The holidays bring family members together for food and fun but what about finance? Too many families avoid “talking turkey” about money. But a family that keeps the communication flowing can maximize their financial harmony.
Say you are the parent of grown adult children, and perhaps, even have grandchildren, what topics should you try to address when you see them this holiday season?
Parents need to help guide their children (and grandkids) to make proper financial decisions by reinforcing some key financial principles. Don’t be afraid to share lessons learned stories from mistakes you or your friends have made. Here are some areas you may want to reinforce:
- Check that the family is protected in the event of a catastrophe. A family with small children and/or a home mortgage will need proper life, disability and liability insurance. Most Americans are woefully under-insured. A good rule of thumb is to have level term insurance of 7-10 times your yearly salary with a term that covers you throughout your career. Disability coverage should ideally cover 70% of your pretax income.
- Make sure that they are paying themselves first. Cash flow management is hard in today’s economic environment but they can put the process of savings on autopilot by having at least 10% of their pay directed to their retirement plan at work. The most common comment I receive from clients is that they wish they had started saving earlier and that they want to pass that message on to their kids.
- Would they like help with education funding? A great way to transfer your wealth to avoid estate taxes while incentivizing your children to save for their kids’ educations, is to match whatever they save in a 529 for their kids’ education or start the fund for them. You can gift up to $13,000 year per grandparent per kid, and you also get a 7% South Carolina state income tax break for doing so if you contribute to the SC Future Scholars plan.
- Ask if they have proper estate planning documents in place. - A will and advanced health care directives such as a health care power of attorney, durable power of attorney and living will are essential for a young family with children, especially if the children are minors. In SC, if one parent passes away his/her assets will go to the kids as well as the surviving spouse. If both parents pass intestate (without a will) than the court decides who gets the kids. Everyone over the age of 18 needs these basic documents, so even consider this for kids who are heading off to college.
Similarly, adult children want to make sure that their elderly parents are financially as well as physically and mentally fit. Here are some topics they may want to broach.
Do your parents have estate planning documents in place? Once again, wills, trusts and advanced health directives are critical documents for the elderly to ensure clarity in the event of incapacitation or death. If they don’t have these in place, the family will need to work with the court system to make decisions on their parent’s behalf.
If they do have these documents, encourage a family conversation about their ultimate intentions. It is far better to have these frank discussions prior to a death or incapacitation. This prevents surprises that could potentially create huge family rifts. This is especially important if there is a second spouse involved.
How is your parent’s health? It is so important to monitor your parent’s ongoing health. Make sure they are engaging in a range of physically, socially and mentally stimulating activities. Research indicates that the risk of depression, disease, and dementia is reduced if senior citizens keep active in this way. Since 1 out of 7 Americans over the age of 70 have dementia, it is important that you and their doctor monitor their cognitive ability and look for early warning signs of Alzheimer’s disease.
What is their plan in the event that they need long term care? Most Americans underestimate the toll that a long term event will take on the family. Most Americans have not saved enough for retirement, let along long term care costs. Medicaid is not an ideal option as they will need to spend down almost all of their assets in order to qualify. While they are healthy and can qualify for coverage, they may want to consider purchasing a long term care policy.
