“I’ve never seen money passed from one generation to another in a manner that actually benefited the recipient.” When a psychologist said this to me several years ago, I was dumbfounded.

Many parents scrimp, save, and sacrifice so they can “leave something to the kids” with the intention of doing them good. It’s hard to accept that inheritances may actually do harm instead. Most of us have money scripts that don’t support this idea.

Typically, I used to hold several money scripts around inheritances. One was that leaving money to your children is a loving thing to do. Another was that parents should always leave their money to their children. A third was that anyone who received an inheritance would invest it wisely, using only the earnings to improve their lives.

Today I know those money scripts were not universal truths. I have more understanding of the problems involved in giving money away in a manner that is beneficial to the receiver. It isn’t as easy as I once thought.

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“You need to protect yourself and your family with life insurance that you won’t outlive.”

This is one of the common selling points for whole life or universal life rather than term life insurance. At first glance, it seems to make a lot of sense. Of course you don’t want to outlive your life insurance. Having it pay benefits upon your death is the reason you buy it.

This statement, however, misses one essential fact. Many people don’t need to worry about outliving their life insurance, because they outlive their need for life insurance.

We don’t all need life insurance throughout our entire lives, any more than we do auto or homeowners’ insurance. If you no longer drive a car, you don’t need auto insurance. If you no longer own a home, you don’t need homeowners’ insurance.

In circumstances like the following, you may no longer need life insurance: First, when you and your spouse have accumulated enough assets and income streams to independently care for yourselves. Second, when your children are self-sufficient adults. Third, when your estate is too small to owe estate taxes or liquid enough to pay the estate taxes.

The primary purpose of life insurance is to replace the future income of a primary breadwinner. Two groups most likely to need it are middle-aged couples saving for retirement and parents of minor children. Ideally, most young families should have over $1 million in life insurance to provide for the children if either parent should die prematurely. Yet many of them are unable to afford the higher premiums for this much “permanent” insurance. Their choices are to underfund their needs with a smaller permanent policy or purchase an affordable 30-year term policy.

As we age, the probability of dying becomes greater. Therefore, a $1 million life policy costs much less for a 25-year-old than a 75-year-old. It doesn’t matter if the policy is cash value, whole life, universal life, or level term, the cost of providing the life insurance component increases every year.

Yet most human brains have a psychological aversion to price increases. In order to please their customers with life insurance premiums that didn’t increase every year, insurance companies came out with level term policies. Essentially, the premiums are averaged out by overcharging in the early years of the policy and undercharging in the later years.

Whole life and universal life insurance policies don’t have that same averaging. To be “permanent,” the premiums must be much higher in order to fund a savings account that grows over time and is often used to offset a significant portion of the death benefit in the later years of the insured’s life. Usually, if the insured cancels the policy, a portion of the premiums will be refunded.

A cash value policy may occasionally be a good estate planning tool, generally for those with substantial wealth. It might be used to fund an irrevocable life insurance trust upon the second spouse’s death, perhaps to pay taxes on an illiquid estate like a family farm or other property. It also can be used for those wanting to leave the bulk of an estate to charity and still provide income to their children. These strategies rarely apply to those whose primary goal is basic income replacement for their families.

One of the ironies of insurance in general is that we all know it’s essential and we all hope never to need it. For most people, life insurance is not really an exception to this. Its primary purpose is not to provide us with investment income, but to provide our families with income if we aren’t there.

Trusts are effective financial planning tools based on a structure that is simpler than it may seem. The creator of the trust contributes something of value into the trust and creates instructions as to how it will be managed and eventually disbursed. The trustee is responsible for keeping the property safe and managing and distributing it according to the instructions. The beneficiary is the person or entity that eventually will get the property in the trust.

Trusts may be useful in estate planning, asset protection, and providing for elderly parents or other family members who may be unable to manage their own affairs.

Establishing a trust isn’t especially difficult, but it’s not a do-it-yourself project. It’s important to work with an attorney to be sure the trust complies with legal requirements and will actually carry out its intended purpose.

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Since the death of singer Whitney Houston, I’ve seen several articles from attorneys and financial advisors about the errors in her estate planning. They have summarized three areas where it was badly flawed:

1. Lack of privacy. Ms. Houston had a simple will that was subject to public probate, rather than a living trust that would have kept her affairs private. Anyone with thumbs and access to the Internet can see a copy of her will.

