What The Wealth Retirement Podcast

A Big Inheritance: How to Successfully Pass Wealth (119)

• Jonathan Bednar II, CFP • Episode 119

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In this episode, I explain how inheritances go wrong and lay out a plan to keep wealth private, tax-smart, and protective. We compare wills and trusts, share real examples, and detail tools that shield heirs from probate, overspending, taxes, and outside claims.

• Hidden risks of probate, cost, delay, and publicity
• Living trusts for privacy, speed, and control
• Trust funding steps and trustee selection
• Spendthrift structures to prevent blow-ups
• Rules for age, milestones, and needs
• Roth conversions and the 10-year rule
• Asset protection


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If you or someone you care about could use the help of a financial advisor and sees the value in establishing a financial plan, please reach out to me.

Thanks for Listening!

Jonathan

SPEAKER_00:

How your kids inherit your money can either change their lives for the better or quietly destroy them. Most parents think if I leave them a big nest egg, they'll be set. But I've actually watched the opposite over the last 16 years as a financial advisor. Families ripped apart by fights over money, kids who burn through an inheritance in just a few short years, and lucky heirs who wind up more lost and dependent and fragile than ever before. And here's what almost no one realizes: the government, the courts, ex-spouses, creditors, and even your kids' own worst habits are all lined up to take a little bit, a small piece of what you leave behind. And if you don't structure things carefully, your children are set to inherit potentially more problems and less tax efficient than if they were a little bit more structured and strategic on the front end. You don't want that to be the case. You don't want to ruin them, you don't want to cause unnecessary stress or burden on them. Your desire is to help them. What you can't do is not have a strategy in place. You can't just write a simple will and hope for the best. In this video, I'm going to walk you through the same strategies that wealthy families use and that we help people in our financial planning practice use to pass down money in a tax-efficient way and to help protect their kids from bad decisions, divorces, and lawsuits while keeping family relationships intact. I'm Jonathan Bedner, certified financial planner, owner of Paradigm Wealth Partners here in Knoxville, Tennessee. And today we're going to talk about how you can help your kids inherit money potentially tax-free and without causing unwanted or unneeded stress. First, I also want to say I'm not an attorney. You know, we don't give legal advice. You know, you should consult your professional advisors, your attorneys. But what we are here is talking about some strategies. So let's talk about the hidden danger that no one talks about in their inheritance, the hidden dangers of inheritance. So the so many times we see clients that we work with, and you know, they've they've got a pretty good family. There's really not a lot of fights, there's not a lot of arguments and bickering. And you know, parents seem to think if I leave them more money, I've done my job as a parent. I've set them up, I've provided a legacy. They've they've got a leg up. And I think that that's especially important. And what I hear more and more from people today with the economy the way it is, is they want to make sure that they leave money in the form of a legacy to their heirs. And so they just think, well, if I leave them money, they'll be set. All is good. A simple will will be great, and you know, they should be protected. Relying solely on a will is one of the most dangerous mistakes you could make. Why? Because a will equals probate. Probate is a court supervised process, and that process, the court will validate the will, make sure debts are paid to creditors, distributes asset, and that's a problem because it's expensive. I've seen it cost five to ten percent of the total estate could disappear by the time you count court costs, legal fees, attorney fees, all of that really starts to be a strain on the assets. It's slow. I've seen it take years to settle the estate. Now, they're super complicated when they take that long, but even simple wills or simple uh estates going through probate can take months. And that just slows down everything. You know, people get frustrated, they don't understand why it should take that long, they don't understand the process. It just it just gets frustrating. Uh it's public, you know, it gets put right into the paper. People can see all the business of the family when someone passes away and they leave assets to family members or anybody just through the uh through a will. And so, you know, a lot of times if you want to try to protect your your family and your loved ones and who you're providing to, you know, leaving, leaving it, you know, through a will doesn't have any, think of it as sunglasses, you kind of hide behind them. It doesn't have any sunglasses on the on the plan. It just everything's out in the open. It's all there for anybody who wants to look it up, to look it up. Who who who got what and how much they got. And then finally, it's it's it's stressful. There's a lot of paperwork, uh, there's deadlines, there's family tension, uh, there's arguing and there's bickering, and and you know, it just causes undue and unwanted stress. So, solution could be a living trust. Again, I'm not an attorney, I don't give legal advice. I'm just telling you about what a living trust does. What a living trust does is it holds the assets while you're alive. And then once you pass away, it distributes them privately. So, unlike the will that puts in the paper, here's what the estate was, and here's who's getting what, the living trust distributes that to