How Pre-planning Can Help Your Heirs
When I first met Carolyn, she was a vivacious, engaged person with an active social life. She had been widowed for a few years, and we were thinking about the potential of her eventually needing long term care. Since we are a “Fee-only” Investment Advisory firm, we do not sell any kind of insurance product, but we wanted to walk beside Carolyn to make sure she received adequate insurance coverage, so we served as her counselor during the process.
The insurance companies refused to offer her coverage because of a heart issue that she had experienced years before. We found that odd, as it did not appear that would be a trigger that would cause her to need long term care. As I thought about her options, I realized we might be able to get her some group coverage through her former employer, the Commonwealth of Virginia. At the time, she was eligible and we were able to get her excellent long-term care coverage.
A couple of years later, Carolyn’s memory declined and she did require on-going care. Having the long term care insurance in place has secured her future in a facility with good care, and has also led to significant protection for her heirs, making it likely that they will be able to inherit some of their parent’s hard earned savings.
The Importance of Organizing and Simplifying Your Assets and Your Life
I began working with Angela and her husband George just as they were both about to retire. George had already significantly reduced his work commitments due to a degenerative disease. They had already significantly simplified their home life by moving into an apartment, eliminating the day to day responsibilities of owning a home. Then we worked together to simplify their finances.
Like most people, they had investment accounts in several institutions. I worked with them to consolidate the accounts that could be combined, and then we started working together on their financial plan and on determining the investment mix that would be the best for them. At the time, George’s life span was uncertain. He could have lived many more years. Unfortunately, he died within a couple of years after we began working together.
With the loss of her spouse, this was a tough time for Angela. The grief was difficult to work through, and her life changed dramatically overnight, not just from the loss of her long time spouse, but her daily routine changed completely. She had gotten to the point where most of her time was spent caring for him. Suddenly, she had very few responsibilities on a day to day basis.
Fortunately, we had already simplified her financial life, and could answer the question, “what can I sustainably spend each year for the rest of my life?” Once Angela was in a place where she could begin to envision a future, we began to map out how she could use her resources to support her vision for how she wanted to live life going forward.
It’s Not Always a Child Who Is the Primary Point Person
My relationship with Bethany began many years ago, when she became more actively involved in managing her Aunt’s financial life. Her Aunt Suzie had the majority of her investments in one hotel stock, and the company had just been purchased by another hotel chain. Suddenly, her stock was converted to cash, and they were not sure what to do with the funds.
After fleshing out Suzie’s situation, we invested the assets in a manner that would support her during her aging years. Over time, Suzie’s need for care became progressively more intense until she was in a full-time nursing care facility. All the while, Bethany worked hard to make sure her Aunt was taken care of, even though it was a difficult task due to her responsibilities to her own family. We met regularly to make sure all of our goals and tasks were in alignment.
Several years later, Suzie died. Even though the goal for Suzie’s assets was not explicitly to provide for an inheritance for Bethany, there was enough assets to fully cover Suzie’s needs and leave an inheritance for Bethany.
Dealing With the Grief While Managing the Estate Settlement
Claire, like me, was widowed after her husband lost his battle with cancer. Claire’s children were already teenagers when their father died, and their struggles with grief compounded the struggles that teens already feel to fit in, trying to handle pressure and figuring out where they are going in life. It was very stressful for Claire to try to hold her family on course while also figuring out her finances.
Her husband had been the one to take care of the money issues, so when he died, she not only had to deal with her own grief and the grief of her children, but also the scary responsibility of family finances. On top of the issues above, Claire had to get a job. The stress was (and is) enormous, and despite a fairly frugal way of life, Claire had some debts that were increasing the pressure in an already tough situation.
I helped Claire find a way to more effectively pay down the debt, which greatly reduced the stress she was feeling. She is still going to have to actively pursue the debt paydown, but due to some consolidation, she is now in a position to make faster headway against the debt while preserving her investment portfolio to fund her future.
Why Choosing the Correct Beneficiary Designation is So Important
Roger was a small business owner who had led an adventurous life. When I first started working with Roger, he still actively worked in his business. His personal situation was not uncommon – he had two adult children from a previous marriage, but no children with his present wife. Even though Roger seemed to have clear intentions of how he wanted to divide his estate, I could not convince him to document those intentions as clearly as he should have. Specifically, Roger’s largest investment account was an Individual Retirement Account (IRA).
Even though most assets are transferred to heirs by the instructions provided in a will, an IRA has designated beneficiaries. The beneficiary designation trumps one’s Will – who is named in the beneficiary form will inherit the assets – even if the Will says something different should happen. Technically, Roger did name his IRA beneficiaries in line with the wishes of his will by naming his Estate as the beneficiary. However, in the long run, the most tax efficient way to inherit an IRA is to name a “live person” as the beneficiary. This can also be accomplished with a properly designed trust. When a “live person” is a beneficiary, heirs can stretch distributions from the IRA throughout their life, giving the asset more time to grow for their own retirement. This also diminishes the taxes paid on the distributions each year.
In the case of Roger, he named his Estate as the beneficiary of his IRA. Since the Estate is not a live person, when Roger died, the assets in his IRA had to be completely distributed within five years, pushing all of the taxes into those years, while losing the opportunity to let those funds grown longer. I had many discussions with Roger about changing his beneficiary designation, but he refused to make that change, and his heirs paid the price.
Diversification of Investments
Michael first became my client shortly before the financial crisis of 2008. He is a hard-working person, employed by a major financial institution that had been hugely successful. The first time I looked at his portfolio, he had the majority of his assets invested in his employer stock. Although I could not predict what was about to happen to the value of that stock, I do know it is never prudent to have most of one’s investments in any one asset. I built a portfolio for him that kept a piece of his company stock, but then broadly diversified the rest between many different kinds of stocks and bond.
Shortly after we made the changes, the financial crisis crashed down on the U.S. economy. His employer stock lost about 88% of its value. To put that in perspective, most of the world stock markets, including the U.S. markets, lost about 40% in value. Michael’s portfolio had significant risk above market risk before we made those changes. Because of that change, his portfolio was much more resilient than it would have been, and also regained its value much more quickly than it would have if we had not made those changes. His company’s stock price still has not recovered fully from the plunge in value, while his portfolio has not only recovered, but also grown beyond its original value.
To be clear, it is virtually impossible to predict when we will have a market correction. I certainly cannot make those kinds of predictions. One’s best defense is to have a portfolio invested in the right mix of stocks and bonds and then within those asset classes, own many different types of stocks and bonds. That is classic diversification, and it gives investors a higher probability of success in meeting their financial goals.