Families Need Further Discussion on End of Life Finances

Helping clients develop an estate plan may help them avoid certain tax consequences, Fidelity says.

According to findings from a recent Fidelity Investments Family & Finance Study, while the vast majority (90%) of parents and their adult children say it’s important to have frank conversations about estate plans and wills, all too often the discussions aren’t taking place—or at least, in a meaningful way.

While 70% of parents surveyed believe they’ve had detailed conversations with their children on the subject, more than one-half of their children claim this isn’t the case.

Even in the simplest of family situations, conversations that do not occur frequently and in detail may result in fairly substantial family disagreements and disconnects. For example, the Fidelity study found that seven in 10 parents and their children had major misconceptions about the value of the parent’s estate—and on average, children underestimated that value by $278,000.

In addition, while eight in 10 parents believe their children know where to find important documents such as wills, power of attorney and health care proxies, only two-in-three children actually report possessing this knowledge.

The potential for confusion only becomes greater—and the need to start planning even more urgent—when one considers that the modern-day concept of family may include stepchildren, in-laws and former spouses. Furthermore, an estate plan provides protection for those left behind, which may be especially important for loved ones requiring special care. Without a will, the state laws where a person resides may determine how the property is distributed upon one’s death, and this outcome may not be aligned with what was intended nor be appropriate for a specific situation.

NEXT: What an estate plan can do for clients

Regardless of one’s net worth, passing on assets to the next generation may involve a multitude of complex issues. Having an estate plan in place may help simplify the entire process, by allowing a person to accomplish a number of things, including the ability to:  

  • Preserve and maintain control over the transfer of assets;
  • Designate who will execute wishes if a person is incapacitated or passes away;
  • Protect the family’s privacy and possibly avoid probate;
  • Provide immediate access to liquidity;
  • