Planning Ahead: Financial Steps to Take Before a Loved One Passes

June 13, 2024

In this personal episode of FIN LYT by EWA, Matt Blocki and Ben Ruttenberg delve into one of life’s most challenging experiences: preparing for the passing of a loved one. Understanding the emotional weight and complexity of this topic, they offer compassionate guidance on how to manage financial affairs before a parent or loved one passes, focusing on the crucial conversations and actions that can ease this transition.
Matt and Ben discuss the importance of proactive planning to ensure all financial aspects are orderly, which can significantly reduce the stress during such a trying time. They cover practical steps such as compiling a comprehensive list of assets, understanding the different types of assets and how they are handled upon passing, and the critical roles of wills, estates, and direct beneficiaries in simplifying the legal processes involved.
Matt and Ben offer insights into the execution of estate plans, including the setting up of wills, trusts, powers of attorney, and the crucial aspects of healthcare directives. The episode also addresses the sensitive discussions that should occur with aging parents about their wishes and financial plans, which, while tough, are essential for a smoother transition and to honor their legacy respectfully.

Episode Transcript

Welcome, everyone, today’s podcast. Been lit by AWa, joined here by Ben Ruttenberg. We are very emotional topic. This morning we’re recording this. We’ve had the unfortunate but also fortunate of being able to guide and help our clients. You know, when several clients have passed, several clients parents have passed. We think it’s a very important conversation to address because this, emotionally, it can be a very tolling time.


One of the most toying times that you go through in life. And getting stuff ducks in a row, before, during, and after, can allow you to really focus on family and what matters and legacy. So today’s podcast, we’re talking specifically on what financial steps can be taken before a parent passes or really any loved one passes. But specifically, we’re going to be looking at this from the child to parent perspective, as that’s the most common one we’ve had the experience of dealing with. So, Ben, give us a quick introduction before we get into it.


Yeah, that was well said. I think things to think about when you’re framing this conversation is number one. This is a very sensitive topic, and I understand that this can be difficult to deal with. But the harder conversations that you have and the more proactive you are, the easier this is going to be and will lead to a much smoother process when your parents pass. Just more proactive conversation you can have. The harder conversations you can have before this, the easier it’ll be. It’ll make your life a lot easier as you’re settling their estate or you’re sorting things out after the fact. And the goal of this, that podcast, is just to provide practical advice, kind of unbiased third parties, things you should be thinking about as you’re going through this and as you’re preparing for this.


Yep. And we’ll address what professionals you should be working with. You know, obviously, financial advisors can be key, but also, you know, an estate planning elder care attorney as well, is typically, and then someone to do the taxes on the back end, so. Okay, well, first and foremost, so if you know, hopefully you have a great relationship with your parents. If so, the more open and direct conversation you can have, if you know, there’s a health concern on the table. So we want to start by making sure you have a list of all valuables. So this would be typically, you’re going to have a balance sheet that’s typically comprised, for most people, comprised of a couple things. The first thing is going to be liquid assets, bank accounts, cash, stock accounts, etcetera. The second category we’re going to say is qualified assets.


This would be 401s, iras. These typically are the easiest to deal with, because most of the time you have a direct beneficiary that’s required to be on those qualified assets. Then the third thing we would refer to as, like, physical assets. This would be your cars, houses, maybe vacation houses. And the fourth thing, which is really those first three categories I just described. Pretty easy to track down. You know, any accounts gonna have a statement attached to it or on a monthly basis, you gotta log into it to get those monthly statements. If you don’t have those, you’re gonna get tax documents yearly. So you can refer, you know, typically to trail, whether it’s a statement or tax document, and then a house, you know, you’re gonna have. You can look up the deed, go through your county, you can, you know, tax.


