Many people fail to fully comprehend just how many threats there are to keeping their family wealth throughout their lifetime and beyond. In today’s post, I’ve tried to explain 13 of the most common threats that could jeopardize your families’ wealth.
With everything from poor financial decisions, to lack of planning, to failing health, this post covers just about every possible scenario that could derail your financial future. Let’s get to it…
1. Poor Financial Decisions by Your Loved Ones
One of the biggest threats to your Wealth is what will happen to it after you are gone. Is your family prepared to handle a large windfall of cash?
Study after study has shown that when a large inheritance is left to spouses and children who have not had experience managing money that the money is spent down and lost far sooner than the deceased would have liked.
This isn’t just a problem for people who inherit money. This happens over and over with any situation where a person who isn’t used to having money suddenly receives a large sum of it. You see this with professional athletes, entertainers, and lottery winners.
And even if you felt that your family would make sound financial choices and could handle a large windfall, consider the pressure that they may face from outside sources such as other family members, friends, salesman, old classmates, etc. Does your spouse or child have a bleeding heart and would they be willing to give a large percentage of your money away?
If your children are grown, are they married? Is their spouse a spendthrift? Would they lose the money in a possible divorce situation?
Before you decide to give your money outright to a family member, consider what might happen to that money after you are gone.
2. Disorganized Assets
When my mother passed away in early 2016, one of the first things my siblings and I had to do was find all of Mom’s money. You see, my mother, for many years, persisted in a state of “organized chaos”.
Financially, she had all of her information, but it was organized in a way that only she could truly understand. If you had asked her where her financial information was, she could tell you. But without her to guide us, it was much more difficult.
So my question for you is this – do you have a complete list of what you own, where you owe money, where your bank accounts are, etc.?
Could your financial information be easily retrieved by your family members if you were no longer able to provide it?
Here are just a few of the consequences of unorganized financial planning:
- Incorrect Beneficiaries. Do you know who all the listed beneficiaries are on your life insurance, annuities, and retirement plans? When was the last time you double checked this information to ensure it was still correct?
- Not Updating Your Estate Plan. If you have already put together an estate plan, are you sure that it is properly funded? Are your assets titled the correct way? Are your beneficiaries in line with your estate plan?
- Unnecessary Court Involvement. If you are disorganized financially, your loved ones may need to unnecessarily involve the court system to get a guardian appointed over you or to manage your assets through the probate process. This can delay access to necessary funds, and make your private affairs a matter of public record.
- Lost Money. One of the biggest consequences of failing to get organized financially is that your family may lose funds to the Department of Unclaimed Property. This is a state-run department that receives money that has been forgotten or left unclaimed after someone dies or becomes disabled.
- Frustration and Stress. A common consequence for families of a decedent who is disorganized financially is plain old frustration and stress. Losing a loved one is frustrating enough without having to comb through their important documents in an attempt to locate all of their assets.
3. Nursing Home Expenses
As you get older, the risk that you may end up in a nursing home or other long-term care facility increases greatly. Loss of wealth to nursing home expenses is a very real possibility for many seniors today.
Fortunately, most families still have time to plan for these expenses and ensure that their assets are protected.
Some simple ways to manage these expenses include:
- Purchasing Long Term Care Insurance
- Take full advantage of military veteran’s benefits if applicable
- Transferring assets in a way that avoids the Medicaid penalty
- Start the planning process as early as possible.
4. Losing Control or Access to Your Assets
Proper planning can help you to control who can access and manage your financial assets in the event you are no longer able to do so yourself.
The most common reason for this is your incapacity (i.e. you are in a coma or suffer from dementia or Alzheimer’s).
A frequent tool used to plan ahead for your incapacity is a durable power of attorney. This is a legal document that gives someone you trust the ability to manage your financial affairs on your behalf.
When drafting a durable power of attorney, it is important that you hire an experienced estate planning or elder law attorney to assist you. You want to make sure that your durable power of attorney will allow your agent to do anything that you could do if you were mentally capable of doing so.
This includes buying and selling investments, managing your retirement accounts, or engaging in long-term care or asset planning on your behalf.
Once again, if your power of attorney is infective when needed, you family will need to hire a lawyer to file a guardianship on your behalf.
