Episode: 08-10-2021 | Estate Planning & How to Handle an Inheritance

Hosted by Kevin J. Zywna, CFP® and Allison K. Dubreuil, CFP®

What Is Estate Planning And Why Is It Important?

Allison Dubreuil, Wealthway Financial:  We’re going to talk about one of your favorite topics. It’s the last thing that almost everyone tackles in the financial planning process. And that is estate planning. Most people don’t want to think about their ultimate demise. I think that’s a very American thing. We don’t like to think about death and the possibility of it. But it is a reality. At some point you will pass away. And whether you’ve done your planning or not, something will have to happen with your assets. People think that estate planning is something just for the rich. That it’s for taxes and just for wealthy people. No. Estate planning is something for everyone. Everyone needs to address at some point in their lives. If you don’t make an estate plan, then your state will essentially create your estate plan for you. It may not be what you would hope or wish for.

Kevin Zywna, Wealthway Financial:  An estate plan is an important component of a well-rounded financial plan. In fact, a good financial plan is not complete without an estate plan. And yes, it does tend to be the last things our clients tend to tackle when it comes to completing their financial plan. Once they get it done, there tends to be a load lifted off their shoulders. They know that the transfer of assets that they have set up will happen seamlessly, efficiently and in the right manner. I will tell you (and we will often have clients you know joke about this) “well when I’m gone I don’t really care. I’ll let the kids fight over it. Haha.” Which I know most people are being facetious when they say that but in reality that happens a lot. It happens a lot when you have no estate plan. It even happens a fair amount when you do have an estate plan. Nothing crystallizes people’s thinking and tests the bonds of family relationships, much like fighting over the antique car that dad loved or the piece of furniture that mom had or jewelry or something like that. And of course, the money and the land and the property. So responsible people, who are dedicated to the financial planning process will create an estate plan. Because estate planning is not something you do for yourself. Estate planning is something you do for your heirs and for your loved ones. To ensure a smooth and mature transfer of assets and to keep the family unit together and in harmony and on good terms, and not tear it apart. Like we have seen in the past on many occasions when there is not a well communicated estate plan. So that’s why it’s so important.

Allison Dubreuil, Wealthway Financial:  I think another piece that people don’t realize is that an estate plan is not just about who’s going to get what when you die.  It’s about who’s going to help you if it ever comes to the point where you can’t handle your own affairs or make your own decisions. Because maybe you are temporarily incapacitated in the hospital, and you can’t manage your investments or your cash flow. Or we see more and more people being diagnosed with dementia, and they’re gradually unable to handle their affairs. So it’s not just about where your money goes, when you pass away. It’s about who is going to take over for you, if you need help with medical decisions, and financial decisions. And for married couples, it’s not just automatically going to default to your spouse. So I think a lot of times people think, “Oh, well, my spouse will make those decisions for me.” That doesn’t happen automatically, you have to go through a sometimes expensive and lengthy court process to be appointed as a guardian or a conservator, even for your spouse in order to make financial decisions if you haven’t planned proactively before an event occurs. So it’s for planning at death and in case you need someone to help handle your affairs while you’re still alive.

Kevin Zywna, Wealthway Financial:  Which as we all are living longer now, and the body tends to stay alive a lot longer than the brain, sometimes there is a high probability that, at some point in all our lives, we’re going to need some type of help like that. It is prudent and responsible to lay these things out in advance so that everyone understands what the role is, and what’s expected of them. And there isn’t chaos, confusion, and discontent at the time of crisis.

What Are The Components Of An Estate Plan

Wills

Allison Dubreuil, Wealthway Financial:  Yes. So what is an estate plan? What are the main components of an estate plan? First and foremost, a will, most people know about that. Most people say, “Well, I don’t have anything. So I don’t need a will.” Well, if you have young children, the will is the document that allows you to state who would become their guardian, if something happened to you. Most parents feel like they want to make that decision. They don’t want to leave it up to chance or to the court to decide if something happens unexpectedly. A will is the very first piece of an estate plan that really everyone needs.

