Michael Lynch | 08/06/15 8:45 AM
There are generally two stages to the financial planning process: accumulation and distribution. As more and more Boomers move into retirement, focusing on the distribution phase is becoming increasingly important. One step in this process that is too often overlooked is ensuring that a beneficiary or beneficiaries are named—and more importantly, that the right beneficiaries are named.
Think about this: it has been said that the average beneficiary who was left a lump sum amount generally spends through that money within 18 months.1 Make sure your clients hear that statistic and really think about it—it might take them 30 years of hard work to accumulate a comfortable retirement, and it could be gone in just 18 months. That scenario might be hard to believe, but how often have you heard a story about someone who hits the lottery, and two years later has spent all of their winnings? How does that happen? Well, if they chose to take it all at once, they have to pay taxes on that money, so 30-40% is gone right away. Then they put it towards credit card debt, student loans, ‘honey-do list’ projects around the house, a dream vacation . . . You get the idea. The money disappears quickly.
To make sure your clients avoid that scenario and choose a beneficiary carefully, there are a few key conversations to consider starting with them:
Ask the ‘Two-H Question’
If your client is grappling with the question of who to name as a beneficiary, pose one simple question that will get them thinking about their choices:
If something happens to you, and your money is left to a child or grandchild, will your beneficiary use the money for Harvard or to buy a Harley?
The object of the two-H question is to help your clients determine whether their named beneficiaries will care for their hard-earned money and make the smart choices in what to do with the inheritance. Although it is a somewhat facetious question, it can serve as a jumping off point to help your clients understand how critical the beneficiary decision really is.
Have the Trust Talk
If your client expresses concern over how their beneficiaries will spend their hard-earned wealth, talk to them about the benefits of naming a trust as beneficiary. Doing so can take the pressure off of them and eliminate the need to answer the two-H question. A trust can also be structured in a number of ways to ensure that the beneficiaries benefit from the money. Restrictions can be placed so that only a portion can be distributed each year, to the next generation and even to multiple generations.
Offer a Meeting of the Minds
If your client shows interest in setting up a trust as beneficiary, suggest that they set up a joint meeting with their tax and financial professionals and a qualified legal professional. In the meeting, your client can explain what it is they want to do, and you and the legal counsel can work together with them to develop a plan that best suits your client’s needs and wishes. Having this collaborative discussion can give your client peace of mind that their wealth accumulation is protected.
Even if your client has total trust in their beneficiaries, I think we can all agree that everyone is tempted by money from time to time. Having these conversations with your clients is important in that through them, you can help your client feel confident in their beneficiary decisions. Your client should be able to enjoy the retirement phase of their life—they’ve earned it. You can help them rest easy by making sure they have considered all scenarios and have planned smartly for the eventual distribution phase.
1 Wall Street Steward Newsletter 1/28/13, most recent data available
All information provided is for informational and educational purposes only and is not intended to provide investment, tax, accounting or legal advice. As with all matters of an investment, tax, or legal nature, you and your clients should consult with a qualified tax or legal professional regarding your or your client’s specific legal or tax situation, as applicable.
The preceding is not intended to be a recommendation or advice. This material is intended for general use by financial advisors.