your heirs privately. No one sees the family business. That takes tension and stress and pressure off the family. It avoids probate completely, which is amazing. It saves time, it saves money, it saves stress, and it lets you control how and when the money is passed on and who it's passed on to. So, four really, really big benefits there. Again, hold your assets while you're alive, distributes them privately once you pass, avoids probate, huge benefit, and lets you control the money from the grave, let you dictate how and when and how much uh of your assets someone gets. So let's let's talk about a quick example. Let's say uh John is a retired engineer, he's got a$2 million estate. Scenario A is a will only. This could take nine months to two years in probate potentially at 5%, could cost$100,000 in cost to probate this. There's a lot that goes into that. Where do they live? What state? Uh, do they have assets in multiple states? I mean, this can get messy fast. So, you know, it's important to think through some of that. But there it could be a significant cost. So let's just say it's 5% on$2 million. That's$100,000 in cost. And then finally, everything is public. So scenario B is John created a living trust. Assets passed directly to kids, it's fast, private, minimal taxes, or excuse me, minimal costs, and avoids probate completely. It is a very useful tool that a lot of people avoid just because they don't want to pay a couple thousand dollars on the front end to have someone strategically and legally draft up documents to help their assets pass more efficiently to the heirs and charities that they care about. Charities are less of a big deal, not that they're not a big deal, but having that privacy I've found to be important for people. And so when you look at a couple thousand dollars for a living will and estate planning documents to be drafted by an attorney versus potential hundred thousand dollar costs in this situation and everything's public, it's a no-brainer to just have a couple of meetings and get it done professionally with counsel so that you understand the decisions you're making. If you come to that table and say, hey, I'm out, I want to do will only, okay, that's your choice. I think most people, once they understand the benefits, would not choose to do that. So, how do you set up a trust? Simple roadmap for you. You should work with an estate planning attorney. These are great resources to provide that counsel. You should retitle assets into the trust because if you don't actually retitle them, even though the trust is set up, nothing flows through it. So again, you'll want to work with the attorney to help you retitle the assets into the in you're gonna want to name trustees. You know, could be you now if you're still living and in good health. Obviously, you're living, you're you're drafting these documents, but you see what I mean? You're in good health, you you you can sound mind, you can make decisions. So you can be the trustee now, but you might want to add a successor trustee on later. Maybe that's a spouse. So you're gonna want to name them. Again, this is all part of the estate planning attorney's process, and then spell out who gets what and when they get it. Now that we've kept your estate out of probate, let's talk about how we keep your inheritance from accidentally harming your kids. Uh so in this section, we're talking about how do we protect your kids from themselves. Creating these big lump sum inheritance sounds really generous. And I have a lot of clients that like to do this, passing down money to their kids and potential grandkids. And a lot of times I see it backfired. They overspend, they invest poorly, they get influenced by friends, they just a lot of times they didn't earn the money. And so they don't have the same respect for it as someone who worked and saved and maybe did without to accumulate the nest egg that you did. And so some of it ends up getting squandered. So if you leave a big lump sum inheritance, you can actually hurt your kids, uh, especially if those kids are young, they're inexperienced, they're impulsive. Potentially, what if they're struggling with addiction or um, you know, maybe have debt problems or unstable relationships? Those those scenarios can burn through money very, very quickly. Uh, I've seen someone inherit uh three million dollars uh at age, you know, 60, 65. Their mom, when their mom passed, was uh in her late 90s. This is a grown child who should have a pretty good head on her shoulders at you know, mid-60s. And the money was completely gone in two years. Every dime of it was blown at uh a casino. And you know, she had an addiction, she couldn't overcome it. And that's where, you know, a little bit of foresight on the front end can help protect your family, your kids, your benefactors from themselves a lot of times, but also skip probate. So, you know, there's there's solutions for this. And it is, you know, a spendthrift trust, or or uh also sometimes known maybe as a structured trust. These types of trusts help protect your children or grandchildren or whoever you're leaving money to, a lot of times from making their own poor decisions, from creditors, from lawsuits, from you know, potentially divorced spouses. Um you know, in the in the situation that I just talked about,$3 million gone to the casino, it would have prevented her blowing through all that money. The lady is literally on food stamps now. And uh, you know, it's sad to see someone have so much, have, have everything she could ever want, and and just be their own worst enemy. So these can be really beneficial for people to protect themselves from these poor decisions. The trust would own the money, your child doesn't, and the trustee would distribute money according to your rules. And you can make really whatever rules up you want. It could be by age. Let's say you want to give them 25% at 30 years