For many investors, setting aside inheritance money for their heirs and loved ones is a natural part of retirement planning. But doing this successfully is not easy, and fortunes rarely last for long. In fact, long-term studies show that six out of 10 family fortunes get dissipated by the end of a second generation. And nine out of 10 are gone by the end of the third generation.
In fact, there’s a good chance that at least one member of a couple in their 70s will live to age 90 or beyond. So the typical heir could be, say, age 60 before he or she gets a dime.
Moreover, medical expenses soar in later years. That’s especially so now, with today’s faster pace of medical advances, many of which are hugely expensive. It may help to inform your heirs that your retirement planning doesn’t include cutting corners when it comes to keeping yourself alive, mobile and pain-free.
For that matter, you may want to get hold of a copy of one of the Die Broke books. The philosophy of these books is that you should spend all of your money while you’re alive. But you don’t need to agree with that retirement planning philosophy, or even read the book.If your heirs lack ambition, it may be worthwhile to get hold of a dog-eared, used copy, ideally with crucial passages highlighted, and leave it around the house where they are sure to see it.
Inheritance money planning tip #1: Have a financial contingency plan
This will let someone you trust take charge of your finances and investments if you can’t handle them yourself. However, it’s best to focus on finding someone you trust thoroughly, and giving that person as much latitude as possible.The alternative — leaving fixed instructions — introduces a random element that can only hurt you. After all, fixed instructions (such as “If I get sick, convert all my holdings into T-bills”) won’t add to your wealth. But they may turn out to be wholly inappropriate, and whoever you put in charge won’t be able to do anything different.
Inheritance money planning tip #2: Invest based on your heirs’ timelinesIf you have substantially more money than you’ll need for the rest of your life, and you plan to leave the excess to your heirs as part of your retirement planning, it makes sense to invest at least part of your legacy on their behalf. That is, invest based on their time horizon, not yours.For instance, if your heirs are in their 40s, your retirement planning should involve holding at least part of your portfolio in a selection of investments that would suit investors in their 40s. Of course, you’d still want to invest conservatively. But you’d want to take advantage of the many years that 40-somethings have till they reach retirement age.If your retirement planning involves holding your money in T-bills for the last few years of your life, it will generate a minimal return after tax: you may actually lose money after accounting for taxes and inflation.
After your death, it may take months or longer to settle your estate. After that, your 40-something heirs may need time to put your legacy to work, especially if they are inexperienced as investors. They may have passed 50 by the time they get around to investing in an age-appropriate fashion. Missing out on, say, three years of even moderate returns can take a big bite out of the funds they’ll have a couple of decades later, in retirement.
Inheritance money tip #3: Keep a close eye on your life-insurance forms
As part of your retirement planning, you should periodically check the form that names or changes the beneficiaries of your life-insurance policies. Often, you’ll name a primary beneficiary (generally your spouse), and a secondary beneficiary (often your children) if the primary is incapacitated or dies at the same time as you.
We once came across a case where the insurance agent mixed up the primary and secondary beneficiaries. As a result, instead of going to the bereaved spouse, the form said the eldest child was to receive the proceeds of the policy.
Happily, the eldest child recognized the mistake and immediately agreed to sign the cheque over to the surviving parent, for whom it was obviously intended. But if the child had refused to sign the cheque over, the surviving parent would have had no recourse. The insurance company would have had to follow the instructions on the form.
Of course, most children will do the right thing in a case like that. But you have nothing to gain by putting them to the test. Many families have been torn apart irrevocably for smaller amounts than the payout on the average Canadian life-insurance policy. That’s why you’ll always want to take a moment and be sure the form is correctly filled out before you sign and use our estate planning tips to ensure a smooth financial transition.
Have you spoken to your children about the inheritance money they might receive? Were you surprised at how it went? Share your experiences with us in the comments.
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was originally published in 2010 and has been updated. It has been republished on the Hub with permission. You can find the latest version at TSINetwork here.