By Dr. Jim Dahle, WCI FounderYou've seen the Hollywood blockbusters:
The rich grandfather that no one really knew well has died. Extended family members, including many previously estranged from each other, have gathered around the attorney's huge conference table in the oak-paneled office. Then comes the big reveal of the will and who is getting what. No one knows what to expect. There is rejoicing. There is crying. Threats are made and family members storm out of the room, setting up numerous dramatic threads to be resolved in the rest of the movie.
That's high-quality estate planning there, am I right?
No. That's the last thing most people want to happen when their will is opened. How do you avoid that? You include your kids in your estate planning. There are a lot of benefits to including them and very few downsides. Let's start with the benefits.
#1 No Surprises
When your kids know what is going to happen when you die, there are no surprises. There's no big reveal. The consequences seen in the Hollywood films are avoided. If they don't like how you're dividing up your assets, they can talk to you about it before you die. By the time you die, it's a done deal. They might not like it, but they're probably not going to fight it.
#2 One Child Will Probably Have to Administer It
Most people choose an adult child as their executor. Don't dump that on them without their knowledge. It's a pain to be an executor, and if they're not willing to do it, you probably don't want them doing it. Even if you, for some bonkers reason, want to keep secrets from your kids, you probably at least want the executor to know what's happening.
More information here:
#3 You'll Learn About Their Finances
Families that talk about finances tend to be financially successful. A discussion of estate planning naturally leads to a discussion of finances, and that discussion typically goes both ways. You share a little; they share a little. A huge benefit of having these discussions long before death is that you get to learn about their financial successes, challenges, tax brackets, and more. That's all highly relevant to the estate planning decisions you are making.
#4 You'll Learn About Their Values
When you include your kids in the discussions and decisions behind your estate planning documents, you'll learn a lot about their values and where your money is likely to end up eventually. That might change how you want to live your financial life, and it will certainly change how you draft those documents.
#5 Personal Property Gets Worked Out in Advance
Some of the biggest fights around a will involve personal property: Grandma's ring, that old cedar chest, the lake house, Dad's classic car. Whatever. Including the kids gets that all worked out in advance. They all know who's getting what. You might also discover that none of them want some items, and you can make alternative plans for those pieces.
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#6 Maximize Total Wealth
When multiple generations work together, it becomes possible to optimize a lot more than what a single generation can do by itself. Sometimes it makes sense for one generation to pay the taxes instead of another. Sometimes it makes sense for the younger generation to subsidize the lifestyle of the older generation to avoid the older generation selling an asset and realizing some capital gains that would have been eliminated with the step up in basis at death. The second generation can decline an inheritance and pass it on to the third generation. There are plenty of potential situations where a difference can be made but only if the generations work together.
#7 Allow Your Kids to Make Plans That Include a Potential Inheritance
Knowing about a potential inheritance can facilitate your kids' financial planning. Perhaps they'll be more likely to contribute to a retirement account or have a smaller emergency fund or buy that dream house a little earlier or put less toward the grandkids' 529s. The point is if they know they're going to come into hundreds of thousands or even millions of dollars in their 40s, 50s, or 60s, that can change a lot of things about their careers and finances. Some of those might be bad things (“I'm going to retire at 29 because I now have enough money to get me to my inheritance money”), but most of the time it just helps them to optimize the situation.
The opposite can happen too. Maybe your kids think you're richer than you are or that you're leaving them all the money instead of charity. Finding out now might make them work harder, save more, invest differently, and make different career and financial decisions.
#8 Provide Senility Protection
Waiting too late is a common estate planning pitfall. I'm not talking about dying before getting it done. I'm talking about waiting until you're in your 80s or 90s when your mental faculties perhaps aren't quite what they were. Now you're at risk for one kid or even a professional advisor talking you into a lousy estate plan. Your kids, who are presumably intelligent and love you, can keep an eye on the whole project and ensure it really is the best plan for all involved.
