Some people I meet with are a joy to learn from. I’ve always said my favorite part about my job is that I can live vicariously through how other people have obtained, or are still acquiring, their wealth.
Then there are some people I talk to who think that investment returns are the end-all-be-all of financial success.
“I hear the market returns 8-10% every year, if you can beat that, then I’ll consider working with you guys.
“How did you do compared to the S&P last year?”
“What are your investment returns for the last 10 years?”
I do my best not to jump to conclusions in the moment. And to be fair, they are valid questions. People just want to know that you’re being a good steward with their money and that you’re not skimming a little more than agreed upon here and there behind their backs. (And some people are just way off. I think they truly believe a financial advisor’s job is to rub the magic lamp and make them rich.)
In these moments, I ask people first to take a self-assessment. Take a look in the rearview mirror. How do we actually come to the decisions we make with our money?
First and foremost is usually survival and a little flair. Regardless of how much you make a month, no one wants to live just to get by. But beyond that, it’s usually things like enjoying yearly vacations or a new car now and then. Someday to afford the kid’s college. Or to have the flexibility to say, ‘I’ll quit working when I’m ready to stop working.’
“Good” investment returns are important in the right context. Still, they’re subjective. But “get me a good return” is not an investment plan, and damn sure isn’t a financial plan.
And I recognize things are different now. Access to real-time information in the palm of your hand is instantaneous.
Between the rags to riches stories and the “democratization of investing,” they’ve made investments and gambling (not only synonymous but) the sexiest part of our finances.
But from what I understand, the main motivation for making those choices typically centers around providing a better life than your own for the ones behind you.
This is why estate planning is such an undervalued yet crucial part of your financial life. Trust me, no one’s first thought is how glad they were to beat the S&P in 2022 when evaluating what kind of legacy do they want to leave.
You might ask what an estate plan is or why it should matter to me? Or, maybe you’ve been through the process of settling an estate yourself, and you know what that grueling process is like.
Well, more than 66 million people die without an estate plan or even a Will in place. Over the next few years, this is TRILLIONS of dollars at play, and a large percentage of that will just be eaten away by time, taxes, and court fees.
Of course, no one wants to think about death—but seriously, think about the stress your husband or wife would have to deal with if you were suddenly diagnosed with a terminal illness or a swift accident that took you out instantaneously. Think about the slow erosion or even misdirection of the inheritance your family was entitled to after going through probate court.
Sure, there are tools like insurance that exist. But insurance is not a plan. Insurance policies do not come with a manual telling you how to put your life back together after a tragic event.
These four estate planning misconceptions could leave a massive hole in all the financial success you’ve been working so hard for.
4 Common Estate Planning Misconceptions
1. Estate planning is only for …
Estate planning is not only for older people or the sick. Nor is estate planning only for wealthy people or people who may exceed the federal estate exemption amount ($12.92M in 2023.)
Beginning to plan your estate is as easy as shoring up your beneficiaries on all financial accounts, setting up a basic Will, and identifying a guardian for any minor children if something happens to both parents.
Complexity certainly can come into play, but working with a financial professional and an estate planning attorney can help make sense of those complexities.
2. I’ve created my trust. My family and my assets are protected!
Not quite. A fancy Trust could make sense in some cases. Whereas, for many young couples, a revocable living trust is a great wrap-around estate planning tool. But certain trusts require you to give up control of that asset, which may not be beneficial if you know you’ll need access to the asset.
Selecting which type and the trust creation are steps one and two.
The next most important step is actually to fund the trust. This means retitling assets, investment accounts, and maybe your home in the trust’s name.
3. If I put my assets in a trust, I will no longer have access to them.
There are numerous types of trusts out there. SLATs, CRATs, GRATs. These are all real names of trusts.
However, trust types primarily boil down to two categories: revocable and irrevocable. Is it amendable or not?
Given that an irrevocable trust’s primary purpose is to remove the asset from your taxable estate, it makes sense that only an irrevocable trust disallows you to access the trust’s assets.
4. Trying to create “generational wealth” too soon
Of course, it depends on your goals and circumstances. But certain assets are better to pass down after you’re gone rather than gifting during your lifetime.
Don’t buy real estate and gift it to your kids too soon. Listen to the Tik Tok gurus if you want to. Instead, consider putting it in a trust. Gifting the house to your kids with your cost basis could stick them with a capital gains bill out of the roof (no pun intended) if/when they sell the house.
It pains me to say but you can’t prioritize saving for your children’s college education over retirement. Sure, they may graduate college with little to no student loan debt, but they could be tasked with financially supporting you in retirement.
Finally, but maybe most importantly, is being intentional about teaching your children good financial habits as they grow and are exposed to new levels of money management. You can’t do everything for your children.
“Sometimes not enough time is spent on the soft side of these family dynamics as opposed to just the numbers.”
As G. Michael Hopf wrote, “Hard times create strong men, strong men create good times, good times create weak men, and weak men create hard times.” — From this formula, it’s no surprise that it’s estimated that 70% of families lose their wealth after the second generation, and 90% will lose it by the third.
“The next challenge is how you engage that next generation,” the CEO of Dana Investment Advisors says. The creation of “generational wealth” encompasses much more than merely accumulating possessions to give away. The difference between “privideldged/entitlement” and “I was fortunate enough to …” is giving them opportunities to learn and fail on their own.
If we can avoid these mistakes, we have a better shot at not losing that “generational wealth” we’re working so hard to build.
** Disclaimer – I am not an attorney. This is not legal advice. Please seek professional financial and legal counsel before trying to establish any documents for your estate plan.