Not only does this take time (typically several months at a minimum), but it also will cost your loved ones money in the form of filing fees, court costs, and attorney fees to file the paperwork and attend a hearing. Not to mention that you could have family members fighting over who should be managing your funds.
5. Mismanaged Government Benefits
Many people are severely uninformed when it comes to government benefits, typically Medicare or Medicaid.
If you have loved ones that fall into one of the following categories, they may be entitled to government benefits:
- Adult child with mental illness
- Grandchild with a developmental disability
- Elderly family member in a long-term care facility
Believe it or not, if you leave assets to these individuals upon your passing, you may actually be doing them a disservice as the assets they receive from you may disqualify them from further government benefits!
That’s right. By giving them money, you may just be giving money to the government instead. You see, many of these programs have asset restrictions on what someone can own before they qualify for benefits. And if they get a huge windfall from you, they may be disqualified from additional government benefits.
Instead, your inheritance to them would be used to provide for their care or reimburse the government for benefits already paid.
And don’t forget about financial aid for college. If you give money to a child or grandchild in the wrong way, you may disqualify them from important grants and scholarships that they would otherwise be eligible for.
6. Lawsuits and Creditors
It’s and unfortunate but serious reality for any family. One day, your family is healthy, financially secure, and living the American dream.
The next day, someone you love could be in a car accident, be facing a divorce, or worse. If you leave an inheritance to your family that is not protected from creditors, then you are putting your family’s wealth at risk.
Here are just a few of the many liabilities that could derail an otherwise financially secure family: (1) Bankruptcy as a result of irresponsible spending, business losses or unexpected medical bills; (2) Professional malpractice liability for an heir who is a lawyer, doctor accountant, engineer or other profession; (3) Car accident in which someone is seriously injured or passes away; (4) Unexpected criminal liability; or, (5) Defense of any other legal action, whether frivolous or not, which is expense to defend.
7. Marriage or Remarriage
There are multiple examples where a marriage can lead to the loss of family wealth. Here are several examples, all of which could be prevented with effective estate planning:
The Elective Share. In North Carolina, a spouse can receive a minimum amount from a spouse’s taxable estate, even if they were not included in the Will. The taxable estate includes both probate and non-probate assets. Depending on the length of the marriage and the number of children from the marriage, this amount could range from 15% to 50% of the total net assets.
Everything to the Step-Kids. Suppose you lose a grandparent who was fairly young. Your other grandparent meets an old friend and decides to get remarried. Before an appropriate plan was put in place, your second grandparent passes on. All of their assets had been put into joint name with their new spouse. As a result, none of your grandparents’ wealth is left to your family, and it all goes to the step-kids in a family that you never met.
Spendthrift Spouse. It is quite easy for one spouse to lose their life savings in a matter of several years by getting remarried to a new spouse who is a spender.
There are a number of ways to avoid these problem areas. For example, you may want to use a premarital agreement on second marriages, keep assets separate, or use trusts to protect assets in the event of second marriage.
8. Not Knowing Your Wealth Predators
There are a number of predators lurking whose main goal is to legally drain the wealth you have amassed through the years. Some of them we have already talked about, namely lawsuits, unknown creditors, and nursing home expenses.
But the government, the IRS, and even Family Members can potentially drain you and your family of your wealth if you do not undergo careful planning.
Predator #1: Estate Taxes
For instance, did you know that you may give away $14,000 per year to as many people as you would like? So if you find yourself in a situation where your estate may have to pay estate taxes, and you want to make sure that your heirs get this money now rather than let the IRS get it after you die, then an annual gifting program might be a good idea for you.
Predator #2: Retirement Accounts
Another potential predator lurking in the woods might just be your retirement accounts. Even though many people have a great deal of wealth tied up in a retirement account, it’s possible your retirement could be a ticking time-bomb for your heirs. If not managed properly, your heirs could be forced to sell retirement assets to pay estate taxes, and also pay income taxes on the withdrawal from the retirement account.
But rest assured, there are numerous planning techniques that can be used to avoid this problem scenario. And in some cases, you can make your IRA or 401(k) into a lifetime stream of income for your beneficiaries.
Predator #3: Family Members
We already touched a bit on how family members can drain your wealth. And we aren’t talking about people who are malicious and looking to steal from you. We are talking about family members that may be subjected to lawsuits, creditors, or even devastating medical bills. Some family members may just be financially irresponsible or suffer from addiction problems, and thus they need to be protected from themselves.
