Alright. Welcome back to the next episode of the Great Retirement Debate. Ed, Good to be back with you once again.
Yeah. You too. We have an interesting topic today. One that I've been getting questions on for over thirty years from working with clients when they're doing their estate plans.
That's a long time. This must be a good question.
Yeah. Should I treat my children equally when it comes to inheritances. Probably depends on which child you ask. Right?
It's a serious issue now. In fact, lately, there's a move to stress tests. I'm just reading about this estate plans while you're alive to see if they'll hold up because What I just said is really a bombshell there because it all happens sometimes without the children ever knowing until the parent has died.
So I wanna get into this topic of should I treat my children equally or not, but tell me more about this stress test. That's it sounds interesting.
Well, there are ways certain states will pre validate. They pre-validate. They call it pre-mortem validation. So wills and even trust.
So you know whatever plan you have, that might be attacked. That's the ones that you would do this on that might be attacked is validated while you were alive to make these plans. So there's no question after death if somebody contest it because let's face it. Enough money involved, it's gonna be contested.
Yes. Yes.
So it can be, it can be validated while you're alive. This is kind of very new. Just started reading about but I understand why because of all the problems after death when one child and it doesn't even matter really what I found. If one child is very successful and one child isn't, they still wanna be equal.
So when you say they still, you mean the kids or the kids?
Okay.
Both. The no. You're right. It's more the parents.
Myself as a parent. I want to do for my children equally. It's just the way I think. But the children, you're right about that.
It's the children may not think that way. They will say, well, he's, so successful. He's got all this money. I should get more.
Parents may not think that way. In most cases, the parents that I spoke, although they've been some cases the other way, they wanna be equal because that's how they always thought about their children.
So let me ask you a question. Tell me what equal means to you.
They oh, that brings up a good point. I think I know where you're going with that. They that they receive equal inheritances. If the estate is five million, somehow, they end up with two point five million each. But I think where you're going, what type of assets.
That's right. Yeah. Because, you know, to me, when I look at, you know, the question, should I treat my kids equally upon death or whatnot? There are differences in your children in terms of not just, you know, not that you love one more. You might love them equally.
Well, here's what I say, but they are the same.
Right?
But once you like the best, give them the Roth IRA.
Oh, that's one way of looking at treating your kids unequally. But I think when most people talk about equal, they think fifty percent of each account to each kid. Right? Something along those lines.
It depends how the property is owned. But it could that's what I think that's what the people think making their estate plans. And the mistake they make of it, they go through their will, not realizing how much goes outside of the will by beneficiary designation.
And, again, the type of asset. I just made a little joke about the Roth IRA, but there's a big difference if somebody's getting a million-dollar Roth IRA or a million-dollar traditional IRA. That's a big difference.
Yeah. I think I think that's the key point. Right? In in most cases, when people think about treating their children equally, what in their minds conceptually they're doing is taking the Roth and splitting it fifty-fifty.
Right.
They're taking their traditional IRAs, splitting it fifty-fifty, taking their bank accounts, their brokerage accounts, their other taxable accounts, and splitting those fifty-fifty.
But I think a lot of times what people don't realize is that the net effect to those children may not really be a fifty-fifty split. For instance, Let's say both children are, you know, are successful. The parents are super proud of them, but one is a neurosurgeon and one is inner city, school social worker.
Social work. I knew you're gonna go there.
Well, you know, that..
No, it?s a great example. People that do great things, but the market that society doesn't value it as high. Yeah.
I mean, and those are two important and critical jobs in our world, but we know that they they're gonna paid drastically differently. So, you know, thirty years in the neurosurgeon child, obviously probably is a well, maybe not. Maybe they spend a little bit more too. But in in all likelihood, they would have had an ability to accumulate a lot more.
And they may have a lot higher income, etc. If we leave fifty percent of the Roth to each kid and fifty percent of the traditional IRA to each kid, they're not really getting the same thing. Right? Because at the end of the day, the child who's at a higher tax rate with more income is going to net a lot less from those accounts after tax.
Right?