Tax records will be publicly available. So really, the one that’s important to get, we’d recommend getting a detailed list of all first three categories. But really, the fourth one, the valuables, is super important because your parents may have stuff stored, depending on the generation. They may have stuff under their foreboards, they may have physical cash, they may have stuff in a safety deposit box. You know, banks don’t allow you to have cash in the deposit box, but people do it anyways. So there could be a lot of stuff. And those getting that stuff, if you don’t have the list, or don’t have the titling or power of attorneys, or the proper labeling in your will, it can just be so painful and time consuming to have to go through some of that stuff with probate. So I’d recommend get the list.


And then later in this podcast, we’ll give advice on how to make the transfer process, assuming whether it’s a parent to a parent, or if this is the second parent, to pass the parent to the kid, how to make that transfer process as quickly as possible. Okay, so that brings us into the importance of having an estate plan in place. So, Ben, give us an overview of what is a typical estate plan entail and what’s the importance of each document.


Yeah, so there’s a few things that we’d want to make sure are drafted in preparation for this. The first one, obviously, is just a will. Will will dictate how your assets are distributed after you pass. If you die without a will, it’s said to be you’re died into state, and then everything that your estate will essentially go through. Probate and probate is a lengthy public process that generally is pretty expensive, in which the courts will essentially decide how your assets are distributed. So really want to make sure you have a will in place so that alongside the beneficiaries of your accounts, you can make sure that your assets are passing to either, you know, the appropriate parties in the correct manner.


We’ve seen some instances where there is no will, and the probate process can become lengthy, it could become expensive, and it’s technically public record. So we want to avoid that as much as possible. The second thing we want to do is we want to choose an estate administrator or an executor. And this person will be in charge of taking care of your estate, administering it after you pass. So this can be your spouse? It doesn’t necessarily have to be, but this is someone that is a trusted person that you put faith in to make sure that your wishes carry forward after you pass. From an estate settlement standpoint, other things we want to make sure are set up are powers of attorney. So these would be medical and financial powers of attorney.


So if you become incapacitated, who is making medical decisions on your behalf, who is making financial decisions on your behalf, and potentially, depending on your estate, setting up a revocable trust to make sure that your beneficiaries are protected if and when they inherit any assets.


So, yeah, the revocable trust is such an important one because you mentioned the privacy and that the only way to avoid, you know, public everything being public records, is that a revocable trust cause a normal will. You know, things are going to, things that go through probate are going to be public record. But revocable trust, it avoids all that. It keeps the amount, it keeps the beneficiaries, all that kind of stuff is private to you and your family when you pass. I think the revocable trust for most people, regardless of asset size, it can make sense just from a purpose of privacy to prevent your heirs from having predators, creditors, et cetera, from coming after them.


Yeah. Very safe way to pass assets on to the next generation, too. You can dictate how and when the assets are distributed, if they stay in the trust, how they can be accessed, whether it’s Hems, provisions, at what age these trust assets can be accessed.


So you mentioned HeMs provision. That’s important. What does that stand for?


Yeah. HeMS is an acronym standing for Health Education, Maintenance and support. Any assets that flow into a revocable trust at death can essentially, the revocable trust can be turned into an irrevocable trust, at which case certain provisions can be put on that only limit distributions from the trust for what are called HEMS provisions. This is an acronym that stands for health education, maintenance and support. It’s a very broad definition, but it protects any trust beneficiaries from accessing money that does not fall into those four categories.


Okay, perfect. So some of the other reasons to have a living will or encourage your parents to have a living will is this can eliminate a lot of family disagreements. You can, you know, keep autonomy over medical decisions in advance. Some kids may want you to have, like, artificial nutrition. You may say, no, that’s not for me. Just, you know, pull the plug. Just put it bluntly. You can put, you guide your healthcare decisions, guide healthcare providers. Obviously, the healthcare power of attorney, if you’re incapacitated, that person, maybe it’s a son or daughter, can make those decisions on your behalf, but they’re still going to reference the will with certain big decisions that have to be done because you’ve taken the time to just make those big decisions in the future. This really is about a personal autonomy in the end, legal protection.


