As they go through retirement, many people want to gradually give authority over their finances to their children. It can be a good idea and a great help as managing finances becomes more difficult in old age. But there are some good ways to do it in some ways that can pose significant risks. We discuss what you need to know about the better ways to share the responsibility and the ownership.
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Speaker 1 (00:07):
Welcome back to 30 Minute Money, the podcast that delivers action oriented smart money ideas and bite-sized pieces. I'm Scott Fitzgerald in Roc Vox Recording Studios, Bushnell's Basin Studios. I said studios twice, but that's okay. I like this place Studio.
Speaker 2 (00:21):
Speaker 1 (00:21):
Steve Wershing from Focused Wealth Advisors here, and we're going to talk about, we're going to throw words around executor and power of attorney, but don't get scared because Steve's going to lay down the truth.
Speaker 2 (00:33):
That's right. We're going to give you cool words to use next time you're at a cocktail party with a bunch of lawyers.
Yeah. We're going to talk about how to start giving some, how to start turning over some of your affairs to your kids, which is one of those things that as people go through retirement and they get older and older, that this is one thing that almost everybody starts thinking about doing. And so we wanted to talk about the right way to do it and some of the ways that you can do it, that would be from my perspective, a mistake. So if you are in retirement, if you're older and you have adult children, then very commonly when you put your estate plan together, one of those kids would be, for example, your executor, the one who carries out the instructions that are in your will, and they might be a power of attorney for you. They might be a healthcare proxy for you, but increasingly people will want to get some of those adult children into a more active role because people feel like, oh, I may not be able to continue tracking my expenses. I get confused more easily. Maybe my daughter, maybe my son can do more of this for me. And so there are some good ways of doing it and there are some dangerous ways of doing, and that's what I wanted to talk about because it is so common. I wanted to share with everybody some of the ideas on how you can do it. Well,
Speaker 1 (01:57):
Yeah, and it's is one of those things that now as I get older, I mean I would not let my son run my finances in any way, shape or form.
Speaker 2 (02:06):
Speaker 1 (02:07):
Old is your son? He's 20. So no, but the same thing is happening in my family where my wife has now become the healthcare proxy for her parents and the executor and power of attorneys all being discussed and all these things because they're both retired and these are things that they're words that are getting thrown around in my house. So I'm happy to learn a little bit more. Maybe I can take part in the conversation now. Have your
Speaker 2 (02:30):
Wife listen to the podcast. Yeah. Yes. So that's exactly what we want to talk about today. Now lemme just back up and start with that. Everyone should have current estate documents and we talk about the big three. We talk about wills, healthcare proxies, and powers of attorney. So if you haven't updated those in the past 10 years, may be worth talking with your advisor or your lawyer about whether or not they should be updated. As state laws change sometimes, and certainly people change, the people in your life may change. So it's a good idea to revisit it every five or 10 years. Make sure that things are up to snuff. For example, power of attorney. I think power of attorney is probably the most important of those documents because if you pass away without a will, well, there's state laws that talk about how to distribute that estate. It may not be how we would want to, but at least there are rules. If anything happens to you and you can't conduct your own affairs, if you don't have the power of attorney, then you're kind of at a standstill. I mean, the only alternative to that, and something we'll probably talk about in an upcoming episode is they might have to get a conservatorship for you, which nobody wants to do. Oh
Speaker 1 (03:42):
Yeah, that's been a bad word.
