limitations in doing so, and any parameters you may have for giving them money, i.e. expectations for the use of the money, limits on how they use it, reporting results back to you, and terms of repayment if so desired, etc.

Put it in the form of a letter if discussing it is difficult.  They will appreciate your honesty, and the fact that you took the time to give it so much thought.

In situations in which they come to you for help, I also recommend that they provide full disclosure.  By that, I mean laying out for you where their income comes from and precisely where it is spent. 

Chances are extremely high that they’ve never done this before.  Putting it all down on paper in black and white is amazingly curative all by itself.

What it also forces them to do, which they need to learn to do at some point anyway, is face the reality of the results of the choices they make. 

For example, even though their buddy drives a new BMW, that doesn’t mean they’re entitled to drive one as well, thus leading them to a $680 per month car payment when they only make $500 per week!  Likely an extreme example, but you get the point.

Again, in many cases, what used to be a luxury is now interpreted as a necessity.  Putting that down on paper in black and white usually brings the point home very clearly.

Bottom Line

The bottom line is that you have to take the time to think about your goals in giving.  And, then what you believe the outcome will be from doing so.

Are the likely outcomes in line with your goals?  If not, one of them has to be adjusted or you’re in for a potentially tumultuous long future with your family.

And, that’s no fun. 

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The Confidence and Strategy to Help Your Grandchildren Pay for College

In addition to answering your three biggest questions, 1) “Do we have enough built up in our Retirement Bucket to free ourselves of dependence on a paycheck from work,”  2) “How much can we afford to spend without running out of money,” and 3) “How can we make our Retirement Bucket™ last,one of the benefits of designing your Retirement Blueprint™ in our program is the ability to determine precisely how much you can afford to help your children and grandchildren without jeopardizing your long term financial security. 

This has been a real eye opener for many new members over the years as they had no idea how much they could afford to help, so they held back.  Now that they know exactly how much they can afford to help if they choose to, their questions all center around “how” to help, i.e. where should they invest?

There are several factors that go into selecting the best approach, such as the child’s age, and thus proximity to college, the family’s financial aid strategy, and the amount of money you’re looking to invest. 

However, in the overwhelming majority of cases with our members, the answer is pretty straightforward: 529 College Savings Plans

For the purposes of this discussion, I’m going to assume that your children will be saving for their kids’ education costs, and not planning on receiving financial aid.  

A strategy of hoping for financial aid is just that: hoping.  As you know, the priorities of the government change all the time so counting on financial aid is not a sound long term strategy.

How 529 Plans Work

Let’s take a look at the benefits of 529 Plans:

  • 529 plans are set up with you (or your child/grandchildren’s parent) as the custodian and the grandchild as the beneficiary. You may have all investment statements and correspondence sent to you exclusively, or to your grandchild as well.
  • You retain control of how the money is invested in the plan. Most plans offer a large selection of investment options as well as “age-based portfolios” where the company automatically adjusts the allocation of the investments to coincide with your grandchild’s age and years remaining before the money is needed to pay for college. 
  • All money deposited into the plan grows tax deferred just like your IRA. This is the first BIG long-term benefit.  You will not receive a 1099 each year to report gains on your tax return.
  • As long as the money is used to pay for education expenses, such as room, board, tuition, books, etc., all money is withdrawn from the plan tax free, similar to a Roth IRA. This is the biggest benefit.  Imagine how 18 years of growth would be taxed under normal circumstances!
  • If your grandchild decides not to go to college, you have two choices:
    • you may transfer the balances in the plan to another grandchild without paying taxes, or
    • your grandchild will simply pay taxes on the gains generated in the plan over the years when he or she withdraws the money to pay for anything other than college.
  • Plans have become very liberal, so your grandchild may use the money to pay for virtually any college. In other words, most plans don’t have a limited “approved” list such as in-state schools only.
  • In the new Secure Act, 529 balances may now also be used for private high school expenses (with certain limitations).
  • The last big benefit is that 529s are an estate planning tool for you. All funds deposited into a 529 Plan are considered a gift and are removed from your taxable estate.  Over the years, many Relaxing Retirement members have used this technique to systematically move funds out of their estate which would otherwise be taxed as high as 50% when they pass away. 

