By Mike and Steve Cunningham
It happened in an instant. She received the phone call … he was gone. He had flown his small plane for years, with never an incident. But this time was different, and suddenly her life was changed.
Dan and Linda married late in life. In fact, they had married only a few months before Dan’s accident. Dan had two children from his first marriage, which had ended nearly a decade ago. He was a successful instructor at a private college in Texas, and life began to finally move in the right direction after he met Linda. They married and began to build a new life together.
One of the things they had talked about was Dan’s children. He and Linda agreed that, in the unlikely event of his death, his retirement account should go to his children. Dan had turned in a beneficiary designation form to his employer eight years ago (after his divorce and years before he met Linda). And that was that … or so they thought.
Dan’s death brought terrible upheaval for Linda and the children, but they were not prepared for what was to follow. Shortly after Dan’s death, the benefits department at the college where Dan had worked notified Linda that she was the sole primary beneficiary. That didn’t make sense to her. After all, she and Dan had discussed that the money should go to his children. The benefits administrator patiently explained a provision in the 401(k) plan that Linda and Dan had been unaware of. To Linda’s dismay, the plan provided that remarriage invalidates a prior beneficiary designation. Linda didn’t understand, so the administrator continued.
“Linda, when you and Dan married, his prior beneficiary designation was wiped out, and you became his sole primary beneficiary.” It took a few moments to sink in. Dan’s kids were a bit apprehensive, but after all, Linda was going to give the money to them, just as she and Dan had agreed.
Since the retirement account was now in Linda’s name, she could take the money and give it to the children. However, she would have to pay taxes on the money she drew out. One child wanted the money immediately, which would result in a large tax bill for Linda. Sure, she could take out enough to pay her taxes and give the rest to the first child, but he began to question if Linda was giving him the right amount of money. The other child wanted to take money out over several years. Any time she wanted a withdrawal, she had to ask Linda for it. You can imagine how the relationship began to deteriorate.
It wasn’t supposed to be that way. Dan and Linda had even talked about it. But for all their talking, they failed to take action. And what’s worse, they didn’t even realize they needed to take action. Linda found herself wishing she could turn back time and consult with the benefits administrator. She wondered what else they hadn’t properly prepared for.
This is just one example of a family who wished they had planned better. You know similar stories, each with the same theme: “We talked about it, but we never ….” A wise person learns from their mistakes. But a wiser person learns from the mistakes of others. If you find yourself in Dan and Linda’s place pre-accident, while you can still do something about it, you may wonder what you should do. As you give attention to end-of-life planning (commonly referred to as estate planning), we have a few tips. We’ll categorize them as “do’s” and “don’ts.” Let’s start with the don’ts.
- DON’T try to tackle everything at once. If you are like most people, you have several end-of-life issues to deal with. Write a will, check retirement account beneficiary designations, determine if you need a trust, etc. Don’t try to solve every issue immediately. Just start moving in the right direction to make some progress. Take baby steps. Before you know it, you will have completed the tasks at hand.
- DON’T aim for perfection. Naturally, the future is unknown. If you like to know all the details before making a decision, you may have more difficulty preparing for end-of-life issues. Rather than getting caught in the paralysis of analysis, make the best decision you can with the information available at the time. You can always make adjustments later if necessary. In any event, it is better to have an imperfect plan in place, rather than no plan at all.
- DON’T get fancy. It’s easy to become enamored with excessively complicated strategies. Don’t fall into that trap. Trusts can often become too complicated. If you don’t understand the purpose of the strategy, it’s too complicated. Simplify and know what you need. If you can explain your plan to an 8-year-old child, it’s reasonable to proceed.
On a more positive note, here are some suggestions of what to do as you think about and prepare for end-of-life issues.
- Make a list of all your financial assets. You may find it hard to believe, but we had a client who did not make a list of all their financial assets. One year after the client died, his wife discovered one of his life insurance policies. Thankfully, the insurance company paid the claim. A financial inventory can be helpful to you, but it is immensely beneficial to those who are tasked with sorting out your assets after your death. You don’t even have to show them the list before you die. Simply tell them where the list is located. Include account numbers and approximate values of retirement accounts, bank accounts, life insurance contracts, etc.
- Share household financial tasks. We have two clients (we’ll call them Ben and Nancy) who are in their retirement years. Nancy handled all of the household finances. She was good at it (and frankly, Ben wasn’t). So, it was natural that she took care of the financial tasks. When Nancy died, Ben was left not only to grieve, but to also manage the household finances. It was a task he was not suited for in the best of times, and certainly less so during the process of grief, making Nancy’s loss that much more difficult. If you are like this couple, consider talking more about finances with your spouse. You won’t prepare them for everything, but you may make things a bit easier for them.
- Review your beneficiaries on each account annually. You generally make beneficiary designations on IRAs, 401(k)s, and life insurance contracts. We are often surprised by how frequently updates are necessary. For example, a beneficiary gets married and their last name changes; or, a child is born. It’s a good habit to ask your investment advisor to assist you with this sort of annual review. They can also help you ask the right questions of your employer’s benefits department regarding retirement accounts and employer-based life insurance contracts. If you are divorced and/or remarried, check with your 401(k) plan provider to see if they default to paying your prior spouse or your current spouse. Not all 401(k) plans are written identically. In any event, the best advice is to review your beneficiary designation on a systematic basis.
- Make sure all property is properly titled. If you have an investment account held only in your name, consider a change. For example, consider adding a trusted individual to the account, creating a lot of ease for your heirs. If you have a trust, you likely have certain types of property titled in the name of the trust. On a systematic basis, review your assets to confirm that everything is properly titled. We find that clients often make purchases during the year, but fail to title them in the name of the trust. Consult a professional to determine what types of property and accounts should be titled in the name of the trust.
- Consult a professional. Dan and Linda knew what they wanted. They just didn’t know they needed to complete a new beneficiary designation to accomplish their wishes. A professional can help you identify issues that you are unaware of. Also, we often find that individuals consult their friends, neighbors and co-workers when making huge life decisions. Do yourself a favor and add a professional to the list. We often say that it’s better to consult a doctor about your medicine rather than just taking the pills your neighbors use. The same is true for your investments. By consulting a professional, you could eliminate a lot of potential difficulty for yourself and your heirs.
Dan and Linda (and Ben and Nancy) are real people. Those aren’t their real names, but their stories are true. You know others like them. Although end-of-life planning might not be an entirely happy subject, the benefit is worth the effort. You have worked a long time to accumulate assets. Why risk giving them to the government or strangers? Doing a little work up front can reap great rewards for your loved ones. No single article is sufficient to cover all the bases related to end-of-life planning, so consult your financial planner for peace of mind.
Mike Cunningham, ChFC ® Financial Consultant, and
Steve Cunningham, CRPS ® Registered Representative
Mike Cunningham Investments
Mike and Steve Cunningham are registered with LPL Financial.
Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor.