As we head into the final days of the holiday season, this week’s episode makes the correlation between unique holiday traditions and unique family circumstances to discuss the vital topic of estate planning, including the importance of getting it right for blended families. We also share a favorite tradition that exhibits a fresh perspective on taking risks.
Episode Notes
Presented by Creative Planning, each week Host and Managing Director John Hagensen cuts through the headlines and loud takes to challenge the advice you may have been given and reaffirm what you know to be true. Plus, don’t miss his weekly interviews with Creative Planning specialists as they cover investing, taxes, estate planning and many other areas that impact your financial life!
John Hagensen: Welcome to the Rethink Your Money Podcast presented by Creative Planning. I’m your host, John Hagensen, and on this week’s episode, I’m making the correlation between unique holiday traditions and unique family circumstances to discuss the valuable topic of estate planning, including the importance of getting it right for blended families. I’ll also answer four listener questions and share a fresh perspective on taking risks before applying the famous quote by the great one, Wayne Gretzky, “You miss 100% of the shots you don’t take when it comes to your finances.” Now join me as I help you rethink your money.
The holiday season often brings us back to our favorite traditions. Whether it’s attending a million Christmas concerts like I do this time of year for all my kids, baking secret family recipes, or piling into the car to look at Christmas lights, there’s something special about these moments that remind you of the importance of family. For the Hagensen family, one tradition we’ve embraced is our 30-foot-tall inflatable Santa in our front yard. In fact, my 23-year-old was telling me he has his own TikTok account. Now, I’m not on social media, I can’t verify that. But I did walk out the other day and in the line of people taking videos and photos, one of them said, “Yep, we’re making a TikTok with Santa.” So, I think he’s right. He’s basically the North Pole’s ambassador to our neighborhood.
We like to hop in the golf cart, drive around. And I know if you’re in a cold climate right now, you’re going, Wait, get on a golf cart in December?” We do. We grab our kids, we turn on Christmas music, and we drive through our neighborhood testing all of the hot cocoa and cookie and popcorn, and yes, even a churro stand that are set up throughout our neighborhood. It’s become our own little holiday scavenger hunt. Now before you think, “Man, it sounds cool to live in your neighborhood, John,” don’t plan on needing to get anywhere between about 5:30 PM and 10:30 PM because there are hundreds of cars moving less than one mile per hour going through our streets because we have that neighborhood, the Christmas light neighborhood in the Phoenix area.
So, it has its pros and its cons, but here’s the thing about traditions. They’re meant to bring you joy and they’re meant to bring you peace and that predictability and cadence of the season, not stress. And the same should be true for your family’s future. Unfortunately, though, if you don’t have a well-thought-out and well-built estate plan, what’s meant to be peaceful can quickly turn into anxiety and even worse into a family feud.
I hate to start negative but let me share with you a few horror stories. First is the incapacitated spouse and the reverse mortgage debacle. Couple was married for decades, deeply in love, great relationship, named Jack and Emily. Emily became incapacitated due to illness, medical bills started piling up. Jack decided, “All right, I’m going to reverse mortgage my house. That’ll be the best option.” But here was the catch, Emily couldn’t sign, and Jack didn’t have any illegal authority to act on her behalf to even initiate the reverse mortgage. So, what happened next? A lengthy and a costly conservatorship process that could have been avoided with a simple power of attorney.
Here’s another example of a couple in their mid-70s, plan to sell their second home to cover the cost of care. This is not atypical to say we’re going to avoid long-term care insurance. But we have this secondary property, and the reality is if one of us becomes incapacitated, the other spouse isn’t going to be traveling to that other home. We’ll sell that home, take the proceeds and that will cover the costs at the nursing home. But the one spouse had a dementia diagnosis already and the deed was only in the incapacitated spouse’s name. I don’t know how that happened. They purchased this many years ago. May have been as simple as one of them was getting the mortgage or one person was present at the signing and they knew that in advance and said, “Hey, we’ll just put my name on it.” Never realized it, and without a durable power of attorney, the family was stuck in legal limbo while the cost of care began skyrocketing.
Situations like these are all too common and the stress alone can be worse than the financial hit. Keep in mind, estate planning isn’t about avoiding problems. It’s about solving them before they exist. How about the procrastination pitfall? I’ve met with many couples who say, “We’ll do it next year.” Because this isn’t like your tax filing where you’re penalized if you don’t complete it. No one beats down your door and says, “Your estate plan is still not done or isn’t updated,” making it very easy to procrastinate on.
Well, the husband passed away suddenly, unexpectedly, no estate plan, and because their house was technically in his separate property, his wife was shocked to find out that the state law where they lived split it up and two thirds went to his kids that, by the way, he didn’t even have a relationship with. They were estranged. So the surviving spouse had no say in how the estate was distributed.
Imagine this, you’re not only grieving your spouse, but now you’re also dealing with the unexpected financial stress and complicated probate laws. You’ve lost hundreds of thousands of dollars of the estate that you were banking on within your financial plan. She’s now lost her social security because his was larger. So, she thankfully moved to his but couldn’t keep hers as well. So rain comes down and all of this because they didn’t get around to it. They waited too long. Why? Because he was seemingly in good health, they weren’t overly old. They weren’t spring chicks, but they weren’t thinking death was imminent.