The last factor you will want to consider is which 529 college savings plan to invest in.  There are several good ones out there.  Take your time to evaluate the quality of investment options offered and the fees they charge to run the program. 

Tax-deferred or not, what drives the real value of these plans, like all other investments, is the quality of the underlying investment options available. 

If you need help selecting a plan, let us know. 

Once you have the plan set up, step back, and feel great about the fact that you’re helping your grandchildren get off to a better start than you did. 

Imagine how your grandchild may feel someday when he or she finds out that the reason they’re able to go to the school of their choice is because you helped pay for it by investing for them!

That will make it all worth it.

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Why a Revocable Living Trust Provides the Most Control

While a Will, Durable Power of Attorney and Health Care Proxy are all important and necessary pieces of an effective estate plan, a revocable Living Trust provides three levels of control that the others do not. 

Control Over Timing

A properly structured living trust allows you to specify when you want who to get what in a way that a will does not. It gives you the power to delay passing on your assets to one or more of your beneficiaries while paying out immediately to others. You can stagger the delivery of funds over time, or stipulate conditions on their distribution on a person-by-person basis such as having funds available upon graduation from college.

Control Over Circumstances

Setting up a living trust gives you the freedom to decide, in advance and with great specificity, what you want to have happen in every scenario: if one spouse is incapacitated and the other is not, if both are, if one is healthy and the other passes away, and in the event that beneficiaries divorce. A living trust allows you to spell out exactly what happens, who’s in charge, who gets to make what decisions, and where your assets go. A will can’t give you that level of control.

Control Over Probate

Probate involves validating a person’s last will and testament in a court of law.  The will must be presented by an attorney to the court in the jurisdiction where you live. Once a judge declares it valid, notice is given to any potential debtors, and all of your assets are listed in the newspaper. Although it’s time-consuming, expensive and invasive, every will must be validated before it becomes a legal document on which anyone can act.

If you’ve ever had the unfortunate job of settling an estate for a family member or friend who didn’t have a proper plan in place, then you know just how awful the probate process can be.

A properly funded revocable living trust allows your family to avoid the probate process entirely, something a will can’t do. 

WARNING #1: Your estate planning attorney may suggest that you don’t need a living trust because your estate will owe no federal estate taxes upon your death based on current laws. 

And, in many cases today that is true because estate tax exclusions have rapidly increased in the past few years to $11.58 million per individual on the federal level or $23.16 million for couples. 

In Massachusetts, however, the estate tax exemption is still only $1 million per person.

However, the real problem as I described above is the cost and delay of the probate process.  And, only a properly funded living trust can help you avoid it.

WARNING #2: “Creating” a Living Trust alone does not avoid probate.

You must take step two which is “funding” your trust while you’re still living. Funding simply means re-titling your assets to your trust prior to our death.

The first step is to determine which assets will go into whose trust (i.e. your trust and/or your spouse’s trust).  If your estate planning attorney is doing his/her job, they will spell this all out for you.

The next step is to change the title of ownership on each of your non-IRA assets, a bank account for example, to your trust so that your statement now reads “John Jones, Trustee, for the John Jones Revocable Trust” instead of just “John Jones”. 

Make sure you do this with all of your non-IRA assets so nothing gets left out. 

Additionally, your estate planning attorney should also spell out how your beneficiary designations should read on your life insurance, IRAs, and annuities. 

** A key point here is, if you are going to name your respective trust as your beneficiary, your trust MUST qualify for “pass-through” status so your trust beneficiaries have the opportunity to save thousands of dollars in income taxes by taking advantage of Inherited IRA rules.

While you’re completing the paperwork to re-title your assets to your respective trusts, take care of all your beneficiary designations at the same time. 

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