Speaker 2 (03:44):
Well, it's unfairly. It is been unfairly characterized as bad in the press lately, and that's what we'll talk about in that episode. But suffice it to say that having a current durable power of attorney is real important and there are some good ways and bad ways to do that. So let's just start there. So I think that everyone who's got an estate, everyone who's got any real assets should have a power of attorney, somebody that you can trust to make decisions for you. That's what a power of attorney does, is that's a person who can step in and make decisions in your place if you are not able to because you're too cognitively impaired or because you got sick and you're in a coma or an accident or something. That's why you want to have a power of attorney. And it's really important that you've got a current one so that we know it works and that we know that the person that will be stepping in to do the business for you is somebody that you want to step in,
Speaker 1 (04:39):
Do the business for you, and then this is the person that can legally sign documents, that kind
Speaker 2 (04:45):
Of thing. They can withdraw money from your bank to pay bills they can sign, say, sign the deeded to sell your house. I mean they can do whatever the power of attorney lets them do, but typically you go all the way down the list and at the very, it's a state form, it's standard. They all look the same in New York. So at the bottom it just says everything above here, and that's typically where people initial. And so people have a general power of attorney to do all that kind of stuff. So that's a good idea. Now, if you have multiple adult children and they're all responsible and you trust them all, you can have multiple powers of attorney. You can give powers of attorney to as many people as you want. I would not recommend a hundred, but if you have three kids and they're all responsible adults, it's not a bad idea to make all three of them a power of attorney. There is a choice that you can make though when you do that. One is you can say any of them can act in your capacity or you can say that all of them have to agree.
Speaker 1 (05:39):
That's what I was going to ask. I'm like, what if they're battling it out? How do you work that through?
Speaker 2 (05:43):
That's one of the reasons I recommend against that is because more commonly, sometimes you'll get people who disagree. That's a problem because if it says that they have to agree and they can't agree, it's like not having a power attorney at all. But a more common problem is if your power of attorney says both of these folks have to sign off on this, have to agree to it, and one of them is on a trip in Europe or is otherwise unavailable, you're kind of stuck. So if you have a couple kids or three kids and you give each of them a power and they can act independently, then whoever's available, whoever's the most available can step in and do that. That gives a lot more flexibility from my perspective. In most circumstances, that's a better way to do it, forcing them into an agreement. So first piece of advice, make sure you've got an updated power of attorney. Make sure that they're in a position to be able to do it. You'll want them to have a copy of the power. If they don't have a copy of the power, then they don't have the power. They have to prove it.
Speaker 1 (06:55):
They have to prove it right? Is that what you mean? They have to show the document
Speaker 2 (06:58):
That says they have to walk into the bank and give 'em the power of
Speaker 1 (07:00):
Attorney. Yeah, you can't just say, oh, I've got power of attorney. Exactly.
Speaker 2 (07:02):
No problem. Yeah, right. Sure. Yeah. Okay, we'll take your word for it now. They don't have to have it. They don't have to sign it even until they need it. So if for example, your attorney has copies of them, they can call your attorney and get a copy and they can put it right into effect, but if it comes time to use it, they will need to have a copy of it because any institution that they talk to is going to require that. The other thing, I should clear this up too because people get confused by this. There are a lot of institutions that require that it be certified within the past 30 days. And I had a client situation just recently where we're talking, the client is no longer competent and so the power of attorney wanted to do something and they produced a power that was like 12 years old.
Nothing wrong with that. They were told that it has to be certified within 30 days, and they misunderstood that to mean I have to have a power of attorney that's dated within the past 30 days. It's not what it means. That would be pointless because the whole idea of a durable power of attorney is that years after somebody suffers cognitive decline, you can still use it. What it means is a third party, typically the lawyer has to sign a form, sign, a letter that says this power is still in effect. So that's what that means just in case you have to use it and that comes up so you don't get confused about it. So power of attorney is a way to go. But let's talk about some of the other ways that people get their kids involved in managing their affairs because I just want listeners to understand what some of the downsides of these are and the most common one is, well, my daughter's name on my checking account.
So I took my checking account and I made it a joint account with my daughter now because that way nobody's show up with the power of attorney. The daughter can write checks just like the parent can. So it seems like a really easy thing to do, and on a limited basis, there's probably no real harm to it, but there are implications that people should know. So first of all, if you have an account yourself and you bring somebody on, an adult child as a joint owner, then you have gifted half the value of the account to them. So if it's a small checking account with a modest balance, no big deal. If the balance is more than twice the annual gifting exclusion, then you've just made a taxable gift to the joint owner.