Power of Attorney, Advanced Medical Directive

The other pieces of an estate plan are what I was alluding to: Power of Attorney documents. There’s general power of attorney, which would allow you to name who would act on your behalf to manage your financial affairs if you’re medically unable to do so. Then there’s a power of attorney for health care so you can name who would make health care decisions on your behalf if you’re unable to. A will and then General Power of Attorney, Power of Attorney for Health Care. Then, finally the Medical Advanced Medical Directive. Some people know it as the Living Will. That’s where you spell out your wishes for end of life care. Whether you want to be resuscitated, whether you want life support, those kinds of discussions. So those are the four main components of estate planning.

How Should You Communicate Your Estate Plan

Kevin Zywna, Wealthway Financial:  When you have these documents completed, get them in the hands of the people who will be responsible for making the decisions. Do not just keep them in the big leather bound binder that was given to you by the attorney who drafted up the estate plan. You need to get the Medical Durable Power of Attorney in the hands of your doctor, your primary care physician. Also, the person who will serve as your Medical Power of Attorney needs to have a copy at their fingertips. Same goes with the General Power of Attorney. Who’s going to act in that capacity? They need to have a copy of it. It should not be a secret. You should talk about this with the people who would occupy these roles before you even draft the documents. But once you do, make sure those people get copies of the documents, and that they’re kept in a safe and accessible place because they will be needed.

Allison Dubreuil, Wealthway Financial:  Yes. So make sure you communicate, if you’re naming someone to act on your behalf. Make sure they know that and they are okay with that. And then, like Kevin was saying, documents need to be somewhere safe. They need to be accessible in case of emergency. We always keep backups of our client’s documents on file and the attorney could be a backup as well. So making sure that you have the documents drafted and that they are where they need to be, are really key components to following through with an estate plan.

Power Of Attorney Selection Tips

Kevin Zywna, Wealthway Financial: One other sort of general piece of advice that a lot of people don’t think of. In most cases, where it is practical, you would want to name somebody who is in close proximity to you as your Medical Power of Attorney, General Power of Attorney, Financial Power of Attorney. A lot of times, parents will name their adult children in these roles. But if you live in Hampton Roads and your son is in California, and your daughter is in Texas, it’s more helpful to have people with boots on the ground, close to you if you can manage it. Because trying to serve as a Power of Attorney from several states away is a very difficult thing to do. So just something to be mindful of there.

Are Estate Plans And Trusts The Same Thing?

Allison Dubreuil, Wealthway Financial: We just went through the basic components of a complete estate plan: a will, a General Power of Attorney, a Power of Attorney for health care, and an Advanced Medical Directive or Living Will. You might notice I didn’t say the word trust. Because everyone thinks that an estate plan is a trust. A trust is an estate planning tool. But it is not a one size fit all. It’s not necessary for everyone.

What Is The Purposes Of A Trust

Avoid Estate Taxes

Many people think you need a trust to avoid estate taxes. Well under current law you are not going to have an estate tax problem unless you have more than $11.6 million per person. Most people in the country right now don’t have an estate tax problem. A trust can be a way to help with an estate tax problem. But that’s not really a huge planning concern for most people.

More Control Of Asset Distribution

Another reason you might use a trust is if you want control. So if you want to control from the grave, and you want to lock up your money and dictate who can have what, when, and what it can be used for. That is where you would need a trust. Most people that we come across want to make sure that the money flows to the right people as seamlessly as possible. That it avoids probate. It’s not subject to any unnecessary fees, taxes, or expenses. That can be accomplished with simple beneficiary designations.

Kevin Zywna, Wealthway Financial: I will say, estate planning attorneys (who are the ones who draft these legal documents), they tend to be rather trust-centric. There can be other reasons for having a trust like creditor protection. You could have good reason for wanting to have control after your past, If you have kids or heirs who are not responsible or not the most responsible with finances, then that’s a good reason for wanting to not dump a big inheritance in their lap. That’s what a trust could be used for.

