Episode: 02-08-2022 | Estate Planning and Inheritance

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

Understanding Estate Planning and Inheritance

Allison Dubreuil, Wealthway Financial: We’re going to talk about inheritance tonight. Whether you are looking to leave an inheritance, planning on how to pass on assets to your heirs, or if you maybe just inherited some assets, we’re going to talk about how the different assets are treated and maybe the best way to think about approaching some of these things. When we were looking into this topic, I was interested to read that the median inherent hesitance in 2019 that was transferred between generations was between $76,000 – $93,000. So in 2019, people were typically inheriting $76,000 to $93,000. Now have you come up with a good plan for how you’re going to transfer that wealth? And do you have a good plan for when you receive that wealth for what you’re going to do with it?

Kevin Zywna, Wealthway Financial: Yes. And so some of the reasons why this is important is because we often, in our practice, sit with the inheritors (with the adult children of elderly parents who pass on) while we sit with both sides of the table really. And we’re able to advise both. But some of these issue come up. Some of the complexity comes up with the adult children as inheritors. And we see the mess that gets left behind by a mom and dad, who didn’t do any planning. Didn’t think ahead. Didn’t believe they would ever die. Yes. There are people, believe it or not, there are people out there who think that that they are going to defy the odds.

Kevin Zywna, Wealthway Financial: And that’s why a lot of people don’t plan. You have to consider your own mortality. And that’s not typically a pleasant thought. And so when we are sitting with the elderly parents as clients, then we often advise that we often hear them say, ‘Well, that’s not my problem – my kids will figure it out. You know, I’ll let them fight over it when I’m gone. Look, I made the money. I built the house. They’ll just be happy to get something.’

But without proper planning of an inheritance or doing the estate plan, and especially when there’s multiple children, that’s when the complexity can arise and a lot of unintended consequences get created by failure to plan or a lack of good planning on behalf of the person who’s leaving the inheritance. It’s not that simple. It’s not that easy on the kids.

We’re going to figure it out because there’s a lot of emotion tied up with this type of money. Okay, this is not winning the lottery. This is not a big bonus at work. This is not exercising stock options that somebody earned. This is typically mom and dad’s money. The blood, sweat and tears of the family that now is being bestowed upon the next generation. And as we had a client, just say today, ‘inherited money can change the color of the blood.’

Kevin Zywna, Wealthway Financial: Sometimes the kids can mix up the amount of the inheritance with love. Well, he got more than I did. So mom loved him more than me. If that feeling manifests itself, that doesn’t go away very easily and it can create sibling rivalry that mom never intended to have happen at all. And maybe she had a good reason for giving more to one sibling than another, but she never articulated it. She certainly never put it down in writing. And so no one knows what mom was thinking, except for mom who’s no longer with us. So that is why proper planning of passing an inheritance is a good reason.

If you care about the people you are giving the money to, you generally want them to receive it on good terms in a good way that keeps the family closely knit and held together, assuming you were that way beforehand. But it does take some planning and some forethought. We will go into some ideas on how to do that.

Long-Term and Short-Term Investment Options

Right now we’re going to go out to Virginia Beach and speak with Bill. Good evening, Bill.

Bill, Caller: Yes, thanks for taking my call. So I’m not a high worth person, but I appreciate and am looking forward to your advice. I’ve been trying to put and have a modest amount of money in IRAs and stuff. And I’m looking for kind of a safe haven, and I’m I’m thinking about bonds or something like that or mutual funds? What’s a good vehicle that, might be two or three or four percent? Just as a hedge in all the uncertainty.

Kevin Zywna, Wealthway Financial: So where do you have this money right now, Bill? Just generally speaking.

Bill, Caller: Different kind of mutual funds of 20 35s. I do have some Apple stock and things like that in the IRA.

Kevin Zywna, Wealthway Financial: So target date funds?

Bill, Caller:  Yes.

Kevin Zywna, Wealthway Financial: And you say you’re concerned about short term market movements and you want to reduce some of the potential volatility that you see looming on the horizon?