Right. It depends on their own tax situation.
And I don't think anybody takes that into account. When they plan out their estate and say I want everything to be equal.
After taxes. Right?
No. They never say that.
Right. That's what I'm saying. Yeah. Yeah. Yep. Yep. So, you know, to me, I I I'll say one of my favorite strategies today of everything is treating children unequally to treat them more equal.
After tax or taxes. Exactly. And, you know, the way I look at it, right? Let's just take away brokerage accounts and bank accounts and whatnot because those receive what's called a step up in basis.
And so just to clear that up, Ed, wanna explain what a step up in basis is?
Well, non-IRA assets. We talk about retirement. We talk about four zero one k's, IRAs, they never get a step up in basis. When you inherit an IRA, a four zero one k, that's all taxable.
Whereas if you inherit, say, a brokerage account non-IRA that maybe a parent's invested a hundred thousand, and now it's worth ten million. You get it at ten million. All the accumulated capital gains during their lifetime get stepped up. So you pick it up. You the beneficiary picks it up at ten million. So all of that all of that capital gain is relieved eliminated at debt through something called step up and basis.
Yeah.
I often say death is the ultimate cleanser when it comes to taxes.
But not on retirement counts.
That's right. Not on retirement account. So to just to to reiterate, if I inherit, let's say, let mom bought, you know, a hundred shares of some crazy biotech company years ago, it was worth, you know, a hundred dollars when she bought it. And now it's worth ten million.
If I inherit that in a taxable brokerage account, I can go out the next day as a beneficiary and sell it with zero dollars of income taxes. That's it. We're good. There's no tax liability whatsoever.
But if I have a ten-million-dollar IRA that I inherit we still owe taxes on the ten million. Right?
And that, as you said before, it could be different depending on the beneficiary's brackets. Yep. And the beneficiaries will look at each other because I've dealt with them after the parents have passed on. And they said, well, how come he's paying?
I get I he's paying more. I'm paying less. Also seen problems. You may wanna look at this where parents, especially in their elderly years, they need maybe one child that lives close by and the others far away, and that's the child that is helping and giving all the support.
And they often set up a joint account with that child so they can help them with their bills, maybe long-term care bills, it takes, like, instead of a power of attorney or something.
Right. Right. And this way, they can pay their house bills, maybe if they're in a nursing of what to make life easier. They're not able to to do their financial transactions.
When that parent dies, that joint account, even though they thought everything was equal, is going to that child.
That's right.
Yep. By operation of law. Mhmm.
Those joint accounts just happens automatically.
So that could throw off Sure.
That could throw off the equality intention.
I wanna circle back to this idea though of treating children unequally to treat them more equally. And, you know, the key in this is, you know, sometimes if if parents are looking and they say, oh, I don't want one kid to think I favor the other one more.
That's exactly what they yeah.
Well, then I think there's two elements here. The first is we have to understand who's involved right? If we're looking at, let's say, traditional IRS and Roth IRA, they're really and let's just make it two kids for a simple example. Right?
The if there's two children, there's three people. Right? The two children and the IRS. Right?
If there's three kids, there's four people, the three kids and the IRS. Ultimately, If we look at what people actually get to spend, their after tax dollars, which is what really matters.
If I treat the IRS unequal which no one ever seems to have it properly.
Right.
If I take money from the IRS, it means there's more left for whoever is left Right? If if I if if the IRS is gonna get thirty three percent of whatever it is in taxes. If I somehow shift things around so that they only get twenty percent it means there's thirteen percent left to dole out to the other individuals.
So a lot of times, what, especially now, you know, Ed, The Secure Act two point o, that law that came out just a few years ago, had massive ramifications for post death distributions for most individuals who are not a spouse. Right?
Right.
Right. So, real quick. Right? We went from a lifetime's worth of distributions, taking it out maybe over a beneficiaries, twenty, thirty, forty year life expectancy, in many cases, now we're down to ten years. Right?
I think you said secure 2.0. You meant original Yes.
Sorry. The original secure act.
Too many secure acts to keep track of.
