It is a common human paradox that we often treat money from different sources as if it had different value. For example, money from an inheritance or the lottery is almost always spent on luxuries and frivolous things—it’s typically gone within 18 months. Money from a bonus is blown on those extras that you feel that you “deserve.” One source of money seems to be treated as far more valuable than any other source—IRA funds. In our practice we talk to senior after senior who would rather die than spend their IRA and/or 401(k) money. When we do estate planning, gift planning, and long-term care planning, we often find that our clients are willing to use almost any other source of money except spending their IRA funds. Why is that? The answer is that they spent a lifetime accumulating those funds through their working years. This money means much more to them than “phony-baloney” capital gains increases in the house that they bought for $30,000 which is now valued at $300,000. To them, that’s not “real money.” But there is no question in their minds that the money that’s in their IRA is something that they sweated to accumulate. Now in their retirement years they don’t want to let that money go. Like a legendary dragon who safeguards his hoard of treasure against all attackers, our senior citizen clients hoard their IRAs. We have had many clients tell us with anger in their voices that “they [the IRS] make me take so much money out of my IRA every year!” They have forgotten why they saved that money in the first place. Kathy Motley, our Executive VP of Operations, often tells people, “You forgot why you got your IRA!” She reminds them that they accumulated that money over their working years so that they could spend the money in their retirement years. The reason to accumulate this money in a tax-deferred manner is so that when they reach their retirement years, they are able to use that money and pay income taxes at a lower rate of taxation. She goes on to say that they have developed a habit over the years of thinking about this money as “untouchable.” They have developed a habit of using all other sources of money except their IRAs. We have to ask our clients what would actually benefit the IRS more—our seniors taking the money out and using it for the things they need?—or forcing their children to take the money out at higher tax rates? Our clients have seldom considered the fact that if they don’t spend the dollars, it will be spent by their children after paying a higher tax rate. Of course, there’s always the argument that if the client dies with the IRA, then the child could stretch the benefits of the IRA over a lifetime. But most of our seniors say to us, “I know my kids could save the money, but they won’t… They’ll spend it and spend it fast!” So the question that we have to analyze with our senior citizen clients is this: who should pay the taxes on the IRA? Would it be better for them to use their taxable money now, or leave it for their children? Many of the senior clients that we talk to are people who have already begun to incur sizeable out-of-pocket medical care costs. There is a substantial deduction for our seniors who must incur large, unreimbursed health care costs. We try to show them that they’re often much better off using taxable IRA dollars to pay for deductable medical care expenses. It’s always a better idea to spend tax dollars when you have an offsetting deduction. So as you think about that IRA—don’t forget why you got it!
A number of times I have had clients tell me that they love their adult children, but they have a child who has chosen a destructive lifestyle. Sometimes it’s a mental health issue, or sometimes it’s just a matter of making very bad choices. These parents do not want to abandon any of their children—but they also do not want to give money to fuel the fire that is consuming their child. They come to me and ask me what to do. These are not persons with a legally defined disability—but they will squander all of their inheritance unless their parents find a way to provide “lifetime love and protection” over estate assets. The answer is what I call the Lifetime Love and Protection Trust (LPT). A Love and Protection Trust is designed to be a legal tool to provide protection, motivation, and encouragement for an adult child who is unable to make careful and supportive decisions with his or her money. The LPT works to ensure that your investment in your adult child is used to further your caring purposes, positive values, and enduring concerns for his or her well-being. A professional trustee will follow your written trust instructions and safeguard your property to benefit your child. Trained investment professionals will safeguard the money and work to maximize a reasonable and profitable return on the assets that you have left to be invested. By law and by the trust document itself, the trustee must make prudent and intelligent decisions to protect your child and your trust monies. Unfortunately, it happens all too often that adult children squander their entire inheritance unless you take control and help them by making a final gift of love and protection by using a lifetime trust. The LPT prevents an adult child from foolishly spending, wasting, and losing your hard-earned estate. Your investment in your child is protected from creditors, failed marriages, and other predators. Some adult children consistently make destructive choices and therefore are extremely vulnerable to creditor lawsuits and many other types of legal claims. An LPT can be designed to discourage substance abuse and to provide for the special needs of your adult child. You can and should build protective walls around the legacy that you have chosen to leave your child. Build a fortress with this trust. At its most basic, a love and protection trust will be there for your child long after you are no longer able to be directly involved. Your legacy of love, protection, and sound investment management will give your adult child the best chance to still have money available if and when he or she eventually chooses to seek help to make a positive life transformation.