But just know that a trust comes with a fair amount of additional administration, that you, the trustee, or the trust grantor are going to have to be responsible for administering. If you aren’t up to the task, if it’s not something that you’re really interested in doing, then you want to think long and hard before going down the trust road. There’s additional expense, they could be anywhere between $5-10,000 to set up a trust. Then there’s a fair amount of work going forward that needs to be done to keep them maintained and for them to work properly. If you don’t have assets registered in the name of a trust, like your house, cars, bank accounts, brokerage accounts, if you don’t have them registered name and trust, then they aren’t in the trust. All the wording and language of the trust does no good to anything that is outside the trust. So just know that while a trust does have some good benefits, it also comes with additional work.

Purposes Of A Trust

Help Distributing Assets With A Blended Family

Allison Dubreuil, Wealthway Financial: You named creditor protection as one of the tools that a trust is a good use for. Another reason you might need a trust is if you have a blended family. If there are children outside of your current marriage, it might protect your children from a previous marriage. If you have children or any family members with special needs, and you want to make sure that they don’t lose their special needs benefits. There are absolutely good reasons to use a trust. But most people just automatically think trust when they hear estate plan and it’s not automatic and it’s not for everyone. So have a conversation with an attorney.

Kevin Zywna, Wealthway Financial:  There should be a good reason to have a trust and you should be able to articulate it.

Estate Planning And Beneficiary Designations

Allison Dubreuil, Wealthway Financial: Now most estate planning can be accomplished with those basic documents. We talked about the will, the Power of Attorneys, and Medical Directives, and with proper beneficiary designations. Many people don’t realize that when you put a beneficiary on an account or on your life insurance policy, that supersedes the will. So most significant assets can be set up with a beneficiary so that they will transfer relatively easily, directly to the beneficiary. They will avoid the dreaded probate which I know no one wants to go through. And your legacy wishes can be accomplished quite simply and inexpensively by just using beneficiary designations.

What Accounts Can Have A Beneficiary?

Kevin Zywna, Wealthway Financial: For most people listening that’s probably 90% of your estate plan. Just making sure that you have beneficiary designation set up on all the accounts that are available. So those are things like your 401K or 403B, TSP, and your company sponsored retirement plans. IRAs would have a beneficiary. Annuities typically have a beneficiary designation. Bank accounts can have beneficiaries, but you usually have to put a little extra work into it. You might have to go to the bank specifically and ask for transfer on death type of account setup. Usually banks don’t automatically set them up with the beneficiary designation. So you might have to request that specially. But if you just do that much you are doing your family and your heirs a great service. Beneficiaries transfer is the easiest, quickest, and most efficient way to transfer assets upon death. Typically, we are talking in a matter of weeks, not even months, but a matter of weeks, for accounts to transfer ownership from the decedent to the beneficiary with the proper beneficiary designation. So if you just do that, you’re well ahead of the game.

Allison Dubreuil, Wealthway Financial:  Once you do it, be sure to review it, I would say annually. We don’t want to end up in a situation where you have an ex-spouse named as a beneficiary, and then you pass away and there’s not a whole lot that can be done. So make sure you review your beneficiary designations.

Estate Planning Wrap-Up

Allison Dubreuil, Wealthway Financial: We’ve been talking about estate planning. The basics of an estate plan, the fact that it’s not just for the wealthy, everyone needs a will, a Power of Attorney documents, and Advanced Medical Directive. And by the way, we always recommend going to see a competent estate planning attorney, An attorney that specializes in estate planning. But if you have a very simple situation that can be solved with mostly beneficiary designations. Then there are some free or very low-cost resources online that you could check out.