Oh, I thought you referred to that as the secure OG.
That's right. The OG secure act. That's my fault, you know. Been a lot of tax laws coming.
So that's But I let you go a little while because I thought, no.
He's got a point on secure 2.0, but it No.
No. No. No. Nope. Nope. Nope. That's a fair point. The, so the original Secure Act took that, right, and took it down to just ten years.
So now we're in a place where those beneficiaries are gonna have especially if they're higher taxes, you know, and they're in their working years, they're gonna be paying a much higher tax rate. If I, let's say, had these two individuals, right, my neurosurgeon child and my, my social worker child, And I left more of my Roth IRA to the neurosurgeon child. And more of my traditional IRA to the, to the child who is a social worker. And again, just using this as an example, but the child with lower tax rate.
Right?
You'd be moving more to tax That's I'm moving more to tax equality, and I could actually do some back of the napkin math to get both kids more. Right.
Right. That's the key. That's what I always try to talk to people about in this situation is that you're not treating them unequally to disadvantage one or both of them, you can treat them unequally in a way that gets both children more money because again, if the IRS gets less, it gives you more to divide up between those other two kids.
But here's the thing, and we started with premise, should I treat my children or beneficiaries equally? So he went through the tax part. But how do people feel about that?
Even the non-financial stuff, you know, if you're gonna do that, I would suggest I mean, you don't have to, but I always say to parents, you better let the kids know because it could.
Yep. You could have a, you know, the last thing I think about this myself. The last thing you want as a parent, you want your kids. They're the rest of you leaving behind to get along.
Mhmm. I agree. I agree. I think having a family meeting in those circumstances is important. And mom or dad or whoever it is should explain why this is happening.
Right.
Because otherwise you do end up with unhappy. You have two unhappy children. Right? One who goes, I can't believe it.
You know, mom, dad, they loved you more. They left you more money. Look, it's a bigger account balance. The other kid goes, no, mom loved you more.
Look, she left you the account with no taxes, and both of them are miserable. When in reality, they both ended up better off. I mean, think about having that conversation with your children. Right?
And and sitting down That's the key.
Yeah.
Hey. Listen. You don't need to know. Even if you don't wanna give them all the details, just listen. I'm leaving more of one account to you and more of this other account to you because I I sat down with my financial advisor, and we figured out that by doing this, Both of you will get more money after taxes, which is what I care about.
I've worked really hard my whole life, and I don't wanna see Uncle Sam get any more than they have to. By doing it this way, you will both get more, but I want you to know that this in it is to help both of you because I love both of you know who else they don't wanna see getting more money?
Who? The attorneys.
That's true too.
After death, when the kids start fighting it out because this wasn't communicated properly.
So, Ed, you mentioned this kind of like, just maybe as we're looking to to tie up here some loose ends. What are some other ways? So you mentioned this pre-will or pre-death validation that some states now allow. We talked about family meetings or discussions, which I think are are critical, and I know a lot of people don't wanna talk about their finances with their children, but I think there's gotta be some level of conversation there. To me, I think the more open you are, the better. But for those who wanna be, you know, a little close, what are some other ways that people can go about reducing friction after death.
Well, sometimes they want I've seen I hate to say it where they want friction because they had issues with one child.
Okay.
Or you know, some children need more help. So maybe there's a somebody with an addiction problem, and they don't want that person. Maybe they're relying on the sibling to with a trust somehow to take care of that one because they're worried they'll squander the money. They'll get divorced.
They'll get involved in lawsuits. So you have to know who's who with the beneficiaries. And I'll tell you something that almost every client is, has been worried about when I talk to them. They would always say something like, you know, it's not my kids I'm worried about.
It's the ones they marry up because they're making plans.
Hold on. If my wife is listening, except for you, honey. Exactly. Okay. Good. Alright. Now you may continue.
Go ahead.
Yeah. But that's a real concern because you just said they were hard. They save three, four million in an IRA. And the last thing they want is the portion that goes to say this child. They get voice. It goes to somebody they never even met in their lifetime. Indeed.