Bill, Caller: Yes. Yes. Yes.

Kevin Zywna, Wealthway Financial: Well, what’s this money for?

Bill, Caller: It’s retirement.

Kevin Zywna, Wealthway Financial: How old are you?

Bill, Caller: Near 65.

Kevin Zywna, Wealthway Financial: When do you plan to retire?

Bill, Caller: About two years.

Kevin Zywna, Wealthway Financial: Generally healthy?

Bill, Caller: Yes.

Allison Dubreuil, Wealthway Financial: Do you have pension, Social Security income for retirement?

Bill, Caller: I will be getting Social Security, yes.

Allison Dubreuil, Wealthway Financial: Social Security, OK.

Kevin Zywna, Wealthway Financial: All right, well, we’ll answer that question. But first, we would say this. You’re attempting to time the market, whether you’re consciously doing that or not. That’s ultimately what you are doing. You’re saying I don’t feel comfortable with the current economy, the world situation or something going on in the stock market. So I want to get out. Or I want to move to a safer place to put my money. That’s market timing. So if that’s your intent, when would you get back into stocks or equities? Those things that fear you now.

Bill, Caller: When we get out of this year. And we’ll see what happens is South Korea, with all the supply chain issues. And things get back to normal per se.

Kevin Zywna, Wealthway Financial: OK, well, Bill, things will never be normal. There is always a crisis of the day. There is always something new to stir the pot, and the media’s job is essentially to stir the pot to get you always concerned about some other world event and to attempt to, especially financial journalism, to try to scare you out of equities.

If you are a long-term investor, which you should be at 65, and in good health, you probably have 20, 25, 30 more years of life expectancy ahead of you. Perhaps longer than this money needs to stay invested in growth type of assets for the long term in order to overcome the ravages of inflation and maintain its purchasing power. Or to throw off the income that will maintain its purchasing power to allow you to stay ahead of inflation.

So first recommendation is don’t do what you’re suggesting. OK, stay invested for growth. I would recommend that target date funds are not a favorite vehicle of ours. But if you aren’t working with an advisor and you don’t know better, then they’re better than nothing. But generally speaking, we would we would say that, you should be invested primarily in stocks or equities – and especially in this low interest rate environment. Bonds are not a good place to be.

O. K, so number one, don’t try to do what you’re suggesting. Number two, if you’re not going to listen to that advice, you’re going to do it anyway. Then stay away from bond funds and stay away from bonds. Because in this low interest rate environment, which is now starting to increase, interest rates are now starting to tick up. We are seeing that largely driven by the spike in inflation. We’ve seen here recently rates that drive down the value of bond funds and individual bonds if you invest that way.

So while you might get some income off of those bonds, the income, the income that you’re getting today is number one going to be reduced by rising inflation. So it’s not going to keep pace with that. And the value of your bond investment is also going to decline. So we have purposefully either reduced substantially or eliminated the bond portion of our client portfolios because of the environment that we’re in.

So I would suggest the next best place to do that, to park your money if you’re going to do it is the bank. And maybe you can eke out a little bit of return in a bank CD. Maybe get yourself one percent. But bonds are not going to be the safe haven as we sit here today, they’re not going to be the safe haven for the next 10 years. We don’t think that they have been for the last 20, 30, 40 years because of the inflation and interest rate environment we’re in. So how does any of that sound?

Bill, Caller: No, I appreciate that. Yes. I was under the impression bonds were a safe haven. I was pretty happy with what I was getting before. But, stay away from bonds.

Kevin Zywna, Wealthway Financial: Yes. Traditionally, they have been. Traditionally, in the past. Bonds were a great diversify from stocks when we were basically in declining interest rate environment from the late 70s, early 80s, all the way through the 2000s. But bonds and interest rates act like a seesaw. So when rates rise, bond values decline. And so we don’t think where we are today is a good place for bonds. If you’re bound and determined to jump out of stocks, then probably your bank account. But above all that, we don’t think you should do it. You should stay invested for the long haul. Stay heavily weighted in equities. Thanks for the call, Bill.