An interesting stat from a recent study found that 67% of Americans don’t even have a will. So that’s two thirds playing with fire when it comes to their family’s future. The probate process has been around for centuries, and it exists for a reason, but it’s like molasses. It’s slow, it’s sticky, it’s expensive, it’s public. It’s not one that you want to go through.
How about the unequal heirs? This is like family feud edition. A mother loved her three kids, but she had a little special relationship with the youngest, just a little bit more. She divided her assets unequally without any explanation. Cue the lawsuits, cue the lawyer fees, and the awkward holiday dinners that look like courtroom depositions. I see this as a wealth manager too often, not that there is an unequal distribution of an estate, but that the parent doesn’t really want to have that conversation because they think it’ll be awkward, and it could create drama. Yet, you don’t have the conversation, it creates way more drama because now everyone in the family is guessing at what your intentions were, and in this case, assuming that it was incorrectly written to begin with because it was never discussed. By the time the dust settled in this situation, legal fees ate up over 20% of the estate’s value, much of which was in a family farm. And the family, more importantly than any of the money, was permanently fractured.
So, when looking at estate planning horror stories, we’ve looked at the incapacitated spouse and the reverse mortgage debacle, procrastination, the unequal heirs, and finally, the do-it-yourself catastrophe. Had a client, he was the ultimate handyman, “I built my home, so I don’t need any help doing my estate plan.” He downloaded an online template, then he didn’t update it when he was remarried. He never transferred assets even into this trust that he created online, and the result was chaos. His second wife had to fight for her share while his kids sat in probate court. So, templates might seem tempting, “Oh, this is easier. I don’t even need to meet with an attorney. Why would I need to pay someone to do this?” But laws change, family dynamics shift, and without professional advice, those “cost savings”, that I’m putting up in air quotes right now, can actually cost your family a tremendous amount of money.
I mean, every situation is a little bit different, but for a general comprehensive estate plan, even including a revocable trust, it tends to be a tiny fraction, much less than 1% of your net worth to ensure that it’s handled correctly and it’s kept private and it’s clean for your family, those that you’re spending time with right now, likely over the holidays and that you care deeply for. Stories like these happen every day, but they don’t have to.
I want to transition over to blended families as it relates to estate planning. Blended families face some obvious unique challenges, different dynamics. I want to share five essential tips to ensure that if you’re in this situation, your wishes are honored, and you avoid unnecessary headaches. Number one, communication is key. Silence is not golden when it comes to your estate planning. In blended families in particular, communication helps ensure that everyone knows what to expect.
Sitting down with your spouse, sitting down with your beneficiaries, maybe it’s kids, grandkids, step-kids, step-grandchildren, can clarify your intentions and prevent misunderstandings later. For example, let’s say you plan to leave a larger portion of your assets to one child because they’ve sacrificed their career to care for you or they’re a part of a nonprofit that you really believe in, but they made way less money than their siblings. It’s fine. It’s your money. You don’t owe that to your other children, but if you don’t explain it, the others might feel slighted and not understand why you did it. They might even contest the will leading to unnecessary strife and potentially a mess like higher costs that could have been avoided with open communication.
Number two, you probably need more than a will. For most people, a will alone isn’t enough. Trusts are invaluable tools for blended families. For instance, you could do a QTIP trust. No, not the thing that goes in your ear. It protects your current spouse while ensuring that your kids eventually get their inheritance.
Number three, consider the possibility that your spouse could remarry. I know it’s a weird thought when you’re married to envision your spouse with someone else, but this is often overlooked. What happens if your spouse remarries after you pass? Without proper planning, your assets could end up in the hands of their new partner instead of your kids. How about regularly reviewing your beneficiary designations, very important for a blended family. And finally, decide who will make decisions If you become incapacitated. Name a trusted healthcare proxy and financial power of attorney. Life happens fast. Just like your favorite holiday traditions, your estate plan needs to stand the test of time. Thoughtful planning ensures that your family can celebrate together without conflict for years to come.
Today we’re diving into unique estate planning situations. To join me is Seamus Smith, a partner here at Creative Planning, Director of Legal Services. He earned his JD from the University of Kansas and his Master of Law degree from the University of Missouri, Kansas City. He leads our team of over 60 attorneys. Seamus, welcome to the show.
Seamus Smith: Thanks for having me, John.
John: Well, let’s start with the basics. Someone listening, let’s say who has put off their estate plan for years, either they haven’t done it or it’s just way out of date, they intuitively know that, what’s the first step?
Seamus: I think the most important thing is just to commit to a deadline and then to meet that deadline. Go ahead and take the step of setting an appointment with an estate planning attorney and just getting started. Life’s busy. Talking about death and capacity are not necessarily the most attractive things to do, but it’s one of those things where at some point you’re going to be incapacitated. At some point you’re going to pass away. And so do you want yourself and your family to be prepared for that or have it be one of those things that was just put off to the point that it was too late?
John: Well, about 50% of all American marriages end in divorce, so a lot of blended families out there. What are some of the biggest mistakes that you see regarding blended families?