Speaker 1 (09:37):
Speaker 2 (09:38):
Yeah, that's interesting. If you've got a hundred thousand dollars in your checking account and you add a child to that, you've just made a big taxable gift to that child
Speaker 1 (09:46):
And so wow,
Speaker 2 (09:48):
Now you probably won't actually pay any tax because it comes off of your exclusion. So they have to work it all out on your estate
Speaker 1 (09:57):
Tax return. But it's something you have to be knowledgeable.
Speaker 2 (09:58):
It's something you should know. There's something that you should probably know. The bigger issue, frankly, is that if you add someone to a bank account or any account, then that account, any of those assets are subject to all of the risks of that other person. So risk to creditors for example, that they have a bad credit rating. Well, if they have, let's say that you have an adult child as a joint owner on a bank account and they have a traffic accident and they get into serious medical debt and they have problems with creditors, those creditors can come after your checking account because it's jointly held with that person who's having the problem. Something that's a little bit less common, but I mean if you end up in, if your child ends up in a messy divorce, well that ex-spouse can potentially come after some of that money. You end up exposing some of your assets to a whole lot of things that probably won't happen to your child, but might. And that's a risk. There's no reason to if you don't need to. If they have a power of attorney, they can't get your accounts at all. If they're a joint owner, then it's their property and people can pursue it just like if it were just theirs without you.
Speaker 1 (11:15):
I see. So actually having a power of attorney rather than a joint account holder is probably to
Speaker 2 (11:21):
The better way to go. Much better way to do it. Right. And again, if you want to have a small account, if you've got a couple thousand dollars in a checking account and you want to put your kid on it so they can write checks, great, no problem. Just be thoughtful about it. Don't do it with large accounts, don't do it with, because of all of those implications. There's also, I hate to say it, but there's also that risk of malfeasance that elder abuse is a real thing, and I've seen more times than I wanted to. I've seen situations where somebody was made a joint owner or even given power of on an account and they abused that power and they took money for themselves or they bought things for themselves, or you want to be careful about that. I would like to believe that it's more common with non children like a caregiver or somebody who's outside the family, but it happens even with children. Sometimes it happens and you just want to make sure you understand that.
I hear stories every once in a while about a family with multiple adult siblings, and one of them takes advantage of the situation. And so it's something that you want to be careful about for that reason. It's a good idea. If you give authority to somebody to take care of some of your affairs, you should meet with that person periodically so that they can bring you up to speed on what's happening and where things are. Even if you say, Hey, listen, my son is going to start paying my bills just because it's more work than I want to do. I just want to be able to get away from that. I find it harder to do these days. That's fine. Meet every quarter and have them bring you up to speed on what are the bills that they've paid and what's the balance in your account, and have them brief you on it, and if you are getting a little bit more confused, then make sure somebody else is sitting in the room like one of their siblings or an outside trusted friend or something like that. It's, it's a good idea so that periodically you're being brought up to date and so things can't get too far off the rails before you recognize that something's wrong here.
One of the other implications that I think is important is that if you gift things, if you transfer ownership of things during your lifetime, then when they go to sell it, so maybe you have a bunch of stocks, you give it to one of your kids, they put it in their account when they go to sell it, their cost basis is what you paid for it originally. If you have it in your account and they inherited it, then they get what's called a step up in basis. So if they go to sell something later on, then the capital gain they would have to pay is the difference between the day they inherited it and the day they sell it, not when you bought it and when they sell it. So if for example, you bought a hundred shares of Apple computer when Steve Wozniak was still working there, and so it's gone up a zillion percent. If you give it to your child and they sell it, 95% of that price is probably going to be capital gain. If you pass away with it in your name and they inherit it from you and they sell it the next day, they will have no capital gain. So it's a big deal and it's something worth thinking about before you go putting your kid's name on your brokerage account. Wow.