How To Invest A Received Inheritance

Kevin Zywna, Wealthway Financial: Now we’re going to run out to Chesapeake and speak with Rob. Good evening, Rob. You’re on Dollars & Common Sense.

Rob, Caller: So my wife and I, we got an inheritance recently. It’s tied into a Schwab account right now. We got the first, what do you call, the first minimum required pay out on that?

Kevin Zywna, Wealthway Financial: Required minimum distribution.

Rob, Caller: Yes. Okay. The first check was totally unexpected, really. That was $30,000. That is sitting in a savings account right now because I’m assuming, some of that’s going to go straight to taxes this year. And then we have the remaining amount – $170,000.

So we’ve got to figure out how we’re going to invest, that. We will be sitting down with a financial advisor. But the other part of it is, very gratefully, we have two children, they’re both in high school and each child has $125,000 set aside for college now. So we’ve kind of gone from sacrificing and living check to check to the uncharted territory of we actually have some disposable income and we want to make sure we’re doing the right thing with it. So kind of in preparation for sitting down with the Schwab person, wanting to know do you guys advise much when it comes to crypto and bitcoin possibilities?

Kevin Zywna, Wealthway Financial: All right. Well, that was a left turn from inheritance to crypto. So generally, no on the crypto, at least as of yet. We’re skeptical of it as an asset class. Still very unproven and too early in the cycle to invest any of our clients’ money in it. But I think to your larger point, Rob, is you’ve had a major life event here. And this is it. Might not be life changing, but it’s life modifying and you have a golden opportunity here to build a good, solid, financial foundation and set you and your wife and your kids and the rest of your family up on a good path if you seize the moment and and take advantage of it. I think before you get into the nuts and bolts of the inheritances, you were going to want to look at your overall financial picture?

Allison Dubreuil, Wealthway Financial: I think you mentioned required minimum distribution, but do you know what type of an account the the Schwab account is in?

Rob, Caller: Still wrapped up in a trust.

Allison Dubreuil, Wealthway Financial: Oh, it’s in a trust. OK. And do you know what’s going to happen? Is it going to stay in a trust or will it be distributed?

Kevin Zywna, Wealthway Financial: And who’s the trustee?

Rob, Caller: The inheritance was my wife’s aunt and they did not have any children. And so my sister-in-law got an amount and we got an amount. We have nine years to spend the rest of what’s in that Schwab account. And then, after where she’s waiting on some documentation to come through and then we’ll be sitting down, I believe, with a financial advisor and or the Schwab representative to figure out what we want to do with the money. I don’t know whether to take it all out at one time because I was thinking my taxes are really going to hit us hard if we do that.

Allison Dubreuil, Wealthway Financial: Yes. Well, it’s sounding like an IRA. It is, yes. Because when when you inherit an IRA, you  have 10 years to distribute the funds. And you’re right, Rob, when the funds come out of an IRA account, they are taxed as ordinary income. I think it’s great that you’re going to meet with a financial advisor to come up with a good plan for how to distribute this over the years. But no, you don’t have to spend the money. You can turn around and reinvested in another investment account so that you’re continuing to invest for long term growth.

Kevin Zywna, Wealthway Financial: And Rob, this is a great example of the complexity around inheritance.

Allison Dubreuil, Wealthway Financial: Well, we were talking about your inheritance situation, Rob. It sounded like it was actually an IRA account that your wife inherited.

Rob, Caller: I would assume so, especially since I’m assuming with with the IRA inheritance, you’re automatically going to get that required minimum, first payment.

Allison Dubreuil, Wealthway Financial: Well, it’s not automatic. And it’s not always true. You have to distribute an IRA as long as it’s not your spouse that you inherited it from. You have to take all the money out of the IRA within 10 years. But you could wait nine years and 364 days and take it all out in year 10. You don’t have to take annual distributions. Unless Rob, when did she inherit this money? Did it just happen or was it years ago?

Rob, Caller: No, no, we got a letter. I think it was in December.