Seamus: The biggest mistake is clients not working through what’s the goal when they’re both gone? So it’s really common in a blended family, if one spouse is gone, they want to provide for the surviving spouse. But then often if they’re both gone, they want to provide at least something usually to both sets of kids. And if the plan’s not developed correctly, it’s very common you’ll have a scenario where all the assets end up with the surviving spouse and then when they’re gone, all the assets end up with the surviving spouse’s kids. Basically the kids of that first spouse to die have been disinherited to some extent. And a lot of times it’s not even a choice by that second spouse to die. There just wasn’t a proper plan in place to ensure at that point where they’re both gone, what they want to have circled back to the first spouse to die’s kids, just was never implemented.
John: I’ve seen this firsthand where the surviving spouse’s kids all of a sudden have brand new BMWs and the other kids of the spouse who just passed away are looking around going, “Wait a second, we haven’t seen a penny from the estate. Now my stepmom’s already buying expensive vehicles for her kids.” So there are obviously ways to protect against that to some extent with a trust, but it’s hard to do. Seamus, if you do want the other spouse to have as much control as possible while they’re alive, that’s one of the risks. Is there an easy way to solve for that?
Seamus: That’s right that we’re typically using trusts to create that structure and it requires a lot of conversation with the spouses and what their intent is, what sort of restrictions are they comfortable having in place to ensure their wishes are made. And then develop the plan along that line of what they’re comfortable with and then getting to the end goal for the division among both sets of children.
John: The more restrictive you’re going to be on the surviving spouse, the more it protects all the children involved, but the less potential access and flexibility the surviving spouse has. So you’re trying to balance that for your own situation, I suppose?
Seamus: Yeah, that’s totally right because the more rigid you want to make the plan, to some extent, you’re forcing that surviving spouse to answer to the children, which the clients might not be comfortable with. So walking that line of making sure there’s plenty of flexibility for that surviving spouse but not necessarily forcing them into awkward situations.
John: For families who have special needs children, what’s one thing they need in the plan that you find most people overlook?
Seamus: The most relevant option or technique is just providing for that particular beneficiary in a special needs trust framework. So if you’ve got a beneficiary with special needs and they’re on some kind of needs-based government assistance, if they get a traditional inheritance, that’s an available resource and will get them kicked off those programs, which can be extremely valuable. We worked with one family where they had a child receiving very unique treatments where market costs would’ve been like $300,000 a month. There’s no way the family could have borne that expense. And so it was really vital that anything going to that child was in a special needs type structure, which ensures it’s there for the beneficiary, it’s there to provide for things but won’t get them kicked off needs-based government assistance.
So sometimes clients in that scenario, they’re just not aware that that’s a tool, and so the worst thing they can do is just leave assets to that beneficiary in the traditional way and they end up getting kicked off assistance. Sometimes clients are aware of that concern that if that beneficiary inherits, they’ll lose that assistance. And what they’ll tend to do is leave assets to other kids, basically disinherit the special needs beneficiary knowing, “Okay, well they’ll have their assistance and then I can rely on my other kids to take care of them through their inheritance.” The problem with that is even if the other kids are willing to do that, it may not be within their control. What if they themselves become incapacitated? What if they pass away? What if they have creditors, IRS is after them, maybe the money’s taken? So when you’ve got a beneficiary-
John: What if they get divorced or have a spouse that’s like, “Wait, this is our money now. I don’t want to help your brother.”
Seamus: Yeah, and so with the special needs trust structure, you can have the funds dedicated for that beneficiary, won’t get them kicked off assistance, and you’re not subjecting that money intended for that beneficiary to things like a spouse or the IRS or any sort of other creditor.
John: Seamus, how do you approach estate planning for families who own a business? How is that different from someone who is wanting to build out an estate plan but is just a W-2 employee?
Seamus: If there’s a family business, it really adds two additional considerations that have to be addressed within the estate plan. The first is just succession planning. So in the event the client’s gone, who’s going to run the business day to day? Because a lot of times the person who’s inheriting the business isn’t going to be the person that actually manages the business day to day.
So it’s not uncommon where somebody passes away, they had a business, they’re leaving the actual ownership of the business to their kids, but the kids were never involved in the business. They have other jobs, they know nothing about that industry, they know nothing about how that business operates. And so in those cases, clients really have to identify, if I’m not around, who are we pulling in to run this business basically for the benefit of the kids. And a lot of times it’s a longtime employee, a trusted employee who has been with the company a long time, understands the industry, the needs of the business, but it does take some time on the client’s part to potentially identify who that is and then groom them for that ultimate role when the client can’t do it themselves.
And then the second issue is liquidity. If you’ve got somebody who passes away and they have cash, publicly traded securities, there’s bills to pay, there’s taxes to pay, there’s bequests to make, well, that’s easy. There’s cash, there’s publicly traded securities, which you can convert to cash right away. But if the estate’s primarily a business, you can’t move that into cash very quickly. And so through the estate plan, we have to consider things like is the business going to be kept? If the business is going to be kept, where are we going to get liquidity to pay taxes. If the business is going to be sold, what’s the timeframe like that going to look like and how are we going to cover expenses, tax in that interim time while the business is being marketed?