One of the other things that sometimes people like to do is that they will retitle their house to their adult children so that the house doesn't go through probate. A lot of people are really concerned about probate, and there are some things to know about probate in New York. It's not really the horrible disaster kind of thing that some people make it out to be. There are costs involved, but it's not as expensive as some people fear. And it doesn't necessarily, as long as your estate is well organized, it doesn't necessarily have to take all that long to probate an estate.
Speaker 1 (15:23):
And probate is like limbo. What is
Speaker 2 (15:25):
Probate? Yeah. Well, probate is the process of carrying out the instructions in your will. Okay, alright. And so when you die, everything gets frozen, and then anything that passes through the will, anything that passes through the estate, you can't really do very, the executor can do things like liquidate things and that kind of stuff, but they don't really go into the hands of the people that will inherit them until the whole estate is probated. And so some people really worry about that and they'll do all kinds of things to avoid probate. If you can avoid probate easily, that's fine.
I wouldn't go crazy with it. It's not that big a deal. But one of the things, because everything that goes through probate has some expenses attached to it. One of the things that people like to do is to maybe retitle their house because it's the biggest non-financial asset that they have. And so they might retitle their house to their kids. Couple of things we should mention again, just like before, if you retitle your house to your kids, your house is now subject to all of the creditors of your kids and all the liabilities that your kids may take on. So if you do that, I'm not saying it's a good idea, I generally don't think it is, but if you do that, make sure that you get what's called a life estate, which means it's their property now, but they can't kick you out as long as you're alive. And so that's real important to have. That makes sense.
Speaker 1 (16:44):
Yeah. So if I retitled my house to my kids, I would have to get this life estate that you're talking about. That's right. So that I could still live there and they can't just kick me out. That's dead.
Speaker 2 (16:55):
Exactly. That's right. Yeah. You don't want to retitle it to the kids. And then the kids go 10 years and one of 'em has a financial problem. They say, well, sorry, dad, we're going to have to sell the house. You don't want to run into that. And if you have a life estate, then they can't force you out.
Speaker 1 (17:07):
And if you leave the house to them after you pass, is that a different thing? Yes. Is that a completely different thing?
Speaker 2 (17:13):
If you leave it to 'em, you get the step up in basis. So that's good. It's just that it has to go through probate, so it takes a little while and there are costs involved in it. The attorney gets a fee, the executor gets a fee, but generally that's a better way to do it anyway. Now there is for financial assets especially, there is another way around that. Now, one thing I should mention too is that there are a lot of things that people have that do not go through probate your retirement accounts. For example, insurance policies, for example, they're not included in the probate estate. They don't have to go through the probate process. They have beneficiaries on them. And so those things are considered will substitutes. So if you have an I R A and you pass away, it goes directly to the beneficiaries of the I R A.
It doesn't have to go through probate. It doesn't matter what happens in probate, it goes directly to the beneficiaries. And so that's a great direct way to do that. If you've got a very large, it doesn't have to be large, but if you've got a taxable investment account that you want not to go through probate, you can convert it to what's called a transfer on death account. And it's basically just, you can put a beneficiary on a regular old taxable account and it goes directly to them. Does not go through probate. You don't have to wait for it. You don't have to pay anybody involved in the estate on it. That's a better way to do it than retitling it to that person, better to make them a beneficiary than to put them on as a part owner. So conclusion of the whole conversation is when you're thinking about giving somebody like an adult child more authority over your financial affairs. From my perspective, best way to do it is a good solid power of attorney and just be very wary and very cautious about changing ownership on anything when it comes to making that kind of a move.
Speaker 3 (19:13):
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Speaker 2 (20:38):
Okay, so what is your 30 minute action item? I think I can guess, but you go ahead. Yeah. 30 minute action item. Check that you've got a current power of attorney and have a conversation with that power so that they know what authority they have if they ever need it.
Speaker 1 (20:51):
Lots of great information there. Of course, 30 minute.money is where you could listen and watch the podcast. I'm Scott Fitzgerald. Thanks to Steve Wershing from Focused Wealth Advisors. We will catch you next time.