So any any great, you know, words of sage advice that someone could you know, could use to help minimize these after death conflicts because, you know, we talked about should you treat your children equally? I think you know, the implicit question we were asking is, should you treat your children equally if you want them to actually get the benefit. That's one thing.
Sometimes you actually do really want to treat your kids very unequally, and that may result in some reasons or poor reasons or I'll give you another reason.
I had a a case where, a parent loaned a lot of money to one of the children. And in her will, she said, well, nobody gets until that's paid off.
So you hit on actually one of my big ones. I was gonna, you know, say, would say some tips One of my big tips is you do see that a lot with families, especially when they've been able to accumulate dollars into family loans.
Child, but not the others.
That's right.
And they felt bad. They said, well, In essence, this child got more money because I loaned him all this money.
Mhmm. And sometimes, a lot of times, these things aren't documented. So one of my big tips is doc anytime you do an intra family loan, it should be properly documented, and everybody should be aware of the situation. At least to the extent that you feel comfortable.
But at the bare minimum, documentation is critical because I see a lot of times after death, I I've worked with a lot of individuals where it's like, oh, that was a gift. No. It was a loan. No.
It was a gift. It was a loan.
It was a gift.
Right. Which child are we asking? The other one is you know, there are some other legal ways in which you might be able to help this. For instance, in some states, you can use something called an interim clause. Right. Right. Which effectively is a provision in your will that says, if you or any beneficiary challenges my will after death, then you lose any amount that you would otherwise have got.
I think now they say you get a dollar just to show they didn't forget them. Right.
That's It's, you know, it reminds me. I don't know that we have a ton of, you know, time to to go into this, but it reminds me of an old joke. My grandfather used to tell me you know, it started off, and I'll and I'll go through it very quickly. You know, the that they were at the will reading and the first spent, you know, first child up, it goes ahead.
You know, you get all, you you get the, you know, the house. You get a million-dollar bank account. You get everything. And then they went to the second one.
You got a house you get another million-dollar account. And finally, they got to, you know, like, my brother. It was like, my brother who never had a job and lived with me, who never did anything. He always smoked the finest cigars.
Mine, he drove the finest cars mine to my brother, Louis, who was such an a, present person in my life for all these years. Hello, Louis.
And that was it.
So I saw a there was actual will that had a version of that. I used to use it in my seminar. To Louis or whoever it was in your example. I leave the pleasure of earning a living.
Yeah.
Alright. So we covered a lot today, and we unearthed some important concepts You know, one of the first is that being or treating your children equally if you want to do so may actually mean different things to different people. For instance, you may decide equal to you means I wanna leave fifty percent of my IRA, fifty percent of my Roth, fifty per everybody gets the same fifty percent, And your own tax situation is your own situation, or you may decide that treating my children equally means I wanna get them an equal amount of money to be able to spend on the things that they wanna spend on. In which case, we might have to take into consideration taxes. Ed, we also talked about the fact that if you do treat your children equally or unequally, you may wanna have conversations. I think, actually, that's just good advice always. Right?
There has to be communication up front because we're talking about saving people money. As I mentioned, the one you wanna cut out is the lawyer after death. Alright.
So ultimately, where do you fall on this ad? I know different for everybody.
Well, it's different for every parent. That's why you have to have communication. And there are reasons, like, I gave some examples. You have a disabled a handicapped child. You know, there are reasons, to have different, inheritances, but you have to have the communication upfront And the more rock solid that is, the less problems you'll have afterward, and you can rest assured. Hopefully, it's more likely your estate plan will get carried out as you wish.
Think ultimately that's the key point. As you wish, whatever you do, do it with intention. You wanna treat your kids equally. Great.
You wanna treat your kids unequally Great. It's your money, your choice. Do it. Do it.
It sounds like, it's your money. You can get it when you want.
But the the big point you made there before, document everything.
Mhmm.
Alright. We'll leave it there, Ed. That's right. Another good episode here of the Great Retirement Debate. You took away something to use with you and your family, whether you treat your kids unequally or not.