By FPA member A. Christopher Engle, LUTCF, CFP®, ChFC®
Last Updated: March 1, 2010
Every parent knows that starting at about age 12, the communication with your children changes dramatically. The smiling face that always laughed at your silly jokes and asked you questions about everything now just rolls their eyes and gives you that dreaded "nuthin" to your inquiries. It is just part of growing up. Over time they mature and communication improves again as they become adults. One common exception to this improved open communication is personal finances.
Parents often are uncomfortable having their adult children know their personal business. The parents of Baby Boomers, in particular, are a generation where the father of the house handled all the finances in a private manner. Often the wife or mother wasn't even involved in many personal financial decisions. Now, the children are afraid to introduce the subject for fear of seeming greedy or insulting to their aging parents. Unfortunately, this communication gap can lead to some poor financial planning decisions and in some cases damage otherwise healthy family relationships.
Loving relationships between brothers and sisters often turn sour when they are forced to be "partners" in businesses or vacation homes through the estate planning of their parents. Another common mistake is leaving all of the assets to one child with instructions to divide it up. This scenario, compounded by the emotion of the loss, has a great potential to drive a wedge between otherwise happy siblings. No parent wants this to be their legacy.
10 Common Mistakes:
- Procrastination: Don't wait for a crisis.
- Thinking that financial and estate planning is only for the wealthy.
- Outdated or improper beneficiary on insurance and retirement plans: Will an ex-wife inherit an old 401(k) plan?
- Leaving too much in Individual Retirement Accounts (IRAs) and other tax deferred accounts: This could create more taxation for next generation. Mom and Dad are often taxed at lower rates.
- Forcing siblings to be business partners or to own property together for long periods of time.
- Leaving everything to one child and letting them split it up: This almost guarantees misunderstandings and tension between siblings. Also, it could create gifting problems.
- Using joint ownership to transfer assets: This could cause more gifting problems and the loss of potential tax benefits. Also, it could create more family disharmony.
- Not putting special wishes in writing: Family heirlooms and valuable household items can become the source of major family squabbles. Once it is in writing, discuss it with everyone so that there are no misunderstandings.
- Not discussing financial and estate decisions with other members of the family: This could create more misunderstandings and hurt feelings.
- Not properly using professional advice: Financial, tax and legal professionals have experience with most family situations. They can also ask questions that might be uncomfortable for any family to ask.
So, now you want to have this discussion with your parents. How do you approach them? When is the right time? Unfortunately, there is no perfect answer. Obviously, signs of forgetfulness or evidence that keeping up with household tasks is becoming overwhelming indicate that now is the time. It is a mistake, however, to wait for these signs. The best planning is done well in advance of needs.
Do not try and have a family meeting over the Thanksgiving turkey or other social event. Schedule a special time, have someone bring a homemade dessert and serve coffee with the good china. This will put everyone in the right frame of mind to have a loving, productive discussion. Enlisting the help of a financial planner to help bridge the generational gap is a great way to minimize the emotion and anxiety over this type of planning.
A financial planner will meet with you, your siblings, and your parents individually to gain an understanding of each financial situation. Everyone's financial situation is considered as plans are developed for income, healthcare and estate planning needs.
FPA member A. Christopher Engle, LUTCF, CFP®, ChFC®, is a partner with Argus Financial Consultants in Grand Rapids, Mich.