What You Need To Know About Inheriting An Estate

We want to now shift gears and look at the other side of the equation. What happens, or what should you do or be aware of or think of, if you yourself, end up inheriting assets. Say you have a sudden, maybe unexpected windfall, what do you need to know? And how should you handle it? Because really, if you look at the statistics, more than 1/3 of all inheritors, when they get an inheritance see no change in their wealth, or actually their wealth ends up declining because they don’t take the right actions to protect their inheritance. They end up maybe blowing it on a vacation or a fancy car. And before they know it, the money’s gone. In fact, 70% of people who suddenly receive a large amount of money, have it all gone within just a few years. That’s why we want to talk about what you should do, what you should think about, what you should be aware of, if you yourself, find that you have inherited some assets.

Step 1: Go Slow

Kevin Zywna, Wealthway Financial: The first thing you do, when you get inheritance is nothing. You should go slow. You should not make any big decisions, probably for three to six months. Perhaps even longer, depending on the size of the inheritance. There’s a lot of emotions, usually tied to the money. There’s most likely a loss of a very close loved one as the reason why you’re receiving that money. And a lot of people aren’t in the right frame of mind to make big lasting financial decisions under those circumstances. Rule number one, take it slow, don’t make any big decisions right away, give yourself some time to grieve. Think through your options, before making any big decisions.

Step 2: Consult A Professional

The next thing you probably want to do when you are ready to start making decisions is to make sure you are doing so in consultation with the right professionals. If you’re getting a small inheritance of a couple $1,000, then that that’s not necessary. But I would say anything of $500,000 or more, maybe even $300,000 or more, you should start consulting with a financial advisor or financial planner. Perhaps a tax professional is involved. There could be an estate planning attorney to help you receive the assets in the proper in the appropriate way. And, and so assembling a team of advisors when you receive a large windfall of money, no matter how you receive, it will be important and critical to ensuring that you hopefully honor the legacy of the person who gave you the money, and that you do good with it going forward.

Step 3: Consider The Inheritance

Allison Dubreuil, Wealthway Financial:  When you’re doing nothing when you’re taking that timeout period, it’s okay to start thinking about what you want to do with the inheritance. It’s always really a good idea to remember where it came from. To think about maybe the hard work and sacrifice that it took that person to accumulate that money or that asset. Keep that in mind when you’re making decisions so that you’re making decisions with a sense of responsibility and accountability, the way that your loved one may have hoped. And in fact, we tell our clients to communicate to their heirs, that what they would hope to see happen with the money doesn’t mean that’s going to happen exactly. But at least then the people who receive the money know what the intention was behind it.

Step 4: Remember The Loved One – Appreciate The Inheritance

Kevin Zywna, Wealthway Financial: Probably the biggest question that we see in our clients who become inheritors is, “what would mom or dad wanted me to do with this money?” They’re trying to figure out how to honor the legacy of the parent typically where they’re getting the inheritance from. But the person who gave them the inheritance, what would that person want me to do with that money. So you know what, just communicate it on the front end or put it into documents. Put it into the will. Put it in trust documents. Put it as a console to the will. Or just put it on a blank piece of paper and attach it to the back of the will. That’s better than nothing. The inheritors want to want to know, “what should I do with this money? How can I best honor them?” And then the other thing is, don’t get too emotionally attached to the financial instruments in the inheritance such as stocks, bonds, mutual funds.

Sometimes we run into cases where clients will say, “I can’t sell that IBM stock because, you know, dad left it to me. And if I sell that stock, that’s disrespectful to my father.” Unless your father has specifically told you never to sell IBM stock, what your father was trying to do is transfer something of value to you that you could then ultimately use to enhance your quality life and improve your circumstances. So I don’t think really stock in IBM was the was the thing that your dad wants you to have. He wants you to have something of value that you could use for yourself. Don’t get too emotionally attached to the individual financial instruments. We see people cling to that too much, sometimes to their financial detriment.

