“What should I tell my children?,” is a common question I hear after clients execute their estate plans. Few people enjoy discussing their own mortality. And few parents speak openly to children about what will unfold financially after the parents die. Parents may fear that by speaking about their estate planning it could ignite a family fight over who will receive what. Further, many of my clients worry that children may become entitled and lose motivation to be financially responsible.
However, open communication can benefit both generations. The parents can explain their decisions and the children can better plan their lives. Further, children can provide feedback about their needs or lack thereof. Also, parents and children can discuss tax considerations and develop more efficient plans.
Here are five reasons to tell children what is included in your estate plan before you die:
1. You can calm angered heirs.
Resentment among related heirs runs rampant after discovering Dad and Mom’s final wishes for the distribution of their estate. Talking over the rationale for making unequal distributions can smooth ruffled feathers. I have seen clients give more to children who have more children of their own as opposed to a child with no offspring. I have clients who leave a greater share of their estate to a financially irresponsible child in trust so the child will not deplete the assets but they task a responsible child with making the distributions. Such an arrangement can be doubly painful for the financially prudent child. I have also seen heirs who resent their parents for leaving significant bequests to charities. Parents can explain these decisions during their lifetimes, in their own words, to alleviate angry or bitter feelings.
2. You can save hassles and prevent mistakes.
Children will be emotionally spent following the death of a parent. If they have to search far and wide for estate planning documents and assets, they will be psychologically, physically and financially spent too. Parents should let children know where to locate estate planning documents and what to expect within those documents. If children are surprised by the deceased’s wishes, they may not execute those wishes properly.
3. You may benefit your children’s lives now.
Parents should devote time to listening to and learning from their children about their financial wherewithal and work ethic. Holding regular meetings or open dialogues would provide a golden opportunity for the parent to share their plans with the children. Parents may withhold assets from children during financial struggles as part of a “tough love” approach. Yet, this approach can be viewed as stingy and cause children to question why Mom and Dad chose to withhold assets during the child’s difficulties.
4. Children might give you a better idea
Many of my clients hold significant wealth in a home or business. I have had numerous clients wrongfully assume that their children want to keep the valuable home or operate the business. I have come to expect that parent business owners do not discuss with their children whether the children want to keep the business. Placing stipulations on the continued operation of a business or keeping a valuable real property in trust may not be the desire of the heirs. Recently, I dissuaded a client out from keeping a family cabin in the Sierra Nevada mountains in trust for his children’s lifetimes. One child resides in another county and the other child works as a very busy professional in another state and has not been to the cabin in six years. Seek your heirs input.
5. You may save children taxes
You should consider whether children need additional assets. Also, be mindful of the type of asset you are passing down to a child. Consider the difference between an IRA account in which future distributions will be taxed and a rental real estate property with an existing mortgage. A beneficiary working as a school teacher will likely appreciate the additional income from the IRA much more than a beneficiary working as a highly-paid physician. For even greater tax savings, you may be able to make asset transfers directly to grandchildren and skip the children altogether.