Baby Boomers: Will They Be Able To Afford Their Parents?
By Lee R. Phillips
Do you worry about whether your aging parents have their "affairs in order?" You
should. After all, you’re 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. All of the waste and
frustration can easily be avoided.
Experts predict $10 trillion will be transferred in the next two decades from parents
to baby boomers. The average inheritance will be $200,000. The parents have spent
all of their lives saving to leave something to their family. For most boomers,
their inheritance will be the largest single financial transaction most they will
ever handle. Depending upon the planning done today, the amount actually transferred
could be doubled.
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. Too often the family has to get a court order
to have a parent declared incompetent and get permission to manage their affairs.
After both parents die, probate will eat 2-5% of the estate, and estate taxes can
take another 37-50%. Additionally, the estate mess can take many 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 also 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 a parent’s hard-earned money, transfer
the maximum amount of inheritance to the family, and ease the family’s legal and
- 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?
- Dodge family disputes. Make sure either the will or trust distribute personal
items with a list describing the item and the intended recipient. Most states allows
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 $1.5 million in their
estate, including the life insurance, retirement money, and 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. This shields up to $3 million 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 incompetence 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 that states it will endure the
incompetence 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 and asset protection
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.
Attorney Lee R. Phillips is a nationally recognized expert in the field of finance,
estate planning, and asset protection. Lee is licensed to practice law before the
United States Supreme Court & also holds licenses in insurance and securities.
Lee is a dynamic speaker & has spoken to over a half million people throughout
United States, Canada & the Pacific Rim helping them understand the law.