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For many people, estate planning is both a private matter and a morbid topic – not something that parents want to discuss with their adult children. While having such conversations takes a lot of courage, families that speak freely about these delicate issues can avoid problems down the line.
Sometimes it’s easier to understand that by looking at a family other than our own. You’ll find a close-up example in my Forbes Investment Guide article, “Madeline And The Family Business
.” If you enjoyed Ludwig Bemelmans’ Madeline books as a child, or read them to your own children or grandchildren, you won’t want to miss this fascinating story about what’s happening with his descendents 51 years after the artist and writer died in 1962. Reach your own conclusions about the perils that might await them and the enchanting Madeline character. Then look around the table as you gather with loved ones for the holidays this year and consider whether you’re making any of the same mistakes.
Here are seven reasons to clear the air.
1. Avoid surprises. Families that speak freely about estate planning can sometimes address awkward situations that might arise, like the choice of the executor – who is in charge of distributing assets after someone dies – or succession plans for a family business or the leaving of assets in trust. Tempting as it may be to tailor your plan to the personalities, abilities and needs of individual family members, remember that disparate treatment, particularly of children, can rekindle old rivalries or ignite new ones. Rather than leave children thinking, “Why did she do that? Mom didn’t love me as much,” you might want to be upfront about your intentions.
2. Refine your approach. While parents have no obligation to change an estate plan after hearing a child’s preferences, disclosing what they plan can lead to a better result. For example, maybe you are thinking of leaving one child a larger inheritance than the others because he has more children. By sharing these details with this child, you might learn that he would prefer to receive the same amount as his siblings, rather than face their wrath.
When there is a family business, company founders often want to pass along the enterprise to the children who are involved with it. But it’s important to gauge whether they want to continue that role. If they do, you can look for ways the children who will not be involved might receive other, comparably valued assets, such as stocks, bonds and real estate, or the proceeds of a life insurance policy.
Summer and vacation homes are another potential source of conflict. Before leaving these assets to more than one person jointly, find out whether they want them and how they might continue using them. Various legal vehicles are available for sharing and running these homes, financing their operation and buying out people who do not want to participate. For more about this thorny subject, see “The Family Cabin: Private Retreat Or Isolated Battleground?” by Seattle lawyer Wendy S. Goffe.
3. Save taxes. If estate taxes could be an issue, you might want to consider making lifetime gifts now to save estate tax later. Lifetime gifts leave less for the government to tax when you die, and if the assets increase in value after you have passed them along, you will not owe gift tax on the appreciation.
Until Congress passed a new tax law last New Year’s Eve, the federal tax-free amount was scheduled to automatically dip to $1 million per person. The tax deal that averted the fiscal cliff prevented that from happening. (See my post, “After The Fiscal Cliff Deal: Estate And Gift Tax Explained.”) The American Taxpayer Relief Act of 2012, passed in the closing hours of last year, maintained the high exclusion amount. Then on Jan. 11 the IRS made an inflation adjustment to raise it even higher for 2013 – to $5.25 million. With the latest adjustment, announced Oct. 9 in Revenue Procedure 2013-35 it goes up again in 2014, to $5.34 million. (See my post, “IRS Raises Limit On Tax-Free Lifetime Gifts In 2014.”)
4. Adjust expectations. People who made large lifetime gifts last year thinking the exclusion amount was about to drop, “cracked open the door to the secret of the estate plan,” says Susan T. Bart, a lawyer with Sidley Austin in Chicago. Children may now be wondering whether that’s all they’re going to receive, or whether there is more money coming later. This might be a good time to set the record straight.
Another thing to discuss is whether your estate plan will even out certain disparities that have arisen during your life. For instance, if you lent money to one child for a business venture and were never repaid, you could leave that child proportionately less. If one of your children never married or had children, and you have set aside college funds for grandchildren, you could give a larger inheritance to the child who is not a parent (though you should note, and hope all parties recognize, that a child with grandchildren and college costs needs more funds).
5. Explain your reasoning. Explaining the principles that have influenced your decision could make them easier for children to accept. For instance, don’t assume it’s obvious that you left the summer home to one child because he used it most; a parent’s death or even illness can rekindle sibling rivalries from decades earlier.
6. Anticipate disclaimers. This refers to the process of declining an inheritance (typically with the intent of benefiting another person or a specific charity) – usually for tax reasons. People who disclaim, known as disclaimants, are generally treated as if they had died before the person from whom they are inheriting. The assets go to the person next in line as designated in the estate plan or under state law if the plan makes no such provision, or to a specific charity if that is what the estate plan specifies.
A will must name the specific charity or charities that will receive any assets that are disclaimed – the choice of the nonprofit is not up to the people who would otherwise inherit them. Example: “To my daughter Sally, but if she disclaims, to Our Town Public Library.”
With IRA assets, the procedure is different, since money in these accounts does not generally pass under a will. Instead, it goes to inheritors according to beneficiary-designation forms that you fill out when you open the accounts or amend later. (See my post, “Inherited IRA Rules: What You Need To Know.”) So if your children want to be able to disclaim all or part of their inheritance – either to their own kids or to a charity – you should name your child as a primary beneficiary, and a grandchild or specific charity as the contingent beneficiary.
7. Promote family harmony. Of course, parents who share their thinking risk hostility from adult children who do not like what they hear. Sometimes it is best to have a series of talks, rather than covering everything at once. To reduce the possibility of a hostile audience, parents may talk to each child separately, rather than addressing them as a group. Afterward, ask each child, “What do you think?” You may be surprised to find that adult children have great ideas and interesting opinions.