How To Treat An Inheritance Or Windfall

Allison Dubreuil, Wealthway Financial: Ultimately, it depends on your own financial situation as to what plan of action would be best for you to take. If you find yourself receiving an inheritance or even a windfall, maybe you win the lottery, who knows any kind of inheritance or windfall. It will really depend on how your finances are already structured. Here are some ideas as to how you can treat an inheritance or windfall.

Donate To Charity

First and foremost, if you are charitably inclined, you can of course, give some of it away. We certainly have clients we work with that believe in tithing. And so would count that in their tithing and would give 10% to their church or charity of their choice. So being charitably inclined is definitely something that can be a great use of unexpected inheritance.

Pay Off Debt

Or if you are in a situation where you need to kind of get your own financial house in order, maybe you pay off some bad debt. So tackling credit card debt, getting it paid off. But then the second half of that strategy is to keep it paid off going forward so that you don’t end up right back at square one where you were before the inheritance. paying off debt can be a great use of inherited funds to help you get a leg up and to help you take a huge step forward. One of the caveats is mortgages. If you listen to this show for any amount of time, you’ve most certainly heard us speak about mortgages. While there’s nothing inherently wrong with paying off your mortgage, just think twice. That may or may not be the best financial decision, depending on your mortgage interest rate and what else you could be doing with that money.

Kevin Zywna, Wealthway Financial: I would stress that if you have a mortgage interest rate, below 3%, you should not pay off your mortgage. Even if you have a mortgage rate below 4%, you’re probably not going to want to pay off your mortgage. Redirect those funds into vehicles that can earn more than that interest rate over a long period of time. You will grow your net worth faster by doing that. So don’t automatically rush to pay off the house. If you have a great low mortgage interest rate, which most people should, in this environment, for the last five years we’ve been in.

Allison Dubreuil, Wealthway Financial: If your interest rate is above five, then it might be time to refinance, you should be fine. So do pay off bad debt. Pay off credit card debt, wipe that clean. Keep it paid off. You could consider paying off student loan debt depending on your situation, depending on the repayment plan that you’re on. Or if you’re on the road to forgiveness that may weigh in that decision. But that could be a great use of funds.

Secure Emergency Funds

And of course, to cover the basics, make sure you build up the bank account to have your three to six months worth of expenses in a bank account. Even though it’s earning nothing, just there for emergencies so that you don’t have to rely on credit cards. If something goes wrong, which it inevitably does, there’s always expenses that pop up.

Plan For Future Expenses

Kevin Zywna, Wealthway Financial: Beyond that, you might want to think about maybe frontloading kids college funds, if that’s important to you. And when we say college funds, I’m talking Virginia 529 plans. These can be used for more than college, any accredited institution of higher learning beyond college. You might want to think about putting some in there though.

Enjoy The Gift

And then of course, the last thing is to enjoy some of it. Because that’s, in almost all cases, the part of the reason you were left the money, out of love and care and kindness. The person who left it to you wants you to enjoy some of it. So make sure you do that as well.

Allison Dubreuil, Wealthway Financial: Hopefully it’s on experiences. Maybe it’s a trip with the family to create new memories or something like that. That’s renting a beach house for right now.

Kevin Zywna, Wealthway Financial: We’ve had clients think, “granddad used to love going to the Outer Banks or the mountains of West Virginia or something. So we’re all going to go there, we’re going to have big family gathering and have a party in his honor and we’re going to pay for it with his inheritance. That’s what he would have wanted.” That’s a great use of it. That’s a great honoring of the memory and the legacy.

Calculating A Refinancing Decision

We’re now going to go out to Virginia Beach and speak with Bobby. Good evening, Bobby, you’re on Dollars & Common Sense.

Caller: Good evening, I have a question about refinancing my primary residence in order to pay off the mortgage on a rental house. The interest on the rental house is about 5%. If I can refinance at 2.9%. It sounds like a good idea unless you factor in the $18,000 or so in closing costs. And my big question, is this: with 15 years left on the 5% loan, am I paying more toward my principal on that loan than I would be on a brand new loan at 30 years at 2.9%?