John: I want to know if you agree with me on this, but I feel like if none of your children are going to be involved in the business, you are way better off trying to sell the business and do that while the business owner themselves, the parent in this case is alive and can figure out the valuation. A team like us here at Creative Planning, have a valuations team and we can help navigate that entire scenario with our business services team. But I think it’s way better to try to get those illiquid assets, especially if it’s a business that no one’s going to be involved in before they pass. Or if one of your three kids is going to run the business, the other two are not, but it’s the bulk of your net worth and you want to not disinherit the other kids, figuring out what is that other kid’s compensation going to be that’s running the company, putting some of those things in place while you’re alive.
Now of course, sometimes that owner dies completely unexpectedly out of the blue, and that’s where having this plan in place and having it all documented is really helpful. But would you agree on a big family business, try to do as much of this while you’re alive assuming that you have a runway to be able to do so?
Seamus: I agree with that because it creates so many other issues, not just the illiquidity, but dealing with the management itself. And you’re right, how do you divide this asset? If none of the kids are involved and nobody has a particular interest in it, if you can just take that off the table, if that’s possible, it will make everything much, much easier.
John: Well, where I’ve seen it, Seamus be a big problem is when one of the children is involved or two, but one or two are not. And now the other two kids that aren’t involved but theoretically own a quarter of the business because they all own 25. Well, the one kid that’s now the CEO is like, “Well, I pay myself 2 million a year because I’m running this huge company and you still have your ownership and you’re sharing in the profits.” And the other kids are like, “Well, the profits are a lot lower because you pay yourself $2 million a year.” These are the actual things that I’ve seen that cause massive division within the family and it can create some of the stereotypical family issues when it comes to money or family businesses.
Seamus: For sure, because you’re right, there can be mismatch of expectations for the person who’s actually in the business and see how it operates and then the person just standing on the outside and probably doesn’t have a lot of visibility or prior experience to set any expectation. You’re at risk then of creating family friction. We’ve seen that before where siblings are in that scenario, one’s in the business, one’s not, and they have a difference in expectations and then it affects their personal relationship.
John: From an illiquidity standpoint, real estate I suppose is somewhat similar. We have clients with a lot of real estate holdings, whether it be commercial properties or in the Midwest, farmers that own a lot of farmland. Would you say someone owns properties across multiple states, how do you think they should be considering that within their estate plan?
Seamus: For those clients, they really need to be using a revocable trust structure. And the reason why is if you’ve got real estate in multiple states and no estate plan in place, you pass away, you actually end up with probate in multiple jurisdictions. And everybody’s heard probates bad, but drilling down into that, it’s bad because it takes time. It’s expensive. You’re paying the court, you’re paying attorneys, and just a frustrating process.
It’s also public. So when somebody famous dies and we hear about what assets they have or what money they have, where it’s going, who’s receiving it, that’s because it’s a probate proceeding and some reporter just went to the court and looked it up. So clients don’t like probate and if you’ve got the real estate in multiple states, you’re going to end up with it in multiple states. If we use a trust, we can avoid that.
So a quick example, clients in New York and they have a vacation home in Florida, they pass away. There’s going to be a probate in New York where they lived, where they had a home. That New York probate proceeding has no jurisdiction over Florida real estate. So now the family has to go and open a second probate proceeding in Florida. They’ve basically doubled the work, doubled the cost. And if the client had incorporated an estate plan and we used a trust, a very common estate planning tool, and moved the real estate into the trust, it wouldn’t have affected the client’s ability to use, sell, finance that property during life. But then when they passed away, we would’ve avoided two probate proceedings.
John: Will someone’s current estate plan work as it’s constituted? Let’s say they do it in Kansas and then two years later they move to Portugal and they’re residing there for more than half the year and that’s their primary residence or they have kids overseas, does that necessitate a change with their estate plan?
Seamus: There’s usually going to be some portion of the plan that’s affected. If you move overseas, generally the laws governing where you live are addressing incapacity. So what happens if you’re incapacitated? And so that portion of your estate plan, powers of attorney for healthcare, financial matters are probably going to have to be updated if you move to a different country. Also, owning property overseas can affect a plan just because in the United States, every state has different laws, but it’s all derived for the most part from the same thing. So there’s more similarities than differences.
You go overseas, it can be across the board. And in fact, there’s some countries that don’t even recognize trusts, which are a very common tool in the US. And some countries that do recognize trusts will not allow US trusts to own property there. So in a lot of cases, if you’ve got foreign assets, there’s a need to work with a foreign attorney to address how can those assets be incorporated into the plan. And if not, how do we take care of them so we don’t end up with foreign probate and the assets are still going where we intend for them to go?
And then it can also create a complication for beneficiaries, like you mentioned. Some countries will end up taxing trusts left for beneficiaries in really unique ways, potentially higher rates too. So when you’ve got beneficiaries overseas, there really needs to be a consideration of what is this going to do to their income tax scenario and should we really be using a different structure because of that tax scheme imposed by their country of residency?
John: If you own a place in Greece versus China versus The Bahamas, it’s going to be very different in terms of property rights. Well, this has been fantastic. Seamus, thank you for sharing your insights. Thanks for joining me.
Seamus: Absolutely.