Allison Dubreuil, Wealthway Financial: OK, so just happened.

Rob, Caller: Yes, so a couple of months ago. We haven’t really done anything with that first $30,000. This is sitting in savings because we’re getting ready to do taxes right now. So we want to see how that’s going to impact this year’s tax situation. We’re probably going to owe. Because ever since I retired from the Navy like three years ago, I’m finding out I’m basically owing every year on taxes.

Allison Dubreuil, Wealthway Financial:  Do you know if they withheld taxes already? Because typically they will withhold taxes if you tell them to.

Rob, Caller: In terms of what? This inheritance?

Kevin Zywna, Wealthway Financial: Let me just clarify, Rob. The act of the inheritance is not a taxable event to you. However, the distribution of the IRA, of the $30,000, that is taxed to you as ordinary income. That portion is taxed. But as Allison was saying, in most cases, taxes are withheld by the custodian. You receive the net effect after the taxes. State and federal taxes are withheld and paid on your behalf.

Rob, Caller: Okay, that makes sense. Yes, I guess the next step is … She’s waiting on some documentation from the lawyer. And then we’re we’re going to sit down with, I guess it’s a Schwab representative, to figure out the best course of action with what we want to do with it. And the real changing thing is my kids, I think they have until they’re 25 to spend the $125,000 for college. What they don’t use goes straight to the American Cancer Society. Once they turn 25 if it’s not used.

Kevin Zywna, Wealthway Financial: Rob, is that one $125K in 529 savings accounts or is it just set aside through language in the will or trust?

Rob, Caller: That’s a good thing. I can tell you right now that both kids are in private high schools. And we’ve gone ahead and started paying off what’s left of their high school education. And then if they have money left for college on the back end, we’ll pick that up.

Kevin Zywna, Wealthway Financial: OK. So who’s the who’s the executor of the estate? That is the person who is sort of in control or in charge of the distribution of the money and in doling out the inheritance. Who is that?

Rob, Caller: Believe it or not, I think it’s the lawyer.

Kevin Zywna, Wealthway Financial: Could be. Yes.

Rob, Caller: I think it’s the lawyer. I really do. I was in the military and my wife ran the checkbook and everything. The only reason why I called in was just because you guys are talking about inheritance tonight. We’re getting ready to face all these tough decisions. But also very thankful situation as well. I just wanted to get the opinion of some professionals as we head into this.

Allison Dubreuil, Wealthway Financial: Yes, I mean, I would say that it does sound like this is a great financial leg up. And that it would be wise to, like you’re doing, just take your time to meet with some advisors. To make sure that you’re making the best decisions to really help use this money in the best way possible. And while, typically, inheritance is not taxable, it does depend on the form and what type of an account it’s in and how it comes to you. So you want to be very careful before you just start cashing things in and spending it or putting it in your bank to make sure you don’t make any unnecessary missteps there.

Rob, Caller: And I will say my wife apparently has spoken to either the Schwab person or the lawyer, and the Schwab rep did such a good job for my aunt and uncle through their advisement over the years when they were working and, retired that my wife said we may just continue to work with this person to try to make this this nest egg last as long as it can. And of course, the ultimate thing is to help it grow a little bit more.

Rob, Caller: Well, thank you guys so much for your time.

Kevin Zywna, Wealthway Financial: Yes, I’m glad you called in, Rob, because you illustrate to the listeners that while receiving an inheritance is great, there can be a lot of moving parts to it. And when you get one, you usually want to respect the wishes of the person who gave you the inheritance and you want to be thoughtful and careful with it. And it sounds like you’re doing that. While there are a lot of moving parts, it’s best to get some good, solid, objective advice in order to set yourself up for long term success. So once again, thanks for the call. We appreciate it.

Inherited IRA Required Minimum Distribution Rules

Kevin Zywna, Wealthway Financial: We’re going to go down to Pongo,Virginia Beach and speak with Vicky. Good evening, Vicky. You’re on Dollars & Common Sense.

