Dinner bill gotcha
When you go out for dinner with the family, who picks up the check? You or the kids? Whether the children are 15 or 53, if they can’t pay for dinner without a loan, that’s telling.
The stakes
Without a will, the State of Texas lets adult heirs pick the administrator of your estate. If the heirs are not mature enough or won’t agree, that’s another reason to make a will, one that names your preferred executor. The right choice can ensure the children enjoy as comfortable a retirement as you do. Even a merely adequate nest egg can be a blessing for grandchildren who otherwise might have to support their parents.
One technique
Lifetime descendants’ trusts are a good vehicle for passing wealth from one generation to the next, and beyond. On the surviving spouse’ death, the remainder of the estate is divided among the children, with each child’s share in a separate trust, exempt from creditors’ claims and protected from divorce and avoidable estate and generation-skipping transfer taxes.
Trustees
The downside includes a fiduciary income tax return, accountings, and a trustee. Responsible children may serve as their own trustee. So may irresponsible children.
Corporate trustees welcome large, liquid trusts, e.g., $3 million in IRAs or mutual funds. Corporate trustees are expensive. For a $1 million trust, fees can begin at 3% of trust assets per year. Corporate trustees are picky. They often reject real estate, including the home, family farm, or rental property. They can reject children, too. Is your number one son in the custody of the Texas Department of Criminal Justice? In rehab? At war with siblings? Corporate trustees may decline to serve.
After inflation and taxes, a well-managed trust may not throw off more than 4.5% in annual income. With a corporate trustee at 3%, that means 2 for them, and 1 for you (or your heirs), assuming you want the trust to last in perpetuity, or at least long enough for the grandkids’ turn.
A better dinner plan
Knowing the stakes, smart families do more than play dinner bill gotcha. The successful ones, those who preserve wealth past the third generation, educate the children about finances and wealth, communicate the family’s values, and hire good advisors. For thoughtful discussion, visit www.nytimes.com/2019/08/02/your-money/parenting-wealth-discussions.html.
Dead or alive, the children eventually are going to read your will, discover your assets, and meet your attorney and C.P.A. Better that you gradually share your values and information than that the kids wake up one day like lottery winners, with no education and no skills.
Further reading
- Are You Rich? Where Does Your Net Worth Rank in America? A New York Times wealth-rank quiz.
- Merrill Private Wealth Management studied 650 high net worth individuals and wrote a whitepaper addressing changes to develop a successful family culture.
- A family business presents special challenges. CPA Ross Nager discusses a wealth transition plan in a 2014 Sentinel Trust newsletter.
- Older adults struggle to discuss money with their adult children. If you care for parents, visit David Solie’s blog post Unwanted Conversations: Aging Parents and Money.