John: We were talking about Christmas and my fourth grader said, “Dad, BC means before Christ and AD means after death.” And I’ll admit, I almost let it slide because I remember that’s kind of what I thought for a while when I was a kid. But I asked her a question, I said, “Zaya, what do you think the 33 years Jesus was alive, what were those years? Did they just not count? Did time stop? Were those the lost years?” And I could see the wheels turning. She paused, had that woe moment, “Oh man, you might’ve got me here, Dad.” And finally she asked me, “Well, what does AD mean if it’s not after death?”
And for those of you playing along at home, AD stands for anno Domini, which is Latin for in the year of our Lord. It marks the year Jesus was born not after he passed. Now it’s a small detail, but it totally changes the way that you think about time itself because again, it couldn’t be after death, you’d have a giant hole in the calendar. And just like the simple aha moment for my daughter, there are plenty of financial beliefs that you’ve likely carried for years that deserve a second look.
So today I want to dive into pieces of common wisdom to rethink together, starting with that your 401k is the best spot to invest. It’s your best type of investment account. It’s the logical and most optimal place to contribute your savings into. Let’s talk about 401ks for a minute. They are often considered the gold standard for retirement savings and for good reason, most come with an employer match, which is amazing. It’s free money. Doubling your initial investment on day one with zero risk is better than any other investment opportunity that exists on earth. So yes, contributing to your 401k up to the match is an absolute no-brainer, and it is the best place, you could argue, to invest money.
But let’s talk beyond the match because I think so often that logic extends out and it’s like, “Well, I have to max it out or the next $10,000 after the match. Of course that’s the right spot to invest in.” Maybe, but maybe not. I want you to consider a few factors like tax efficiency. What’s your current tax bracket? You can make a lot of money right now and stay in lower tax brackets. So is deferring into retirement accounts asking the IRS, “Hey, can I pay taxes on this later?” might not be the right call, especially if you’re in a low tax bracket right now. It might make sense to prioritize Roth contributions over deferred contributions.
How about liquidity needs? Most Americans have most of what they’ve saved in deferred retirement accounts. What if you decide to retire early? I’ve seen this. It can be very frustrating. You’ve done a good enough job saving. So on paper you have enough to retire at, let’s say 50 and you’re young and you’re healthy and you’ve got all these ideas and then you realize, “Wait a second. To tap into these accounts, I have penalties or I have to create a complicated 72(t) arrangement with the IRS. I didn’t really think this through. I thought I was doing the right thing. I was saving in the correct places, the most tax efficient spot. Now I’m realizing it’s hindered my ability to enjoy and use the money that I worked so hard to save.” So what assets do you have outside of your 401k that you can utilize?
Investment options are also a consideration. Some 401ks, by the way, this has gotten better, but some have really limited choices and high fee investments. I see some 401k plans for prospective clients, what in the world? Was this built in 1980? Six different funds, all expensive, all actively managed, bad performance. Gosh, I guess this mutual fund company’s wholesaler takes your HR person or your owner golfing a bunch every month. What’s going on here? This is terrible. And if that’s the case and you can’t get through to that owner or HR to consider some lower cost, better options, you might be better off just contributing to a taxable brokerage account or opening an outside IRA or an outside Roth once you’ve taken advantage of the match that the employer is offering.
And then finally, just flexibility. Retirement accounts such as 401ks are among the least efficient to pass onto your heirs. All the money’s taxed at ordinary income rates on top of everything else that they make. And think about it, if you pass away in your 80s, your kid who’s inheriting it is 60, they may be in their peak earning years. So they’re inheriting this money and stacking it on top of potentially some of their best years toward the tail end of their career, which can be a significant burden for your beneficiaries. Yes, the 401k is a great tool, but it’s not the only tool. Think of it like building a house, you wouldn’t want to just use a hammer. A hammer’s great, but you’d want a full set of tools. The same goes for your financial plan.
Our final piece of common wisdom to rethink together today, and this is a big one, it’s that social security is only for retirees. Maybe you’ve thought that. I mean, I can only claim in 62 years old, right, John? I guess if I’m a widow, maybe 60. We have to rethink this because while most hear the term social security and immediately think of someone in their 60s, in their 70s, in their 80s, living comfortably off of those benefits that they paid into while they were working and now they’re in retirement. And sure the vast majority of Americans, that is when social security kicks in. That’s the whole idea of rethinking common wisdom. It’s common wisdom for a reason, that is usually the case. But what about families with young children?
Let me share a story with you. About a decade ago, had a new client come in with a family where the husband, commercial airline pilot, had tragically passed away. He was much older than his wife. So the widow and their two minor children who were still relatively young, came into the office to meet about their plan. They were actually with her, so I remember it well because they were busy on a screen. I think they had an iPad or something with them and they were sitting in the corner of the conference room and we were going through her situation and I asked her about social security.
Well, unfortunately, she had not applied for social security for several years following his passing, and they had missed out on tens of thousands of dollars that they were entitled to. She had done a lot of other things well and frankly had been very overwhelmed and had a lot going on. It was a sudden passing. She had made a lot of other really great decisions, but this is one that was overlooked. And here’s how it works.
