Rethinking Default Inheritance Assumptions

When having estate planning conversations with clients, one of the common questions or discussions that comes up is, for lack of a better word, who could be their “logical” inheritors. For some, there’s no question about who they want to inherit the bulk of their assets and estate. But the conversation, particularly when clients don’t have a significant other or children, often becomes a process of listing extended family that would be the next logical familial inheritors. Sometimes, these relatives are distant and hardly known to the client, other times they are siblings whose age is such that it’s unlikely that they’ll even be alive when the client passes away. Even though my clients are generally the type of people who tend to make their decisions through a lens of high social responsibility, it makes me wonder if we may all be sleepwalking a bit when we think about aligning our estate planning wishes with our values-based lifestyles and financial decisions.

Now, I want to be clear that I am not objecting to a choice someone makes to leave the bulk of their accumulated lifetime savings to their children or even a long-lost relative. It’s really none of my business who your choice ends up being. It’s just that this choice, for many, represents the largest bequest of assets they’ll ever bestow upon any recipient – so I believe it deserves as much thoughtfulness and intentionality as the other financial decisions clients make.

I have a suspicion that part this “pick the next logical family member” attitude comes from a general discomfort with the estate planning process. At any age, it’s uncomfortable for many of us to sit down and think about what happens to our stuff and our money when we die. Uncomfortable to think too much about someone else living in our home or selling it. Uncomfortable to think about a lifetime of things we consider ours just being given away, especially if we don’t have that perfect someone in mind to give it to.

Since I’ve recently been working on re-drafting my own estate planning documents with my attorney, and I, as a single, childless person, am in a very similar situation to the one described above, it’s given me an opportunity to think through this process of intentionally designating heirs. And through this thinking I’ve tried to develop a series of questions to work through with my clients when a situation arises where they may feel uncertain about who the recipient of their bequests should “logically” be.

Question 1:

What do you value and how can this decision reflect that? 

It’s important to set up this conversation as we would any financial decision – against the backdrop of your values.

If you haven’t yet tackled the “what’s most important to you” question as a part of your broader financial-decision making process, it’s worth it to do that before sitting down to make decisions about your estate plans. Because it seems like trying to answer the question of who you want to benefit from what you’ve accumulated over the course of your entire hardworking lifetime must first be a question of what you think is important.

Question 2:

Realistically, what is the need and the extent to which your family, extended family, or long lost third cousin will benefit from your bequest?

This is obviously a complex question, because we don’t always know that much about the financial situations of others. And, realistically, for most middle and even upper-middle class folks, there are very few people who wouldn’t generally feel a bit more comfort after receiving an inheritance. That being said, it’s also true that many people don’t inherit from their parents or older relatives until they are well along their own path to financial stability. And while it may be important to leave your family something to improve the quality of their lives with, by the time they receive it, it may be more like icing on the cake. And if that’s the case, it worth considering whether there might be other people or causes whom you feel may benefit more significantly from at least a partial bequest of your estate.

Question 3:

Are there organizations who might benefit from a donation, or even a specific asset in your estate?

Many clients I work with place a high value on philanthropy throughout their lifetimes, and often lament the fact that they cannot do more, and yet it’s quite common for them to never bring up charitable bequests within their estate planning wishes. If charitable giving is important to your lifetime financial decision-making though, I think it’s at least worth a consideration in your legacy.

Another way to think of this might be around what parts of your estate may actually really benefit certain organizations that you value and would like to support. For example, the bequest of a house could be hugely impactful to something like a housing and land trust whose mission is focused on the creation of affordable housing opportunities, or the bequest of your vehicle might have a bigger impact to a charitable organization that could put your vehicle to use than its resale value would represent to your estate. Similarly, heirlooms or collectibles that your family has expressed little or no interest in might be extremely valuable to a historical museum. So, it’s also worth considering whether you may have specific assets that would benefit a charitable organization in a way that far exceeds what the sale of that asset would bring.

Question 4:

Are there ways for heirs to benefit from your accumulated assets even before your death?

This one doesn’t apply to everyone, and I’d always recommend working with a good financial advisor to help with these types of decisions. But very often, retirees do hit a point where it becomes clear that they have more than they need to see their retirement through, even if they live to be 105, and need a fair amount of long-term care.

If you are fortunate enough to be in this position, it might also be worth considering upping your lifetime giving to future heirs (whether they are your kids, your community, or organizations whose mission is important to you). Not only is this a good way to put your legacy wishes into action when you can still see their impact, it also may have some underlying tax-advantages as well if structured correctly.

Not everyone is fortunate enough to have this opportunity, and again, I wouldn’t start giving things away during your life too freely without the advice of a financial advisor. But if you are in this position, lifetime giving may be another strategy to explore as complementary to your estate planning wishes.

A few additional notes to consider as you embark on this journey…

1

It’s not really comfortable to do this type of thinking.

No other financial decision brings out more of a “just want to get it over with” attitude in my clients than estate planning.

I think this is why it’s so tempting to just say – leave it all to the kids, or my brother, or this third cousin I don’t even know. The less they have to think about it, the less time they have to spend in that discomfort.

As I mentioned, I recently went through the process of making some of these changes to my own estate planning documents, and it IS uncomfortable. But what I ended up with is a set of documents that I feel represent what I would want to leave behind in this world even if I was no longer around to make a daily impact on it. A set of documents that are far better aligned with how I make my other financial decisions than my previous ones were. But it’s still uncomfortable to think about. I don’t know if that will ever go away.

2

It’s not an all or nothing decision.

Your desire to leave something to charity, or a long-term caregiver, or a good friend or mentee doesn’t mean you can’t leave anything to your family. The great thing about a will is that it allows you to make specific bequests, and it also allows you to portion out your estate. Maybe your comfort level right now is with leaving 5% of your estate to a charitable organization, but maybe in 20 years, when you’re confident that your kids are on their way to being financially stable, or your estate has grown some, you’ll feel like you can increase that percentage or dollar amount.

Portioning off your legacy by percentages, dollar amounts, or even specific assets is something any good estate planning attorney should have no problem completing for you.

The point here is not to cut your kids and loved ones out of your will, the point is to make sure your last big financial transaction is well aligned with what you value, and how you make your other financial decisions. That you’re not just doing it on autopilot.

3

It might be worth having a conversation with your default heirs about your plans.

I have a lot of conversations with clients who are likely to inherit something from their families someday about the importance of not counting on or relying on this inheritance as part of their financial plan. But not everyone has a financial advisor to give them the same advice.

And, even with that, there’s no question that in our society, it’s easy to get gifts (particularly financial gifts) and who receives them tied up with questions about who is favored or loved. So, if you are making changes to your will to include heirs that may not be your children, I think it’s worth considering whether you can reasonably have a conversation with your kids about your intentions and why you are making the choices that you are, so that they’re not left to interpret these decisions as a lack of love for them after you’ve passed.

This is not universal advice – the dynamics of all families are different and I realize in some families, this is simply not possible to do. But often, one of the major complaints I hear from my clients as it relates to inheritance has nothing to do with if they’ll inherit or even how much. It has to do with the lack of transparency and communication their parents have had with them about this particular topic. Their bigger concerns are often just whether there are appropriate estate planning documents in place at all, and what their responsibilities will be when the time comes to enact them.

Remember, the point here is not to cut your kids and loved ones out of your will, the point is to make sure that this decision is simply as well aligned with what you value as all of the other financial decisions you make over your lifetime. That you’re not just doing it on autopilot because you don’t really want to think about it.