Allison Dubreuil, Wealthway Financial: Bobby, just make sure I’m understanding, you have a rental property at 5% that has about 15 years left of a 30 year loan?

Caller: That’s correct.

Allison Dubreuil, Wealthway Financial: You’re weighing the option of just continuing to pay that loan, or actually pulling equity out of your primary residence at a lower rate and using that to pay off the rental property.

Caller: Yes, it sounds like a no brainer until you look at the closing costs. And then each month in my rental mortgage statement, the amount of money that goes toward principal gets higher and higher every month. Which is good. We are worried about the new loan having a much, much smaller amount going to principal.

Allison Dubreuil, Wealthway Financial: Is your rental income covering the cost of the mortgage payment each month?

Caller: Barely, barely.

Allison Dubreuil, Wealthway Financial: Okay. And after 15 years, unfortunately, it’s still barely?

Caller: Yeah.

Kevin Zywna, Wealthway Financial: Can you refinance the rental at below 5%, Bobby? On its own, not using your primary residence?

Caller: That is an option. And the reason I haven’t done that is because the interest rate on that sort of thing puts me within about a percentage point, which with closing costs does not make sense at all.

Allison Dubreuil, Wealthway Financial:  Okay. Any plans to sell either property anytime soon?

Caller: No plans to sell the properties. However, we will probably downsize the primary residence anywhere from 3 to 10 years, at which point we could very easily pay off the properties with the equity in our house. So we’re not looking at another 15 years for 30 years. But do we refinance now? Or do we just go ahead and pull the trigger in 3 to 10 years when we downsize?

Allison Dubreuil, Wealthway Financial: Okay, well, like you pointed out, there are closing costs associated with any refinance. So you want to calculate, how long it would take you to break even and to recoup those closing costs. I would recommend getting quotes from multiple lenders to see if you’re getting a good deal. Otherwise, if you don’t compare it to anything, you don’t know if there’s a good deal. But lately, I’ve been seeing closing costs pretty low, where they can be paid off within one to two years of enjoying that lower mortgage payment. So that makes it really enticing.

Caller: Shop, the closing costs.

Allison Dubreuil, Wealthway Financial:  Definitely shop the rate and the closing costs. Yes. You want to calculate your breakeven. You bring up a good point. Once you’re further along in a mortgage, does it make sense to stretch it out anymore? It depends on what else you could do with that money. So if you are going to be able to lower your monthly payment significantly by refinancing, you would do something else with that freed up cash flow that you would earn more than what the interest is costing you. It still could be a viable strategy. You’d have to weigh those options.

Caller: Very good. Well, thank you so much.

Kevin Zywna, Wealthway Financial: Thanks for the call. Yeah, I’ll also add that 5% is not a bad rate.

Allison Dubreuil, Wealthway Financial: We think it is now.

Kevin Zywna, Wealthway Financial: Right, it’s a good rate for rental property. Also, generally speaking, Bobby, I don’t know how you have the property set up. We’d like rental property to stand on its own. So it should kind of have its own LLC for that rental property. Generally speaking, its own mortgage. There can be good reasons to use your personal residence to pay off that rental but, generally speaking, we’d like to see him separate for business purposes.

Allison Dubreuil, Wealthway Financial: Right, and if the rent, even though it’s just barely, if the rent is covering that mortgage payment that is probably ideal.

Final Inheritance Wrap-Up

Kevin Zywna, Wealthway Financial: Any fast quick tips you get in there about inheritance?

Inheritance and Taxes

Allison Dubreuil, Wealthway Financial: I wanted to talk about all the tax issues. Just know if you inherit something that you should receive a step-up in basis. So just make sure you’re aware of that. You’re aware of any capital gains. And then if you’re inheriting a retirement account, before you cash it in – know what the tax consequences are, because it’s in a tax protected wrapper.

Kevin Zywna, Wealthway Financial: You probably want to keep it in a tax protected wrapper and not take it out until you start needing the money. So go slow, be careful.