If a worker passes away, their minor children under the age of 18 or up to 19 if they’re still in high school, can receive social security benefits. A surviving spouse caring for those children can also receive benefits even if they’re not yet at retirement age. In some cases, disabled adult children may also qualify. Social security benefits are not just for retirees. They exist to provide critical financial support to families in times of need. And it’s one of the most underutilized aspects of social security. And just like this family, many people are completely unaware that these benefits exist or that they qualify.
So here’s the takeaway. If you’re a parent and your spouse has passed away, or if you know someone in this situation who lost their spouse and they have minor children in the home, make sure they understand their options as it relates to social security income and family benefits. Social security is far more versatile than many people realize.
It’s time for this week’s One Simple Task, to plan a post-holiday financial reset. Now here’s the reality. The holidays can be a time of joy and connection and let’s be honest, it can be a time of overspending as well between gifts and travel and those extra boxes of cookies, fudge and Almond Roca, not that I eat any of that, but I’ve heard other people do, that you have to buy. It’s easy to get your finances off track. And one of the things that we do in our family, because these gifts were getting out of control and we have seven kids to begin with, four gifts, something you want, something you need, something you wear, something you read. And that’s helped keep us a little bit more reasonable so that we are reminded and that our kids are reminded what Christmas is actually about. It’s not about them getting gifts.
And on top of that, between grandparent gifts and then my wife’s Santa gifts that come on Christmas morning and their stockings, they still end up with a lot, but that’s something I got from my sister about a decade ago. It’s worked out really well. If you’re a parent or a grandparent and you’re like, “Man, this is out of control. Gifts all over the place,” you can try it. It helps create some parameters. So want, need, wear, read. That’s not my One Simple Task. That’s just a little side dish of advice for you parents out there.
But before the ball drops on January 1st, what I want you to do is carve out just an hour, one hour. That’s all you need to review and reset your finances. And here’s what I recommend you focus on during that hour. Number one, evaluate your holiday spending. Take a look at recent bank statements, your credit card statements, see where the holiday dollars went. It’s not about guilt, you’re going to make yourself feel bad about it, but understanding where do we go overboard here? Where do we stick to our plan? Update your budget for the new year. January is a natural time for a fresh start. If you haven’t stuck to a budget maybe in the last quarter of ’24, now’s the perfect time to create one or get back on track with your current budget and maybe adjust it a bit now having reviewed the previous year.
Next, set short and long-term goals, what do you want to achieve in 2025? Maybe it’s building up your emergency fund that’s been depleted, increasing your retirement savings, giving more, maybe tackling a home project for one of those short-term goals. Write down one or two goals for the short-term and one or two for the long-term. You can check your net worth and balance sheet between Christmas and New Years. Great time to get a reset and quick evaluation and visibility on where do we stand as far as assets and liabilities.
Remember, small resets like this done consistently can lead to big results over time and they’re a whole lot easier than waiting until things are way off track, now you’re overwhelmed and you don’t know where to start. This is one small proactive step that you can address before you kick off 2025. You can reference this and all of our previous One Simple Tasks on the Radio page of our website at creativeplanning.com/radio.
Well, it’s time for listener questions and Britt is here to read those. Britt, let’s go to Darren over in Cincinnati to kick things off.
Britt Von Roden: Yeah, you bet, John. Darren shares that he’s been reflecting on their approach to giving. He shares that he’s 55, married, and has two teenage children. They consider themselves a charitable family, but lately he says that he feels like their donations are more reactive than intentional, just writing checks when something comes up. He says he doesn’t feel like they’re fully utilizing and realizing the impact they could have. So he wants to know how he can engage his family in a way that helps them understand the importance of charitable giving so that the efforts extend beyond just writing checks.
John: Well, this is a great question, Darren. I think about this myself a lot too with seven children and wanting to instill good values and thoughtfulness around generosity with them, especially this time of year with the holidays. Many families I think do fall into the habit of reactive giving. So here’s a few ideas that I’ve tried and I’ve seen work well for others, just involve your kids. Sit down as a family and talk about causes that matter the most to you. Ask your kids what they care about. And when they tell you what they care about, ask them why. This turns giving it into a shared experience and teaches them about the importance of generosity and allows them to have some buy-in and involvement.
You can also do some hands-on giving. Instead of just writing a check, maybe find times to volunteer with those organizations that you’re funding. We’ve done this with a great organization here in Phoenix where we provide financial support and also as a family, build houses in Mexico on these shorter term trips. So it allows us to connect the dots, especially for our kids, but I mean for us as well, between what we’re giving and the impact it’s actually making and the lives and people that we’re partnering with.
You can also create a family giving plan. Set aside a specific amount of money for charitable giving each year and then you can decide as a family, at least with a portion of that, how you’d like to give it considering what each family member chooses related to causes that they care about. And you can use Christmas as a teaching moment. Instead of focusing solely on gifts, use this season to model gratitude and generosity. Share stories of how your family’s giving has made a difference. Maybe incorporate even the giving.
I mean, our kids are constantly talking about what their Christmas list is going to be. And I know it’s fun for them. I mean they’re at that age, but they’re updating their Christmas list and they’re wanting me to print them a new Christmas list. And as I’m doing so, I’m trying to also remind them, “Hey guys, you know that this isn’t all about your Christmas list. That’s not really the purpose here of the holiday season, what you can get, but rather to be reminded of what you already have and how others that have less than you may be in need and how we can help them.” So thank you so much for that question.