Vicky, Caller: Hi, thank you. You threw me for just a quick loop a few minutes ago when you said an inherited IRA needs to be (I may say it incorrectly) dispersed within 10 years after the original owner’s death. I inherited one from my mother, so I’m non-spousal in 2011 so the 10 years have come and gone. But that doesn’t apply. I’m hoping. I did a real quick Google search. It looked like that rule went into effect last year? Am I affected by that?

Allison Dubreuil, Wealthway Financial: You got it, Vicky. So because you inherited it in 2011, you were under the old set of rules where you will have to take annual required minimum distributions, but they can be stretched out for your lifetime, so they would be much smaller.

Vicky, Caller: So odd. But then when I heard it, I went “oh my gracios.’ like you just said, so many moving parts. OK, I appreciate the clarity, that my Google fingers quickly found and that’s the way I was reading it. But thank you so much. I appreciate your show. I enjoy it every other week.

Allison Dubreuil, Wealthway Financial: Oh, thanks for saying that.

Kevin Zywna, Wealthway Financial: All right. Thanks for the call, Vicky.

Allison Dubreuil, Wealthway Financial: And just for everyone else who’s listening. That may not realize this. Earlier, when we were talking to Rob, we were talking about a traditional IRA that when it comes out of the IRA, it is taxed as ordinary income. When you have a Roth IRA, the account owner has already paid tax on the contributions that go into a Roth IRA. And the benefit of a Roth IRA is that it grows tax deferred and is tax free when it comes out of the Roth IRA. So a Roth IRA is one of the best assets to leave for your heirs. Because even though they may have to take it out a little bit each year or within that 10 year time period, it’s not taxable to them.

Kevin Zywna, Wealthway Financial: And so yes, but that rule has changed. And while an owner of a Roth IRA never has to take a distribution from a Roth IRA while they’re alive, if they pass it on to a beneficiary and then the person who inherits it inherits the Roth IRA. They do have to take out required minimum distributions from that Roth IRA, either over their lifetime if they inherited a couple of years ago or beginning in 2020.

Allison Dubreuil, Wealthway Financial: I think it passed in 2020, but it may have been effective 2021.

Kevin Zywna, Wealthway Financial: Well within the last couple of years.

Allison Dubreuil, Wealthway Financial: Yes, it was recently.

Kevin Zywna, Wealthway Financial: Yes, if you inherited Roth IRA, then that needs to come out under the ten year rule.

Allison Dubreuil, Wealthway Financial: Unless it’s a spouse. So we’ve been talking about inheritance and most of it has been non spousal meaning you inherited money from someone other than a spouse. But if it is your spouse, you can typically treat that traditional IRA or Roth IRA as your own. So if you inherited a Roth IRA from your spouse and you got to treat it as your own. That means you don’t have to take distributions for the rest of your life, and that money just grows tax-free and would ultimately go to your heirs. So that’s why we say a Roth IRA is an excellent legacy tool if that is one of your goals,

Kevin Zywna, Wealthway Financial: But you can see, if you’ve been listening to the show for the whole hour that with the changes in tax laws, which happen every couple of years, and the complexity of the different types of inherited vehicles that one may get: a life insurance, bank accounts, traditional IRA, Roth IRA, lLife insurance proceeds, there are different rules around a lot of this stuff. It can be overwhelming to the inheritor. Which is why we always stress when we take on clients, that estate planning is part of a good financial plan. While it’s often the last thing that people get to. It is still vitally important. We make sure that we set up accounts appropriately with beneficiaries. We refer clients to competent estate planning attorneys here in the local Hampton Roads area, who will then draft a comprehensive estate plan. Because of the complexity around it, to the inheritors, and every time we sit with somebody who inherits money, they are almost always trying to figure out what did mom or dad want or what did Aunt Betty want? What would she want me to do with this money? How would she want me to treat it? And absent good instruction through an estate plan, there’s confusion. There can be regret. There’s anxiety. There’s sometimes paralysis. We have a client who received a substantial sum that’s just sitting in a bank account doing nothing. She’s afraid to even move on because it was dad. I know how hard dad worked for the money and dad would want me to be super careful with it. But I don’t know what to do. But I know I’m not doing the right thing. All these jumble of questions and emotions that she has because it wasn’t really passed to her with the right instruction through the estate plan.