And then also the will can clearly state who gets what that doesn’t have a direct beneficiary on it. So this is really important because a lot of times people think, I have a will in place, I’m good. Well, that’s not good because you may be on your second marriage and have a 401K directed to your ex spouse, and your will says it’s going to, you know, your current spouse plus kids. Well, if your will says that, it means nothing. A direct beneficiary on your account always is number one. And that avoids probate. The direct beneficiary avoids probate, it ignores the will. That 401K, in that case would go to your ex spouse against your wishes.


So after you complete your will, the reason we want to have an inventory of every single asset you have on your balance sheet is we want to make sure that every asset, if you possible, has a direct beneficiary, or if you want to have some rules around that, because let’s say you have, the parent wants stuff going to grandkids and they’re not 18, then we want to label some of the beneficiaries as maybe, first, their spouse, if they have a spouse living, maybe secondly, their kids, who are now adults, and then third would be not their grandkids, but a revocable trust that then turns into an irrevocable trust for their grandkids. And you could put all kinds of provisions on that as well. So just doing a will, most people think, oh, I’m good, I have my estate plan in place.


No, you have to do a full inventory and work with your financial advisor and attorney to decide what should I have a direct beneficiary on and what should be the contingent beneficiaries and how should that all align. So. And making sure that everything flows into that correctly. Okay, so let’s talk about the. What trips people up. So I just. So the first section of the balance sheet is non qualified money. So typically, if you have a joint account between spouses, and we’re talking about one spouse passing no issues, it’s going to be really easy for the surviving spouse to get that money.


Now, if you have an account that has just your name on it and you don’t have a will that directs that, or you don’t have a beneficiary, or if it’s not a transfer on death, that’s where we can run into issues. So with any personal individual account in that first category of non qualified assets, we’d recommend, you know, put a transfer on death on it to a spouse, or put a transfer on death on it to the beneficiaries of the trust. Or if you have a revocable trust, you can put the name, you can change the ownership with no tax consequences of your name to the revocable trust. You know, for example, using you, Ben, the revocable trust of Ben Ruttenberg, that doesn’t affect you. It’s revocable. You can change your mind. You can move the money.


It doesn’t affect your day to day transactions, but when you pass that money is avoiding probate, and it’s going directly to where you. Where you want it, no questions asked. So some of the risks of not doing anything with a personal stock account or not having a beneficiary, a personal brokerage account, not having it joint with your spouse, not having a beneficiary on it is, it’s going to have to go to probate. So let’s say you don’t have a will. That can be a very painful process where you have to literally show up in court, probably hiring an attorney. It’s going to be costly. It’s going to be time consuming. It’s going to be the last thing you want to do when mourning the loss of a loved one. So, again, solutions around that.


Add a beneficiary, add transfer on death, make it a joint if you’re still married. and then the second, you know, best solution would be mention it in your will. However, wills can be contested. So if you, like, have two kids and one kid’s kind of gone off the radar or got off the rails a little bit, and you’re like, I want all the assets at least going to my other kid. I’ve written one kid off for whatever reason. We see this more commonly than people would expect. Well, if you just casually mentioned your will, that other child could come and contest the will. But if you’ve put a direct beneficiary on that account, or maybe you’ve added that child onto your account while you’re living, there’s pros and cons to that. There’s no contesting that.


So there’s lots of proactive things to be done before passing.




So let’s. Let’s talk about some. Let’s talk about the four. Like, let’s just say hypothetically, someone has. Let’s just go through a list. We’ll talk about Social Security, we’re gonna talk about pensions, and we’re gonna talk about someone that has several retirement accounts. So, first of all, let’s talk about the pension. So if you have a. If you’re still married, it all depends if you’ve elected a survivorship option. If you’ve elected a survivorship option, then, you know, we need to call the pension, have the contacts, make sure that you have your spouse added as a trusted contact on there. Make that process easier. Let’s say you’ve elected into a pension that is a 50% survivorship. Your spouse is going to continue to get 50% of your pension when you pass.