Britt, who do we have up next? I think we have Jeff.
Britt: His question today, John, is what is a lifetime asset protection trust and does he need one?
John: So a lifetime asset protection trust is a type of irrevocable trust. And your question was, do I need one? I don’t know because I don’t know your situation, but here are the types of scenarios where you may need one. You have wealth and you want to protect that for your children. So if you’re worried that your kids might one day lose part of the inheritance, let’s say to a bad marriage or financial mistakes or lawsuits, a lifetime asset protection trust ensures those assets remain protected and can only be used according to the terms that you set. Maybe you’re concerned about your own liability, maybe you’re in a high risk profession. Medicine, law, got a type of business ownership that’s risky due to the industry that you’re in, a trust can protect assets from potential claims or lawsuits against yourself as well. And maybe it’s just you want control over how the assets are distributed. If this is not a dump and run inheritance, you can control how and when the money is distributed, ensuring it’s used wisely.
So when does this type of trust not make sense? If your net worth is more modest and the cost of setting up and maintaining this type of trust outweighs the actual benefits. If the effective costs are a very high percentage relative to the value of the trust itself, probably doesn’t make sense. It doesn’t mean you need $100 million, but you probably don’t want to do this with $25,000. That would likely be overkill. You also might not need one if you don’t have concerns about liability or asset misuse. Trusts are great tools and this is one of those great tools, but only when they’re solving a specific need. If you’re unsure, I recommend consulting with an estate attorney to look at this within the context of your specific situation.
All right, let’s go to the next question.
Britt: Next up we have Derek out of Montana and Derek and his wife are trying to get ahead of the game this year with tax filing season. He shares their tax situation is a little more complicated than it used to be. He’s looking to potentially sell his business. They own a few rental properties and they recently moved to Montana and bought their home. John, do you have any advice on simplifying tax season this year or making it as smooth as possible for Derek?
John: Congrats on all the changes, Derek. Yeah, can create some tax chaos though, you are correct, especially if you’re not prepared. So here are a couple of tips I’d recommend, start organizing your documents early. You’ve had a lot of changes. You know that a lot of the reporting is going to be needed to even finish out your taxes. So what you can grab now. Gather income statements, W-2s, 1089s, K-1s for your rental properties and any business sale documentation as soon as those become available. Collect deductible expenses and the receipts. So mortgage interest, property taxes, charitable contributions, business expenses. Don’t forget records for your Montana move. These you could have now, you don’t need to wait until a custodian furnishes them. So moving costs may not be deductible anymore, but there may be capital gains implications if you sold a previous home. I’d consult with a CPA who understands your situation sooner rather than later.
If there’s a business sale and rental properties, you’ll want someone experienced in handling real estate income, capital gains. A good CPA can help you look at depreciation, recapture, maybe a 1031 exchange opportunity or other tax strategies that may be able to defer taxes or minimize your bill. Be proactive about estimated payments. Don’t forget about those. If you’ve earned significant income this year, especially from the business sale, make sure you paid enough in estimated to avoid penalties. Keep rental records clean. So track all your rental income and expenses for your properties, including maintenance, property taxes and insurance, a clean record of that. Sometimes those are just a mess. They come in a shoebox, come into our CPAs and going, “Hey, here’s all my stuff. Can we make sense of this?” That’s not the way to go about it. Obviously that’ll make your tax season run a lot smoother.
And then finally, schedule a tax planning meeting in January. If you’re not sure where to turn, we can help you here at Creative Planning. We have over 265 CPAs, but whether it’s with us or a local CPA that you have there that you trust, sit down with your CPA. I recommend you also sit down with your financial advisor to review your tax strategy. Don’t just think about it this year, and you’re not obviously because you’ve asked this question, project into the next year, see if any changes to your income or investments need to be addressed because that proactive planning will help you save time and stress and potentially a lot of money. Make sure that your advisor, and if there are any estate planning implications now that you’re in a different state, make sure your attorney’s involved. You want your CPA talking with both of those professionals to ensure there’s a coordinated strategy.
All right, Britt, let’s go to the last question. I think we have George here in Phoenix.
Britt: Our last question today is from George in Phoenix and George wrote in that he just had a birthday. He turned 56 and he realized he hasn’t contributed as much as he’d like to, to his retirement accounts. He’s heard about catch-up contributions, but he’s not sure if he’s allowed to make them to both traditional and Roth accounts. His question today is, are catch-up contributions limited to Roth accounts only or will he be able to use them both for traditional and Roth retirement accounts? He wants to know what you usually look at when making these recommendations to your clients, John.
John: Well, you are age 50 or older, so you are eligible to make catch-up contributions to both traditional and Roth retirement accounts. There are some income restrictions to a Roth IRA, but let’s look at 401ks first. Regular contribution limit is $23,000, but you can add an additional $7,500 as a catch-up contribution bringing your total to $30,500. For IRAs, regular contribution’s 7 grand, you can add an extra 1,000 as a catch-up contribution taking the total to 8,000.