More information here:
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The Downsides
As you can see, there are lots of upsides to including your kids in your estate planning. There could be downsides too, I suppose. First, you'll have to reveal a little more of your finances than maybe you'd like. Many of us are private people. We grew up in a family where we had no idea what our parents made or how much they had, and we plan to continue the trend.
Well, that makes multigenerational estate planning hard. Or perhaps we're just worried that revealing a big inheritance will suck the work ethic right out of those kids.
I think there are workarounds for both of those problems. You don't have to reveal EVERYTHING to them to get massive benefits from this process. Plus, you can also set up an inheritance to prevent bad financial behavior. For example, even if we died tomorrow, our kids wouldn't get their inheritance until they are 40 (1/3), 50 (1/3), and 60 (1/3). They'll have to fend for themselves for at least 20 years, and hopefully, they'll develop some good financial habits in those two decades. Worst case scenario, you set up a spendthrift trust with all kinds of protections and requirements.
Share your estate plan with your kids. Better yet, include them in the process itself. This will prevent surprises and optimize multigenerational wealth building.
What do you think? What do your kids know about your estate plan and why?
While I don’t have children, my niece and nephew are knowledgeable about my estate plans and I have all the POA and executor rigamarole set in place. In fact, we had this discussion this weekend. It’s important that they understand so they don’t worry that they might be asked to help me; that frees up their planning (folks in my family routinely live into their 90’s). I know neither is as frugal as I am and in some ways downright wasteful, thus I have very specific controls on the money and once I go the other side I want them to understand that some funds are set aside legally for an endowed scholarship and for a young person whom I mentored over the years. Death is hard enough to deal with without the deceased not taking steps in this life to make it easier on the living. The discussion has led to them saying what items they want and don’t want and that is worked out so there is no drama in that regard.
It’s also important so there is no misunderstanding about what to do with my remains and the cat. There is no sense in them spending money on an expensive casket; the least expensive pine casket without looking cheap, no cardboard, but a shroud will do. I want to be sure my cat has a good home.
As usual, the article provides sage advice.
I would add that the MOST IMPORTANT thing that parents can provide their potential heirs is a good sound financial education that would allow them to build their own wealth so that any inheritance becomes irrelevant.
I would add that some of the fears that many people have of children inheriting money end up being moot. Despite my father and FIL having significant issues with heart disease and cancer respectively, my father lived to 93 and my FIL is alive at 91.
While I’m hopeful there will be something left for our kids, I can’t say with certainty that there will be. I don’t want to tell them to expect a certain amount.
Even if you don’t want to share specifics about the amounts to be inherited. I think that at least sharing that you have a plan, and that they will not be on the hook to have to support you financially in itself would be a relief.
I agree with being vague about specifics. I have two kids, one disabled permanently and the other able bodied.
I plan to soon discuss the estate with my able son and his new wife. Not to let them know a big fortune is coming (although it might), but more so that they both know they will never need to support neither me nor their disabled brother.
Thanks to Jim for yet another thoughtful, helpful article. This is really relevant for me as I just completed updating our trust and have gone through the first stages of retirement planning with a financial advisor.
I was already planning to discuss this with my son and new daughter in law and there are some very good thoughts here.
I would like to thank WCI for another insightful and helpful post. I am right in the middle of retirement planning and have just revised a trust and started the initial evaluation with a financial advisor who specializes in families with a disabled child. I was planning on discussing this all with my non-disabled son soon and this article gives a lot of good talking points.
I can see how a lot of younger folks might not consider this advice right now, but they should either copy it or earmark it for when that time comes.
My son used to tell his friends, who suggested he would have it made when his mom and I passed, that I told him he would have to pay to put me in the ground. I did say that, and that is still the plan. There may be a good bit left, but I would rather he not plan on it.
We have two teenagers. They know most of our family finances and our estate plans. I don’t think they find any of it particularly interesting. This is similar to how my parents were with me.