9. Failing Health
Probably one of the biggest threats to your families financial well-being is your own health. Here are some statistics for you to consider. Did you know that among the population aged 65 and older, 69% will develop a disability before they die and 35% will eventually enter a nursing home? In addition, 70% of people over the age of 65 will need some form of long-term care during their lifetime.
In other words, if you are faced with an extended stay in a nursing home and haven’t properly planned for this, either by purchasing long-term care insurance or engaging an elder law attorney to assist you with Medicaid planning, then you stand a good chance of losing out on much of your life savings.
If you don’t completely understand what I mean, perhaps it is because you don’t firmly understand how expensive long-term care facilities can be. In North Carolina, the average long-term care cost approximately $6,500 per month. That comes out to $78,000 per year.
If you or a loved one are in the nursing home for any extended period of time, (3-5 years), then this could amount to as much as $234,000 to $390,000… and that’s for only one person!
Fortunately, time is on your side. You may still have time to purchase a long-term care policy or do some advanced Medicaid planning.
Which leads us to…
10. Procrastination aka Failing to “Plan When You Can”
Among all the different threats to your Family’s Wealth, this is probably one of the biggest.
Because right now, as you read this, you have the ability to create a plan that will protect your wealth and your family.
Nobody knows when they are going to die or become disabled.
Nobody knows when they may need to enter a nursing facility.
Nobody knows when they will be diagnosed with some form of terminal condition.
The thing is, right now, BEFORE any of these things happen, you have an opportunity to create a workable plan that will protect your family, children and other loved ones. You can purchase life and long-term care insurance. You can put an estate plan in place that works for you and your family to accomplish your goals.
11. No Business Succession Plan
If you own a business and you don’t have a business succession plan in place, you are playing with fire.
I talked to a small business owner recently is getting ready to retire when the lease on his business is up – within the next five years. He is in poor health, having had a heart attack several years ago.
When I asked him what would happen to the business if something happened to him, he said it would go to his Godson who works with him. I said to him, “that sounds great”, what legal documents do you have in place to ensure that this happens?
This is all too common. Many people are trusting and just believe that things will “work themselves out.” Unfortunately, in the real world, this isn’t the way it works.
If you have a business, you need to take into account the following considerations in the event something were to happen to you while you own the business:
- Making your spouse (or another close friend that you trust) a minority owner, if you haven’t already
- Drafting a buy-sell agreement that governs what would happen to the business if you weren’t around to manage it
- Purchasing life insurance to pay off the buy-sell agreement if or when something happens to you
- Making sure that all your policies and procedures are documented and systematized so that someone can step in and run the business if you weren’t there
- Get yourself financially organized so that your agent can continue to run the business, make payroll, and pay your bills if you aren’t around
- Get your overall estate plan in order to protect your heirs if something were to happen to you
12. Not Working with the Right Professionals
If you are thinking about putting an estate plan in place, it is important that you are working with the proper advisors. Estate planning is complicated, with lots of moving parts. At a minimum, you should involve the following individuals:
- An estate planning attorney
- A financial advisor
- An accountant
- Life Insurance Agent
- Close family members whom you trust to look out for your best interests
If you are not working with any advisors currently, please contact our office and we can provide you with a list of referrals to individuals we trust and have worked with in the past.
13. Not Understanding the Costs Associated with Failing to Plan
The costs of failing to plan will typically far exceed the cost of planning itself. This post has provided some in-depth coverage of many of the costs associated with failing to plan, which include:
- Cost to unnecessarily probate your estate, or pay related expenses and estate taxes
- The Costs associated with failing to properly pass on your retirement accounts
- The loss of government benefits due to poor planning
- The loss of wealth to creditors, irresponsible family members, lawsuits or divorce
- The unnecessary stress and headaches that will plague your family due to poor planning or a complete lack of planning
It’s Not Too Late To Start a Plan…
Fortunately for you, by reading this information, you are setting yourself and your family up for financial success. You understand that proper planning, done early enough, can alleviate most, if not all of these problems. If you have questions about the topics in this article or would like to discuss your planning options further with an estate planning attorney, please call our office at (919) 460-5422 or fill out our online contact form.