Meet Tom and Sue Jones, a married couple living in Illinois. Tom is 56, and Sue is 61. Tom has two daughters, ages 20 and 16, from his first marriage that ended when his wife lost her fight against a terminal illness. From Sue’s previous marriage that ended in divorce, she has three adult children of her own, ages 33, 31, and 21, and two grandchildren ages 2 and 4 months. Together, Tom and Sue’s net worth exceeds $4,000,000.00, and they would like to use their assets in a way that treats each other’s children as their own.
As I work with Tom and Sue to create a legacy plan that cares for their blended family as a single family unit, here are the 10 things that Tom and Sue need to consider in order to accomplish their goals:
#1 – Don’t Procrastinate! In order for Tom and Sue to treat their family as a single family unit, they must have a written plan in place. If Tom or Sue were to become disabled or die, prior to this plan becoming effective, the law would treat Tom’s heirs differently from Sue’s heirs, even though Tom and Sue are married. My advice to Tom and Sue is to start the decision making process with a decision to create a plan that is effective by the end of this calendar year.
#2 – Give gifts today that meet your legacy planning goals! Tom and Sue believe that education is a gift that keeps on giving, and they want their legacy to create gifts for education for their children and grandchildren. Both of Tom’s daughters are still in school, as is Sue’s youngest son. Tom and Sue know that in Illinois, a 529 College Savings Plan, such as the Bright Directions College Savings Program, is a “Qualified Tuition Program” and withdrawals used to pay for Qualified Higher Education Costs are free from federal and Illinois state income tax. These expenses include tuition, fees, books, supplies, and equipment required for enrollment at a qualified institution of higher education. Room and board is considered a qualified education-related expense if the student is enrolled on at least a half-time basis. Tom and Sue desire to use their money to the greatest extent possible for their family so considering plans that allow them to save tax on expenses they would otherwise incur is a great approach to allowing their dollars to stretch over time. I work directly with Tom and Sue’s CPA, who will advise them on any holding periods that apply for these types of funds prior to a withdrawal being made.
#3 – Decide who will care for any minor children! Tom’s youngest daughter Katie is now 16. Tom will need to decide who should care for Katie if he were not able to do so. As I sit with Tom to discuss this, I explain that he can partition the roles between guardian (the person who cares for his daughter) and the custodian of the estate (the person who manages the finances for his daughter). This allows Tom to choose the best for Katie, while considering two different people to take on those roles.
#4 – Use your Tax Exemptions. Because Tom and Sue’s assets exceed $4 million, the estate of the second to die will incur an Illinois estate tax liability. To properly minimize this tax, Tom and Sue will be advised to make certain marital transfers in ways that will allow them keep control and even keep the income their assets are generating. The rule of thumb for this is to always plan for the future and keep in mind that if you are investing your assets they will continue to grow over time and what you have tomorrow will be more than what you have today.
#5 – Secure/update health care documents. At the minimum, everyone over the age of 18 needs 1) a Durable Power of Attorney for Health Care, which gives another person legal authority to make health care decisions (including life and death decisions) for you if you are unable to make them for yourself; and 2) HIPAA Authorizations, which give written consent for doctors to discuss your medical situation with others, including family members. I advise Tom and Sue to make these decisions so that they are able to have the proper persons making decisions for them when needed in the future. As we discuss this, I learn that Sue’s oldest son is a medical doctor, and he and Tom have a very close relationship. If Tom were to not have his intention in writing, Sue’s son could not make medical decisions for Tom.
#6 Select the Vehicle for Transferring Your Assets. Tom and Sue select a Revocable Living Trust over a Will because (a) of the private nature of the trust and (b) the reduced expenses of administering the estate. This means that Tom and Sue will have a little bit more work upfront updating their beneficiary designations on their assets, but I provide them with a checklist of how their assets should be titled and how to make the necessary changes. In the end, Tom and Sue are eager to do the work instead of having someone else do it later.
#7 – Review and update beneficiary designations! Although Tom and Sue have been married for over five years, they have not reviewed all of their beneficiary designations on each of their investments. Sue’s employer was very diligent in helping her make the changes after her divorce, but her current beneficiaries are her three children do not include Tom or his children. Similarly Tom’s beneficiary designation still shows his former wife. Because Tom and Sue’s plans for distributing their assets include a plan to care for one another as well as all of their children collectively, the designation needs to be changed to mirror their intentions.
#8 – Review and update insurance! Tom and Sue have permitted me to work directly with their team of professionals to determine their current insurance levels and beneficiary designations. In addition to the proper titling of assets, I ask their financial advisor two important questions: (1) Do they have the amount of life insurance coverage to meet their current needs? (2) Do they have long-term care insurance in place to preserve their family assets and use in the event that either of them should need long-term care due to illness or injury? Tom and Sue’s financial advisor will work directly with them on these issues and report back to me with any updates or changes that will affect the drafting of their legacy plan.
#9 – Get Basic Documents for Unmarried Adult Children. Although Sue will tell everyone she meets that it came as a shock when she learned that she could not see her oldest child’s college grades without his permission, she goes on to say that she does not want this type of thing keeping her from caring for him if he becomes ill. I explain to Tom and Sue that unmarried adults (18 and over) need to have a Durable Power of Attorney for Health Care and HIPPA Authorization so you can act on their behalf in a medical emergency. We also discuss the benefits of a Simple Will and Durable Power of Attorney for Property.
#10 – Talk to your children about your estate plan. Although Tom and Sue’s children all get along well now, they should not expect that this will always be the case. I encourage Tom and Sue to sit with their children to talk about their legacy plan and how they have created a legacy for their entire family unit, each of them having an important part. I have explained that they don’t need to show them bank and financial statements, but simply talk in general terms about what they are planning and why. I explain to Tom and Sue that this is important because the more the kids understand their intentions, the more likely they are to readily accept it—and that will help to avoid discord after they are gone. I remind them as well that this is a good chance to talk to their children about their values and the opportunities that money can provide. Tom and Sue took this opportunity one step further and have decided that the holidays are an excellent time for families to do charitable work together. They have signed up to work a local charity event over the next Thanksgiving weekend. Tom and Sue are excited about the legacy they are leaving for their family.