Now as for which account, whether it’s you defer in a traditional account or you eat the taxes today and get them into a tax-exempt environment with a Roth, it’s going to come down to current income and what you project future income to be, combined with where you think rates are going. We do have $36 trillion of national debt. I talk about it all the time on the show. Most of us don’t expect taxes to decrease over the next 20 or 30 years. So you want to factor that in as well while acknowledging that no one has a crystal ball.
If your taxable income right now though is below about 390 grand, if you’re married, filing jointly, or cut it in half, call it 195 grand if you’re single, you’re in the 24% tax bracket or lower. And that’s a sweet spot for Roth contributions because yeah, you’re paying taxes now, but at a rate that is perceived to be pretty attractive and relatively low. If you’re in a higher tax bracket now or expect to drop into a lower bracket than you are today, once in retirement, once you’re taking withdrawals, traditional contributions make more sense.
Many company plans allow you to contribute to a Roth 401k, even if you make a lot of money. Even if you’re at $380,000 of income, you’re married, filing jointly, you make too much for a Roth IRA, but not too much to contribute to a Roth 401k and most plans now allow for this. It also gives you higher contribution limits because I just mentioned, you can put up to $30,500 into the 401 and only $8,000 into an IRA. You also may get the potential benefit of a company match.
And if you’re maxing out all of those, you still want to save more because you’re feeling like you’re way behind or you’ve got a lot of extra cash flow, you can also explore after tax contributions or even a backdoor Roth through either an IRA if you don’t own other IRAs, or within your employer plan, which in many cases will allow you to get a total contribution amount of over $50,000. So before you embark on that, talk with a certified financial planner. They’ll unpack the situation, what you qualify for, the pros and the cons, and look at that in a more comprehensive fashion.
This is a perfect question that you’re asking to be handled by a certified planner, whether it’s here at Creative Planning or another one that you trust because do you have enough saved retirement? Do you not? Are you overfunded? How much of your current contributions are already tax deferred and will be taxed in retirement? Are you charitably inclined? Do you want a lot of these assets to go to kids or other individuals that would be taxable? If you were to pass away and still have money in the accounts, do you want the check to the morgue to bounce? Do you plan on inheriting money? Are you going to be helping an aging parent with their care and that’ll actually be an expense? Do you still have kids who need college paid for? Did you already fund 529s? Do you have a special needs grandchild you want to support or are your grandkids in a better financial spot than you?
These are just a few of the hundreds of questions you’d want to take into account before determining the most effective spot to contribute toward retirement and these final years leading up to retirement. It is a great question. And if you have questions just as these, you can email those to [email protected].
Well, as Wayne Gretzky famously said, “You miss 100% of the shots you don’t take.” We often think of mistakes as things we do, a decision we regret, a risk that didn’t pan out. But what about the shots that you didn’t take? What about those missed opportunities that are far harder to see because you never know what could have been. It reminds me of The Family Man, one of my favorite Christmas movies. In it, Nicolas Cage plays a man who chose wealth and success and monetary gain over family.
The movie starts and he’s living in a penthouse in Manhattan and he’s wearing tailored suits, driving Italian sports cars. He thinks he has everything and on the surface and on the outside, he does. But then he wakes up one day in an alternate life where he married his college sweetheart and he lives in the suburbs. He lives in Jersey. So it’s funny, he couldn’t believe it. He’s like, “I’m a Nets fan now? Oh my goodness.” And he works at a tire shop that’s owned by his father-in-law.
Now, at first he’s horrified, but over time he realizes what he missed, a life filled with love and family and laughter and vulnerability and connection and real relationships. And the truth is, we’ve all faced choices that require risk, a job opportunity, starting a business, moving to a new state, investing for the future. And it’s easy to let fear or uncertainty keep you on the sidelines. But here’s the thing, the greatest opportunities often come from the risks that you do take. The greatest blessings in my life are due to the actions that I took in the midst of uncertainty. And my guess is many of yours are as well. And even when things don’t go as planned, the growth, the learning, the unexpected blessings that follow, often make it worthwhile. So whether it’s related to your finances, your career, or your life, don’t let fear hold you back, take the shot.
Thank you for joining me today here on Rethink Your Money. I hope you have a wonderful holiday season and a happy New Year. And remember, we are the wealthiest society in the history of planet Earth. Let’s make our money matter.
Announcer: Thank you for listening to Rethink Your Money, presented by Creative Planning. To hear past episodes or learn more about the topics and articles discussed on the show, go to creativeplanning.com/radio. And to make sure you never miss an episode, you can subscribe to Rethink Your Money wherever you get your podcasts.
Disclaimer:
The preceding program is furnished by Creative Planning, an SEC registered investment advisory firm. Creative Planning, along with its affiliate, United Capital Financial Advisors currently manages or advises on a combined $300 billion in assets as of December 31st, 2023. John Hagensen works for Creative Planning and all opinions expressed by John or his guests are solely their own and do not necessarily represent the opinion of Creative Planning.
This show is designed to be informational in nature and does not constitute investment, tax, or legal advice. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed on this show, will be profitable or equal any historical performance levels. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed. If you would like our help, request to speak to an advisor by going to creativeplanning.com. Creative Planning Tax and Legal are separate entities that must be engaged independently.
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