Should You Talk To Your Children About Estate Plans?

Allison Dubreuil, Wealthway Financial: Well, that brings up a good question, something we address in our quarterly newsletter that’s getting ready to come out in a week or two is, should you talk to your kids about your estate plan? So we have some people that bring their kids in that are very open. And some people that really don’t want their kids to know anything about their financial situation. So it’s probably best to be somewhere in the middle. It’s probably best to make sure that your family, your heirs, whether they’re children or someone else. They know there is a plan, maybe big picture,  generally, how the plan is supposed to work and your intentions behind the plan, even if you don’t share dollar figures.

Kevin Zywna, Wealthway Financial: So we came prepared to talk about the five best assets to inherit today, and we really didn’t get through it. So we’re going to save that for another show. We will say one of these – because it’s obvious. One of the best assets to inherit is just straight out cold, hard cash, money in a bank account, liquid, easy to access, transferred hopefully by beneficiary. And we should distinguish better the role, the beneficiary in inheritance that supersedes anything having to do with the will. And when most people don’t know that, they don’t realize how easy it is to put a beneficiary designation on a bank account, an IRA account, their 401K. That would then very quickly and easily transfer that asset to the beneficiary and avoid the whole estate planning probate process.

Allison Dubreuil, Wealthway Financial: So beneficiaries are a really simple and effective estate planning tool. You can add beneficiaries to any retirement account. Life insurance policies you can even add them to bank accounts. They usually don’t call it a beneficiary at the bank. Sometimes they call it a payable on death or transfer on death. But you can add beneficiaries. Now that’s different than adding someone as a joint owner so they wouldn’t have any right to that money while you’re alive or any authorization. It would just be at your passing that the asset would transfer,

Kevin Zywna, Wealthway Financial: Which is something you should not do, which we see happen a lot… You should not add a child to your bank account as a joint owner because you want them to get that money when you pass away. That’s making them an owner of the account. That gives them equal access to the money in the account. That means that if they are in an auto accident and are sued, that money is as much theirs as is yours, and it can be confiscated through debts or lawsuit or that type of thing. There’s a whole host of problems when you put, say, a child on your bank account as joint owner. If you’re trying to do it for estate planning purposes, that’s not how you want to go about doing it.

Allison Dubreuil, Wealthway Financial: And on the note of beneficiaries, this is something you want to revisit on a regular basis. We revisit this with our clients every single year because you often find changes in family. You have new grandkids or maybe there’s a divorce or you just don’t like Johnny anymore, whatever, whatever it may be. It’s just a really good idea to review your beneficiaries on everything. And while we didn’t get into a lot of detail about the different types of assets and how to pass them, just one comment I want to throw out there before we end the show is that we recommend wherever, whenever possible, to consolidate as much as possible to simplify and have as few accounts as possible as you transition into retirement. Because we sit with the survivors and the heirs, or even the spouses, who didn’t handle the financial affairs during their marriage that are just completely overwhelmed with the amount of minute administration or legwork they have to do when a spouse passes.

Kevin Zywna, Wealthway Financial:  Yes, we see this a lot. Especially as people age into their late 80s and 90s. Sometimes some cognitive disabilities start to show up – doesn’t have to be full blown Alzheimer’s, but a sort of a squirreling? People become very distrustful about everything. They open up multiple bank accounts. They keep money, literally, under the mattress or literally in the freezer, in a coffee can, and they tuck money all throughout the house and in different bank accounts. You’re not helping yourself, you’re just making it more complicated on yourself and on survivors. And there’s no good value that comes from that, especially if you have anything under $250,000 in the bank where there’s insurance and there’s a high improbability of the bank ever going out of business. All right, that’s all the time we have for today. We are going to come back with more of this on inheritance because it looks like there’s some interest here and we didn’t get through all our checkboxes.