Estate plans are traditionally created by members of a single generation. Mom and Dad hire an attorney to draw up their estate plan, and their children learn the details of that plan when their parents pass away. That makes sense from a legal perspective—when the parents hire an estate-planning attorney, that attorney represents Mom and Dad’s interests…not their kids’ interests.
But it doesn’t make sense from a practical planning perspective—aspects of Mom and Dad’s estate planning are likely to have a significant impact on their descendants’ lives…and those descendants might one day play a role in protecting their parents’ assets or helping them achieve their retirement goals. The smart move is to treat an estate plan as a multigenerational project, with parents, grown kids and potentially even grandkids included in the process.
Bottom Line Personal recently discussed multigenerational estate planning with an experienced team of estate-planning attorneys—Michael Gilfix and his son, Mark.
Communication Is Critical
Extremely wealthy families often establish “family offices” through which multiple generations of family members learn about the family’s financial affairs and have a voice in decision making. Not all parents want to be that collaborative when it comes to money matters, but as long as there’s intergenerational trust and shared values, there’s substantial upside to having some degree of intergenerational financial communication and coordinated planning. Parents who wish to include their adult children in the estate-planning process generally must inform their attorneys that they want this—attorneys need client permission to include anyone other than their clients themselves in these conversations.
Multigenerational estate planning does not require that parents share every detail of their financial situation with their descendants. Example: Some parents opt to share their estate plans in general terms, but not the dollar figures involved or specifics about how their estate will be divided among heirs.
Seven Situations When Multigeneration Estate Planning Pays
Here are several situations when taking a multigenerational approach to estate planning and related financial decisions can benefit families…
#1: Special-needs planning
Parents of special-needs children, such as children on the autism spectrum, often have estate plans crafted with these children in mind. Example: Their plans might feature “special-needs trusts” that would hold any money the special-needs child inherits in a way that won’t interfere with that child’s eligibility for means-tested government benefits. But while the parents of special-needs kids generally have estate plans constructed to protect these kids’ interests, the grandparents usually don’t. That sometimes causes problems—if the parent of a special-needs grandchild dies before the grandparent, an inheritance might later pass directly from the grandparent’s estate to the grandchild, undermining both the grandchild’s benefits eligibility and the parent’s special-needs planning. A family that engages in multigenerational estate planning is likely to spot this issue before it occurs and find a solution—the grandparents’ estate plan might divert any inheritance to this grandchild to a special-needs trust, for example.
#2. Real estate decision making
A woman in her retirement years wanted to remain in her home, but her savings were running short. She concluded that her best option was to take out a reverse mortgage to tap her considerable home equity. When she mentioned this plan to her adult children, the family together decided that one of her kids would instead loan her money. The mother hadn’t raised this possibility because she didn’t want to be a financial burden to her kids—but her kids preferred this option because it ensured that their mother could remain in her home as long as she wished and that the family home would remain in the family as long as they wished. This was a wise decision—in the end, this family came out hundreds of thousands of dollars ahead as a result of choosing an interfamily loan rather than a reverse mortgage, an option that nearly was missed due to a lack of communication. But beware: In some families, the older generation goes to great lengths and expense to keep the family home in the family—not realizing that the younger generation considers that home an expensive burden.
#3. Accelerated inheritances
Younger generations typically receive inheritances when older generations pass away. But what if members of the younger generation are facing financial need while their parents are still alive? If the older generation is financially comfortable, providing a portion of the inheritance in advance could be a positive for everyone—the younger generation receives a financial boost when it’s needed most…and the older generation gets to feel useful while they’re still around to see the positive effect of their generosity on their descendants’ lives. There can be tax advantages, too—one person can gift up to $19,000 to any other person in any year without any tax implications, thereby removing money from the estate and ensuring it won’t later be subject to estate taxes even if the estate-tax exemption is decreased in the coming years. In fact, it’s often possible to give more than $19,000 per year without major tax implications. Example: A mother and father could each give $19,000 to each of their two adult children and their spouses, for a total of up to $76,000. But accelerated inheritances are likely only when there’s intergenerational communication about finances and estate plans.
#4. A gift to grandkids that’s more versatile than a 529
Some grandparents put money in 529 plans for their grandkids—that can be a good way to help those grandkids pay their future college expenses. Other grandparents leave money to their grandkids in their wills, either directly or through trusts—that’s fine, too…as long as those grandkids are mature enough to use the money responsibly when they receive it. A type of irrevocable trust called a Crummey Trust offers a potentially better solution—someone who creates this type of trust can specify both the age at which his/her grandchild (or another beneficiary) will receive access to the money and what that money can be used for. While money in a 529 is essentially just for education expenses, a Crummey trust might also allow money to be used to buy a house, start a business, pay medical expenses or for any other reason that the person who sets up the trust deems worthwhile. Up to $19,000 can be put into these trusts per beneficiary each year without tax consequences—up to $38,000 if both grandparents are still alive to make contributions. The catch: The beneficiary of a Crummey Trust must be given a window of at least 30 days to withdraw money that has been placed into the trust. That makes intergenerational communication vital—the person putting money into that trust must feel confident that the beneficiary won’t immediately take it back out…and the beneficiary must understand that it’s not in his long-term financial interest to do so.
#5. Lasting family legacy
A type of irrevocable trust called a dynasty trust can protect assets from threats including creditors, divorce and estate taxes for many generations into the future. But placing assets into these trusts limits the access that the following generation will have to those assets…and how well those younger generations manage the dynasty trust could potentially impact its effectiveness. If a dynasty trust is part of an estate plan, it’s in everyone’s interest to include the younger generations in estate-planning conversations related to it.
#6. Long-term-care planning
Many aging parents have never had conversations with their adult children about where they’d like to live as they age. Is staying in the home as long as possible the priority? Would they like to move in with one of their kids if widowed? Have they selected a particular retirement community? Adult children who are aware of these priorities often can help their parents achieve them. Those who are kept in the dark often are forced to make rushed, ill-informed decisions after parents experience major health emergencies.
#7. Reinforcement of powers of attorney
A parent’s estate plan often includes a power of attorney that designates one of his adult children to step in and make financial decisions on his behalf if the parent becomes unable to make such decisions for himself. Trouble is, these adult children often are extremely hesitant to use this power, typically doing so only in extreme circumstances, such as when the parent is in a coma. That hesitation isn’t in anyone’s interests. A subtle decline in an aging parent’s cognitive abilities could leave that parent vulnerable to scams that could deplete the parent’s savings if the adult child doesn’t step in promptly. A parent should not only assign power of attorney to a trusted adult child, he should make it clear that he wants and expects that child to monitor his finances and take over if signs of cognitive decline appear, such as if he fails to pay bills…pays bill twice…and/or makes sizeable donations to nonprofits representing causes in which the parent hasn’t previously expressed interest.