Typically, that would stop, and it would not go to kids with a pension after you pass. Secondly, Social Security, you’re going to keep one of the two, it’s always going to be the highest one. So making sure you have clean records, and let’s say you have a parent that’s 90 and a parent that’s 88, and the 88 year old is still living, and he or she’s going to inherit the higher of the Social Security, you need to have all, you know, the documents in line, birth certificate, Social Security cards, all that relevant information to get ready to go to the Social Security office, a death certificate to get that enforced as quickly as possible, then 401 ks.


So let’s say someone has three or 4401 ks, then what’s a proactive step we could do to make that way easier before a parent passes?


Yeah. Easiest thing you can do is consolidate them into one IRA. Let’s just say, for example, these are all. They have three old 401 ks. They’re all from a pre tax 401k. Makes a lot of sense to consolidate those to one traditional IRA so that you’re not tracking down three different old retirement providers to get the right information, you need to make sure that the money flows to the right place. If it’s all consolidated into one IRA, again, that’s a tax free, penalty free transfer from old four hundred one k to Iraq. That would just make your life a lot easier dealing with one account as opposed to four.


No question. No question. And then. Okay, so let’s talk for a second about in Pennsylvania specifically. So in federally speaking, when it comes to taxes right now, exemption levels are very high. So we’re going to talk about 2020. They’re about $13 million per spouse. I mean, if you pass under 13 million. So first of all, spouse to pass. Spouse to spouse is unlimited. There’s no federal taxes. Spouse to kids, from a federal perspective, you can pass the first, you know, surrounding 13 million tax free in 2026. That gets cut in half. So for most people, they don’t have to worry about federal taxes. However, those living in Pennsylvania, we’re gonna use this is state by state. Some states don’t have an inheritance tax. Some states do. Pennsylvania does. So from.


You may know this offhand, Ben, but if I’m just teeing you up, get ready to look this up. So I know the first line is spouse to spouse in Pennsylvania is zero. Spouse to kids is four and a half percent. In Pennsylvania, spouse to. There’s two other ones. Spouse, two grandkids, I want to say, is 15%.


That’s correct.


And then spouse or spouse to siblings is twelve.


That’s right. Why are you asking me to look everything up? That’s pretty good.


I want to make sure I’m not giving inaccurate information. So the point is, you know, if you’re, if this is the second parent passing, and they have it split up between kids, grandkids, some proactive gifting while living. So if, you know, let’s just say hypothetically, someone has $100,000 they want to give to their kid, 100,000 to a grandkid, 100,000 to their brother. Well, if they wait till death. To do that, $4,500 is going to Pennsylvania for the kid, 12,000 is for the sibling is going away, and $15,000 is going to for Pennsylvania taxes for their grandkids. That’s a total of $31,500. We can avoid that if hypothetically, they said, I want to give that hundred while I’m living. And there’s no gonna be no federal taxes.


That if we give 100, 100 away, you know, a year before you pass, that’s gonna come off that, you know, that lifetime gifting exemption, no federal taxes. You completed that gift while you’re living. So no Pennsylvania tax. So we just saved $31,500 by transferring the money before death versus waiting till after death. Now, the exception to that in Pennsylvania is life insurance does not get hit with Pennsylvania taxes. That pretty much everything else does get with Pennsylvania taxes. If you’re passing, just like real estate and have no liquid money, then the heirs have to figure out how to still pay that tax. So there is a lot of considerations with lifetime gifting versus waiting till death gifting, because a lot of taxes can be avoided if you do lifetime gifting.


The flip side of that, though, is if you have a highly appreciated stock or asset. If you bought your house for 100, it’s now worth 500. If you bought a stock for 100, it’s now worth 500, and you pass that to your kid at death, they’ll get a step up in basis. So there’s a $400,000 gain that they will not pay capital gain taxes on. Now, they’ll still have to pay the state tax of four and a half percent on the total thing, on the total 500, but they wouldn’t have to pay a 15% or 23.8%, you know, whatever tax rate they’re in on that capital gain. So if you have a highly appreciated asset, typically it makes sense to wait and pass it on at death, maybe inside a revocable trust.


