Multi-Generational Planning Part 1

No matter how much you have saved or accumulated throughout your life, multi-generational planning becomes an important part of your financial life.  In part 1 of this series, we address some common questions and concerns we encounter when speaking to our clients.  We’ll talk about: 

• Probate
• Some simple and low-cost ways to avoid probate
• Some ways to handle real estate
• Step up (or step down) of cost basis
• Durable powers of attorney
• The basics of how IRA’s pass to beneficiaries

Watch Now: Multi-Generational Planning, Part 1

Timeline

• 0:00 – Intro
• 0:15 – Disclaimer
• 0:19 – Welcome
• 1:02 – The Probate Process
• 2:54 – Low-cost ways to avoid probate
• 4:24 – How to deal with your house – Survivorship deeds and Life Estates
• 6:24 – Step up (or down) ofcost basis
• 8:24 – Durable Powers of Attorney
• 11:41 – IRAs
• 13:11 – Failing to plan is planning to fail
• 14:07 - Outro

What is Probate?

Probate is the formal process of settling your affairs once you have passed away.  It is a legal path to distributing your assets.  The downside of probate is that it isn’t always time efficient and it can be expensive.  In many cases, having a plan to avoid this process can be advantageous.

Some Easy, Low-Cost ways to Avoid Probate

You don’t necessarily need to go through the process of creating a trust to avoid probate.  There are some simple and low-cost ways you can accomplish this.  Some assets and accounts are designed to pass outside of the probate process.  These include life insurance policies, annuity contracts, IRAs, and company-sponsored retirement plans.  They will follow the beneficiary designations you establish.  

For individual or joint accounts, your advisor can add “Transfer on Death” provisions.  This allows you to name beneficiaries for those accounts.   Another consideration for individual accounts is to use a joint account with rights of survivorship.  

When one account owner dies, the assets will transfer to the other owner.  This account type is most common with spouses.

Your House

For your house, you can use a survivorship deed.  This basically allows you to name a beneficiary on your real estate.  You can also transfer the ownership of your home using a life estate which allows you legal rights to live in the property.  

There are some potential pitfalls with this strategy, so please speak with an attorney so you clearly understand where this strategy can backfire.

Step Up (or Down) in Cost Basis

The cost basis is what you pay for an asset.  If it is an investment like a stock or mutual fund, the basis will also include any dividends or distributions that are reinvested.  If it is your house, any major repairs you made to the property would also add to your basis. When you die, the basis of those assets is adjusted to the value on your date of death.  

If the asset has increased in value, you get a step up in cost basis.  But if the value has decreased, the basis will be stepped down.  This will determine how much tax—if any—is owed by your heirs if they sell the asset.

Let’s say you bought stock in XYZ for $100 several years ago. On the date you pass away, the stock is trading for $200. That would be the new cost basis. If your heirs sell it at $210 per share, they would owe capital gains taxes of $10 per share. If they sold the shares for $190 each, they would have a capital loss.

But if XYZ decreased in value to $90, that would be the new cost basis, and your heir’s gain or loss would be based on that new value.

Durable Power of Attorney

This document is a tool to use during your lifetime.  It appoints someone to act on your behalf.  They can write checks, execute trades, sign tax returns, and other functions.  The key part of this is “durable.”  This means the person you choose can do these tasks for you if you become incapacitated.  

Without it, you would have to go through the court system to have a guardian appointed. Remember the legal process is not designed to be friendly or efficient.

What Happens to Your IRA When You Die?

This topic is far more detailed than we could cover in this episode.  But we do have another post on our blog covering this.  You can watch it here.

In simple terms, if your spouse inherits your IRA, they can treat it as their own.

 If a non-spouse beneficiary inherits the IRA, they will be required to liquidate the IRA by the end of the 10th year following the year of your death.  Annual distributions may be required depending on the age of the original account owner. 

Failing to Plan is Planning to Fail

Multi-generational planning affects all of us, no matter how much you have saved.  Planning makes it easier for your spouse or children to deal with your assets at difficult and emotional times.  

If you would like to have a conversation about your situation, fill out the form, and one of our advisors will contact you.

Other related posts

• The Financial Impact of Becoming a Widow
• I'm Inheriting Money, Now What?
• The Social Security Widow's Dilemma

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