old, and another 25% at 35, and the remainder at 45, or you want to do it by milestone. Maybe once they get an education, they get so much money, or they can have so much money to buy a house, or you know, maybe start a business. Some of that, it could also be by need, like, you know, if someone has a health issue, maybe they get some money to help pay for some of that health expenses, or there's an emergency. With the with trusty oversight, someone who can say no when needed helps further protect to make sure that the assets are passed down in the way that you wish. And again, help some of the benefactors protect themselves from making bad decisions. And your goal isn't to control your kid's life, your goal is to make sure that the money helps them, not hinders them. Now, let's take a second to kind of switch gears and talk about taxes and make sure taxes don't take a huge bite out of the apple, also known as the inheritance. So, how do we build a tax efficient or tax-free inheritance? Most families don't realize how heavily inheritance can be taxed. I'm working with with uh a client now who uh is going to have a massive tax bill. It's gonna eat up, you know, 40 or 45 percent of their overall net worth again because they didn't walk through all of the steps needed to think through, and and you'll never solve everything. Having a plan from 15 years ago is not adequate. These plans need to be updated and adjusted as your life changes, as your net worth changes, uh, if you're an entrepreneur, if your business grows, these things need to be updated and not just uh a one-time set it and forget it. Where do these taxes show up? A lot of times they show up at estate taxes. The higher your wealth, the more estate tax you owe. They can show up as state inheritance taxes. Tennessee does not have state inheritance tax, but some states do. It can show up as income tax. If someone has an inherited traditional IRA and um they take a distribution, there's income tax on that. So there are a lot of ways that we could be more tax efficient with the legacy that you are giving to your heirs. And so it's common, I see this regularly, where you know, 20 to 40% of an inheritance can vanish to taxes just because they have poor planning on the front end. So, what are some solutions that we can implement to help provide tax-free inheritance to your kids? The first is life insurance. And these life insurance proceeds are income tax-free. They're often out, oftentimes outside of probate. So, and they can also provide liquidity to cover estate taxes. Actually, the the reference where I just mentioned to you, where you know there was a big estate and they're going to lose a lot of that to uh taxes, uh, a lot of that is because there is no uh there was no life insurance. There was no real liquid money. It was tied up in a business that's going to cause, you know, if if if they don't come up with a strategy, them to force sell the business, which is not ideal. The entrepreneur never wanted that to happen in this plan. But insurance can life insurance can provide some liquidity to help cover some of those estate taxes. So you're not forced to sell the car collection or the business or the beach condo. And that way you're able to keep those assets longer and own them and carry on uh the legacy that your parents or or whoever left for you. The next option is Roth IRAs and Roth conversions. I see this all the time. Traditional IRAs are huge tax bombs for kids and grandkids when they inherit them. Once the Secure Act passed, kids were no longer or beneficiaries were no longer allowed to stretch those RMD or those distributions over their lifetime. They had to deplete the traditional IRA over a 10-year period. And so what you do is especially for uh you know people that are still working and they're and they're typically 40 to you know 60, they're their highest income earning years, and then they inherit one of these traditional IRAs, they're forced to take distributions and it drives their tax brackets up higher, and they end up keeping less of the money. So because these traditional IRAs are tax bombs, if you can execute Roth conversions in potentially a lower tax bracket, there's some huge benefits for you or for your kids. The money grows tax-free, it grows tax-free, their withdrawals are tax-free, they're still subject to taking the money out within 10 years, but they don't get hit with the taxes. And so typically, retirees have a lower tax bracket than someone who is, again, still working in their prime earning years. And so doing some strategic tax planning and Roth conversions could be a huge benefit and a huge way to pass on legacy assets to your children with no taxable, no taxes. How do we do those Roth conversions? You know, we do that by converting pieces of your traditional IRA into a Roth during lower tax years. Uh, I've done another video on this, and you'll see it here on the golden window. And if you watch that video, I explain in detail a great strategy for retirees to use to convert money to a Roth IRA and really do it in a tax efficient way. So, you know, again, if you do that, you can best to do it before RMDs start, before you turn on Social Security. Years when you have lower income and your tax brackets in the you know 10 or 12% range, that that golden window is a great opportune time to think about your overall tax strategy, your overall tax planning, and furthermore, how you plan to leave your kids a legacy without inheritance taxes. Even if your kids are responsible, and even if taxes are minimized, there's still one more threat. Other people coming after the inheritance. You have to protect the inheritance, your hard-earned legacy from divorce, from lawsuit, from creditors. Even responsible kids can get caught in the divorce and the lawsuits, debt, a failed business. Things happen in our lives that are unexpected. Uh, and and even if you have the