Under current tax law, we’re recording this 2024, they would get a step up in basis, but that the government has talked about potentially getting rid of that as well. But there are considerations now. If you have a non appreciated asset, like just cash in a bank, obviously it’s better to pass that will living versus waiting, because you’re just avoiding that Pennsylvania inheritance tax.


And this could be a whole podcast topic in and of itself, is how to gifting we haven’t even mentioned, you know, you said spouse to spouse goes unlimited. You can pass anything to charity Unlimited. So, like, there’s a million other topics here.


Let’s talk about that. Let’s just say, hypothetically, that someone wants to pass a third of their money to kids, a third of their money to grandkids, and then a third of their money to charity. So if what we typically see is we just see a will that says, I want a third, a third. And then what we typically see is they’re potentially wasting hundreds, if not millions, of dollars in taxes. So what we want to do in that example, let’s just say someone’s worth $3 million. We have a million dollars inside of a taxable account, and we have a million dollars inside of a Roth IRa, and then we have a million dollars inside of a traditional IRA. So if we just do everything and split it up, well, the charity can receive anything tax free.


So the IRA we’d want directed at the charity. Because.


The traditional IRA.


The traditional IRA. Because if the kids got the traditional IRA, what happens?


Yeah. So they would inherit the traditional IRA, they’d have ten years to take the money out, and then any distribution that they take would be taxable at their ordinary income rate.


So they’re, let’s say the 32%. It’s a high income. A family earn an over, you know, almost 400 grand. How much tax are they gonna owe? Right off the bat? Yeah, 320 grand.


320 grand.


And that could be more. Cause the account’s gonna grow over the ten years.


Right, right.


So we’ve just wasted 320 grand instead. If we let that charity receive that IrA. Charity’s not paying that 320 grand. No, but if the kids get the Roth or the taxable account. In the taxable account, they get a step up in basis. And the Roth account, they have ten years. But it’s all tax free from a income perspective as well. So it’s really important to coordinate. Okay. Figure out what percentages you want to pass between kids, grandkids, charity, whatever it is, and then directing the right type of asset, or having it written your will. And your executor can decide which type of asset to avoid a huge tax burden.


Yeah. And when you say step up in basis, I just want to be clear. If you had the. If your contributions to the investment account are 100,000 and it’s worth 500,000, when you pass, your kids inherit the $500,000 account, but their basis, their contributions get stepped up to 500,000. So they’re kind of new. Water level is 500,000. So they avoid that $400,000 gain by inheriting that account and getting the full step up in basis. So that’s huge. That’s really important.


No question. Okay, let’s say someone has life insurance and annuities. We see these often aren’t reviewed enough, and maybe they have old beneficiaries. These are great to pass to, obviously, family members or even, you know, if you’re. If you’re saying that example, I’d have the life insurance direct to the grandkids. Cause again, going back to Pennsylvania, life insurance is the one thing that avoids inheritance tax. I would, you know, I’d send the Roth and the taxable account to the kids, they pay four and a half. Send the life insurance to the grandkids and pay zero. Cause if you send the taxable and the Roth to the grandkids, they’re gonna pay 15%.




So right off, 2 million, that’s 300 grand in savings right there. so with annuity, what you have to be concerned about is, you know, what are the. If they’ve annuitized it, maybe the payments stop. If they have annuitized, it does have a death benefit. A lot of people are surprised. You know, they have this big annuity value, but underlying that, there’s a contract value. When you pass, you know, your kids aren’t going to get that annuity value. They’re going to get the contract value, which has probably been eroded, completely eroded by fees and by. Yeah, but anyways, that’s a whole separate.


You can way find our opinions on annuities. On the.


