The Asset List
The Child’s Debt
Multiple Brokerage Accounts
Life Insurance with No Dependents
Selling Life Insurance
Title and Living Trusts
Dear Mr. Miller:
Introduction: My parents are getting older and I want to make sure that they are using their money wisely and investing it properly. They are still reasonably sharp but I think it would be a good idea if I “open the door” to discussion. What should I be looking at?
Your thoughts are appropriate. I can’t tell you how many times clients have walked into my office with no idea of what they have or how it is arranged. And even those that do often have some very strange holdings.
The Asset List: The starting point is to make an asset list of everything they own (ok, not the pots and pans and furniture). And attach a value to each item. Then determine how title is held to each (you can often tell from the deed or monthly statement). So let’s assume they have the house worth $500,000 (just call a real estate broker and he can give you an idea in about 5 minutes) and maybe five timeshares spread across three states worth $5000 each, the $20,000 debt that your sister Mary owes them, the IRA’s of $25,000, the securities (stocks, bonds, and mutual funds) accounts at 4 different brokerages for $35,000 each, life insurance policies for $100,000 for each parent, and bank accounts at three different banks for $50,000 each. A total of approximately $1 million.
Once you have that list you can start asking some very important questions.
Timeshares: First that strikes me on something like this would be the timeshares. Some of my clients will tell me they purchased each one from the developer (usually the first mistake) for $10,000 10 years ago so the value is easily $15-20,000 now. Although possible, that would be quite rare. According to the last article I read, most timeshares are worth 50% of the developer’s sale price and take 3-5 years to sell. Obviously, there are some exceptions and you need to help them find out what theirs are really worth. Are they just an ongoing monthly expense with no real value anymore, do your parents even use them anymore, are they all in your parents’ state of residence or in their living trust? If not in their living trust, will there need to be probate proceedings in each state when they die (that could get expensive)?
The Child’s Debt: The debt owed by a child is always a potential for disaster. Is there a record of the debt such as a promissory note? Is there a record of what payments have been made and when. Does interest run on it and how much has that increased the total balance owing? Unless there are paper records, how will you know how much she owes (after all, your parents will be gone and won’t be able to give you any input)? And if you think the total $20,000 is owing and Mary believes it has all been paid back, what will that do to the relationship between the two of you going forward?
The IRA’s: The IRA’s pose a different issue. Are they each other’s beneficiary? I’ve had clients who still had the client’s ex-spouse named as the beneficiary. Not something the current spouse is going to be happy about if that is not corrected, pronto. And who is the backup beneficiary when the second spouse dies? They probably both want you and your sister to inherit, so are you both listed on the financial institution’s records as the beneficiaries?
Multiple Brokerage Accounts: The four different brokerages is a very often occurrence. When I ask the client why not just one, the most typical answer is because that way the client can get advice from all four advisors. Well, the first fallacy in that argument is that most successful financial advisors are not looking for $35,000 accounts. And assuming your parents want a successful advisor to be giving advice and not an unsuccessful one, they are going to need to consolidate accounts to get closer to most advisor’s minimum account balances. Further, when you or Mary have to take over, you are going to have to balance your own financial life with that of your parents. Trust me, one securities account is going to be far easier for you to handle than four.
Life Insurance with No Dependents: Then there is the life insurance. Life insurance is often an essential holding for those who have dependents that will need the money to keep living their current life style. If your Dad dies, will your Mom need that $100,000 or will the income that is coming in (social security and pensions, based on what will be coming in AFTER Dad dies) be sufficient. I had a client who was barely making ends meet (actually, she wasn’t making ends meet) but she had $4000 of life insurance that she was paying on monthly. No spouse and the kids were all grown and out of the house, so she had no dependents. She had the insurance so the kids would not be burdened with her funeral and burial costs. A nice sentiment, perhaps, but putting food on the table and paying her homeowners association dues would be a far more important goal. I told her to consider canceling the life insurance.
Selling Life Insurance: Another note about life insurance if you are going to cancel it. Often times that insurance can be sold to an investor for more than its cash value and then the investor makes the future premium payments (of course, the investor also gets the proceeds from the insurance company when the parent dies).
Multiple Banks: The three different bank accounts. I still have trouble figuring out why people do this. It can’t really be to get the free toaster, can it? If they are worried about the bank failing and that way they still have money in other banks, the FDIC states that in most cases the FDIC payment is made within two business days of the failure of the institution. Again, you and your sister (and your parents, too) are going to find it much easier to deal with one bank, not three.
Title and Living Trusts: And then there is the question about how title to these assets are held. If not in a Living Trust, will there be a probate when your parents die? Maybe. And probate can be expensive. So that is another issue that needs to be resolved.