2. Lack of protection from claims, con artists, and circumstances. The estate, estimated to be worth over 20 million dollars, was left to Ms. Houston’s daughter, Bobbi Kristina Brown. A vulnerable young woman just barely of legal age will receive three huge payouts over the next decade and become a multi-millionaire by the time she’s 30. A trust could have given her some limits and structure, as well as providing for advisors to help her learn how to manage her wealth and protect herself from predators.

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Parents who start having their own kids when some of their peers are already becoming grandparents face some unique financial challenges. This is a topic Rick knows first-hand, so he had plenty to contribute when Dinah Wisenberg Brin interviewed him for an article on the advantages and disadvantages of being older parents.

One of the biggest concerns is what Wisenberg Brin calls the college/retirement overlap, when parents are ready to retire at the same time the kids are ready for college. This is one of the many reasons Rick strongly advises parents to make saving for their own retirement a higher priority than saving for their kids’ college expenses.

The piece was published September 26, 2011, on CNBC.com. In addition to college and retirement funding, it covers topics such as naming guardians, the challenges of caring for elderly parents and kids at the same time, and the potential role of Social Security benefits.

Read the entire article here.

We’re pleased to feature a guest post from Tom Simmons, a partner with the Rapid City law firm of Gunderson, Palmer, Nelson & Ashmore, LLP.

Most persons familiar with the basic rules of Medicaid eligibility (the means-tested program which pays for about 50% of all long-term care costs in the country) understand that gifts can trigger ineligibility consequences.  The rule is contained with a “5 year look-back” provision.  The look-back rule states that any gift made within 5 years of an application for Medicaid benefits results in a divestment penalty.  The penalty is a period of ineligibility for Medicaid benefits when the individual would otherwise qualify.

The larger the gift, the lengthier the penalty.  The calculation is based on the “divestment penalty divisor” and the precise amount is adjusted annually.  Currently, it is $5,204.17 in South Dakota.  This amount is what the State Medicaid Agency calculates to be the current average monthly cost of nursing home care within the state.  So for every $5,204.17 in assets gifted within 5 years of a Medicaid application, the individual is deemed ineligible for one month.  So, for example, a gift of $53,000 four years ago would result in a period of Medicaid ineligibility of about 10 months, measured from the date the applicant is sufficiently impoverished to otherwise qualify for Medicaid. Continue Reading »

We’re pleased to feature a guest post from Tom Simmons, a partner with the Rapid City law firm of Gunderson, Palmer, Nelson & Ashmore, LLP.

There is a great deal of ruckus about the rights of our country’s elderly citizens to be free from abuse and exploitation.

The most recent cloud of dust was raised when the Elder Justice Act was being argued and considered by Congress.  Mickey Rooney, age 90 and the beloved Hollywood star of films like Boys Town, testified in March of this year before the Senate Aging committee.  Coincidentally, Rooney had to obtain a restraining order against his stepson on account of allegations that the stepson had been financially abusing his stepfather.

So what is elder abuse and what can or should the U.S. Congress do to eliminate it? Continue Reading »

Estate planning isn’t a very easy or fun topic to discuss, particularly with your children. It is a talk many of us simply shove aside until it is too late. Communication about your values and wishes for your estate is essential to ensuring that hurt feelings are minimized and surprises eliminated.

I wrote an article for the NAPFA Planning Perspectives newsletter recently and gave four suggestions for making this conversation a little less awkward.

Have you expressed your values and wishes for your estate to your children recently or ever?  Now may be a good time to consider bringing up the topic.  In most cases, children appreciate knowing their parents’ wishes before you pass. This eliminates kids having to make up the story for you after you pass.

In an interview with Linda Koco, writer for insurancenewsnet.com, I advised that people who are contemplating some estate planning should wait a few weeks. 

She quotes me as saying, “Our firm has not done any estate planning in the last two months,” comments Rick Kahler, a certified financial planner and president of Kahler Financial Group, a wealth management practice in Rapid City, S.D. “The attorneys for our clients won’t even meet with us. It’s become ridiculous for us to talk until we know what we’ve got. We don’t even know how to draft the plans right now” without making it too complicated and costly. Continue Reading »

Last week’s column on “boomerang kids” described some of the concerns to address before allowing adult kids to move back home because they are in financial trouble. This week let’s take a look at that same topic from a different perspective.

It’s interesting that in today’s world, we tend to assume that if adult children move in with parents, it’s the children who need help and support. In earlier times, combining households was more often a way for children to help their parents.

There’s no reason a multi-generational household can’t become a positive arrangement for everyone. The key is to manage it carefully and consciously. Here are a few potential benefits:

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