Yes, and some annuities are good, but like, 90% of them are horrible. So make sure you have that election. And just having a professional look at that, because a lot of annuities, they were sold this huge, expensive annuity. Some of them do have a death benefit, and the death benefit may be twice as higher as the contract value. If you don’t know what you’re doing, the annuity companies and send you the contract value, maybe you’re leaving, you know, a couple hundred grand on the table if you don’t take the right election upon passing. So that’s super important. If it’s a non qualified annuity, obviously they’re going to pay the gains on the contract as well. So what happens if. If someone. So a lot of we see this more than often than not, they think, I think my parents had life insurance.


We have no records of it, because the average american, I think, moves like nine times over their working lifetime. And so a lot of times, like, you have 50 things and one or two don’t get updated along the way. So a lot of times there’s like loose ends that are, and sometimes people are private as well. So there is actually a way to track down life insurance policy. I’m looking this up so you can go to, go to consumer, and then life insurance policy locator under tools. And so there’s ways that you can go find unclaimed life insurance and annuity proceeds. And one current thing, if your parents had annuity contract that was paying them, there’s a good chance they have a life insurance contract with the same company.


And there are some companies won’t names that have been sued for like, you know, hundreds of millions, billions of dollars for, you know, basically what the state found is like, hey, you found out this person had died and so you stopped their annuity payments because annuity payments, you know, hurts the insurance company the longer someone lives. So they’re like really quick to stop those payments when they find out that someone dies and they have algorithms to figure out who’s died. That same person has a life insurance contract, maybe with a million dollar death benefit. If you knew that they died, why didn’t you pay out that life insurance contract? Well, those require a claim. It’s magical how they’ll stop paying you, but then they won’t pay out this death benefit unless you come ask for the money.


So make sure that you go through the search process or make sure you have the conversation with your parents in advance of tracking down where the life insurance is. Depending on the type of life insurance, you know, you may want to make sure it’s properly funded, if it’s a permanent policy.


Yeah, that just circles back to, if you have these conversations up front, this is just going to make your life a lot easier than having to do all this research and tracking on the back end.


Absolutely. Okay, let’s talk about debt. So outstanding liabilities, loans, mortgages, credit cards, how do we handle these, Ben?


Yeah, first of all, I would try to run a free credit report just to see if there are any outstanding liabilities so there’s no surprises when, if and when the person does pass. I just want to make sure that you have a full picture of what all the debt is, what the balances are, what the interest rate is, what the payment schedule looks like, so that you could best prepared for handling that.


Absolutely. And again, if you have stuff passing the revocable trust, and let’s say they have a $10,000 credit card bill that credit card company can’t come after that stuff. Or if you have a 401K as a direct beneficiary IRA, they can’t come after that. But if everything’s going through probate, the debt’s going to get paid. They’re going to have the right to come after those assets first. I’m not saying that you wouldn’t settle up and pay off all the parents debts if they had assets, but that’s another important reason to make sure as much as possible does not go through probate. So other quick hits, discuss funeral arrangements, wishes. There’s probably a whole other podcast.


On the emotional side of this is like from legacy relationships, making sure everything’s set up, but from a financial perspective, you know, make sure you’re going to need the death certificate and Social Security number and birth certificate, pretty much the death certificate for anything you want to do after your parent passes. So make sure you get. And a lot of times you’ll need original, so make sure you get like 50 copies of that just to be safe because you may be sending it to these different companies if these conversations weren’t had in advance. So, and just to wrap up, I mean, make sure you work with a good financial advisor that can help navigate the conversations as far as navigating the right accounts, the right places, right beneficiaries.


Make sure you work with a good estate attorney in advance so you could pay someone a couple thousand to set all this up in advance or end up paying ten times that if they’re having to go to probate with you on the back end.


And one thing I would just add, your likely in a emotional state when you’re doing all this planning. So don’t do this alone. Like you said, consult with an estate planning attorney. Consult with a trusted financial advisor to make sure that you’re not making any rash decisions at a time that you’re mourning or a time that you’re maybe more willing to make a mistake like this.


Absolutely. Well, thanks for joining us everybody. Please reach out if you have any questions and we wish you the best. If you are in the process or in the future going to navigate these tough times, we’re here and happy to help. Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button, make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very much.

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