View Original Notice ? How 2 families avoided the pitfalls of financial missteps
As a financial adviser, I collaborate with individuals and families, each with their own unique characteristics and differences.
With some clients, we talk often, and with others, I may only speak to them to discuss their portfolio or if they have a problem that they need assistance in resolving. The client dictates how engaged an adviser is in their life.
For many clients, I am incredibly involved in family planning as they transition through life’s challenges.
In the following scenarios, the planning went well due to the families collaborating with their advisers. This is not always the case, but it is rewarding and beneficial to the outcome when it works.
The Smith family CPA called me because Mr. and Mrs. Smith were over the age of 70 ½, the age then required to take distributions from their Individual Retirement Accounts, and they were not taking such distributions.
The CPA discovered that they had missed taking the required minimum distributions from their IRAs for a couple of years. The tax penalty for missing the distributions is severe, 50% of the required minimum distribution.
Mr. Smith had always managed the finances but was declining. Mrs. Smith was overwhelmed but trying to make the best of the circumstances. To minimize the clutter from having stacks of paper, and statements in clear sight, she began tucking the financial statements away in various drawers and file cabinets. All seemed in control until the CPA discovered their IRAs were not properly managed.
I quickly set up a meeting with the couple to discuss their IRAs. During this meeting, it was revealed the husband and wife had never closed a bank or investment account during their lifetime and had lost track of the accounts. It was easy to see they needed considerable assistance in managing their finances.
Because their relationships with their children were strong, we called for a family meeting. In this meeting, we identified where assistance was needed and how strategies would be implemented to help. We immediately set up a simple system to capture the mail (a basket on the credenza). We would all meet monthly to open mail, pay bills and identify and sort financial statements.
Additionally, I reviewed several years of tax returns, seeking to identify bank and investment accounts. Many accounts were still open. Others had been closed by the financial institution, and the money was moved to the state controller. Over time, about 50 accounts were identified and consolidated into like accounts, then transferred into a family trust. Eventually, the management of the finances was simplified, and the frequency of the family meetings was reduced.
If the CPA had not identified the initial problem, this family would have had substantial IRS debt, assets would have been lost, and their estate would likely have gone through lengthy and expensive probate as a result of assets being titled incorrectly. This was an undesirable outcome due to the lengthy and expensive probate process.
What worked for this family is that when a problem was identified by the CPA, a team was formed within the family to collaborate with the advisers to help find solutions to assist their parents. The family members supported each other and worked together knowing that this was in the best interest of their parents. The outcome was a smooth transition for the family as the parents’ health declined and they passed away.
The Johnson family was fortunate, as they had received a considerable sum of money years ago. Overnight their lives changed. They went from a typical middle-class lifestyle to building a 10,000-square-foot custom home.
Money made life easy for years, or so it seemed. Behind the scenes, there was not much communication regarding finances, and one adult child was dependent on receiving annual cash payments from the parents.
I was hired following the prior adviser’s retirement. At first, I met with only Mr. Johnson. Mrs. Johnson was not interested in the finances. During the next several years, the family dynamics slowly came to the surface. One adult child realized Mr. Johnson was an easy target to ask for money and learned to rely on him for all financial needs. The other adult children were resentful and frustrated with this perceived favoritism.
Unfortunately, two things occurred about the same time. Mr. Johnson passed away, and the income stream changed, decreasing the monthly cash flow. The meetings transitioned to Mrs. Johnson, addressing the topics of asset preservation, outstanding loans to the adult children, downsizing and care as her health declined.
At first, these meetings were not easy. Mrs. Johnson was very emotional when addressing change. But in time she became comfortable with the routine and format of the meetings.
Initially, we established a monthly meeting to pay the bills and to discuss budgeting and asset preservation. Eventually, we included the adult children in the discussions and addressed the uncomfortable topic of family loans and timelines to make changes.
The priorities were selling the large home due to maintenance and upkeep, as well as providing care for Mrs. Johnson. She loved her home but agreed to a deadline to move into an assisted care facility of her choosing.
In the end, Mrs. Johnson moved into a suite at a care facility she selected. It was decorated with her favorite possessions. Her family visited frequently (more so than she expected), and she seemed happy.
The family home was sold due to the stipulation in the contract for a reverse mortgage and loss of value (no capital gains were owed). Money was preserved to benefit the family in the future. And fortunately, due to addressing the family loans and equalizing the estate, the adult children are still speaking to each other.
What worked in this situation was addressing the problems as a family, identifying the necessary change, establishing a timeline to implement the changes, and assigning tasks to certain family members while holding them accountable to complete the tasks.
For both the Smiths and the Johnsons, if the clients did not work together with their advisers, they would have had serious obstacles to overcome. Probate, hoarding, cash flow deficiencies, missing accounts, incorrectly titled accounts and undocumented loans to adult children would have needed to be addressed following the passing of the parents.
Identifying and addressing the deficiencies before it was too late, settling both estates while taking time to complete all simplified matters. The families were able to close this chapter of their lives without any additional conflict from unresolved issues. The planning worked.