best intentions or or you're a good person, unfortunately, some things, you know, sometimes bad things happen. And so having these assets placed in a trust or an asset protection trust, something like that, keeps uh keeps these assets and these legacies protected for your heirs. This would keep inherited assets separate from marital property. That's huge, again, if there's a divorce, pending divorce, or even divorce down the road. Once those assets get commingled, then they become part of marital property. So keeping them in some sort of trust like this would keep those separated so that your heirs inherit the money and not a potential ex spouse. It makes it extremely hard for creditors to access the money. Again, a huge benefit if someone ends up filing for bankruptcy, loses their job, and helps. Health expenses, health, you know, costs, skyrocket. Not that they don't owe the money, but it makes it really, really difficult for creditors to come after it. And then you're able to control and release money under the terms and rules that you set. And I think that's a big benefit for just kind of the unknown of what happened. So it's not that you're trying to withhold the legacy from your heirs. It's that you've got a great way to help protect them and they can have the assets. They can have their cake, which is the assets, or have their protection, which is the trust owning the assets, and then they can eat it too, meaning they can have access to it under some of these rules and stipulations that you've created. So it's not about how do we, you know, cause them frustration and feel like they don't get their inheritance. It's that, as every parent wants to do, we want to try to help our kids and our loved ones and do so by reducing probate, reducing expenses, making sure we take into account unforeseen circumstances. And so that's why these trusts are really, really important in your wealth planning and financial planning, retirement planning strategy. So let's put it all together. Your inheritance game plan. Here is your roadmap. Clarify your goals. Very, very important. Who gets what? Do you want to support grandkids, charities? How do you want your money, your legacy to be given out? That's number one. Number two, you need to inventory your assets, homes, IRAs, Roth IRAs, investments, business, the car collection, the coin collection, jewelry, life insurance, business interests, rental properties, all of the things that you own need to be inventory. You need to, you know, think through and make sure you're not missing anything. You need to choose your structure. You need to meet with an attorney who can guide you and give you uh uh guidance, answer questions, shed light on different strategies so that you understand the best structure to make when you're doing your estate planning. What kind of trust are you going to utilize in there, you know, in this plan? Build your advisory team. It's really, really important. Don't try to go with this alone. I'm a big fan of this proverb that says, if you want to go fast, go alone. And if you want to go far, go with somebody. Have a team. Go with a team, you know, an estate planning attorney, a CPA, a financial planner, a certified financial planner, your family. Make sure that everyone is involved and on the same team and rowing in the same direction so that you have a really cohesive strategy and confident in your plan. Implement the plan, you know, execute the documents, create the trust, retotal the assets, update the beneficiaries. Don't go through all this work to not finish it. See it all the way through, implement the plan, and then finally review it. Again, I see a lot of times people just one and done. It's been 20 years since you've updated it. Life changes, laws change. Take this out, update it. You know, review this plan. It doesn't have to be done every year, but review it every three to five years to make sure things are still the way they should, passing the way they should. You don't need to make updates. It's very, very important that you know you do not set it and forget it, but you review this regularly, just as you would your investment strategy, your retirement plan, you know, your rental properties, anything. You know, everything has to be reviewed frequently. So, in closing, a big inheritance without a plan can hurt your kids, but the right structure can protect them, support them, and preserve what you've built. If you want help building a plan like this, one that avoids probate, reduces taxes, and protects your kids, feel free to reach out. My calendar is in the about us section. You can schedule some time with me there. I would love to help you. Thanks for watching today. If you haven't already liked and subscribed, please do so. Be confident in your retirement. Have a wonderful day. Thanks for joining me on another episode of What the Wealth. If you enjoyed the episode today, smash that subscribe button. It helps me more than you think. Also, if you found this episode insightful and a light bulb went off, share it. Your friend Aunt Judy, the random guy in the office who's always talking about investments. Wealth isn't about just the chicken. It's about our choices, chances, and changing our financial futures. The information in this podcast is informational and general in nature and does not take into consideration the listener's personal circumstances. This podcast is not intended to be a substitute for specific in financial, legal, or tax advice. You should consult the approved qualified professional prior to making a final decision. Security is offered through LPL Financial, member FINRA SIPC. Paradigm Wealth Partners is the other business name for Independent Advisor Alliance. Investment advice offered through Independent Advisor Alliance, a registered investment advisor, Independent Advisor Alliance, and Paradigm Wealth Partners are separate entities for LPL Financial.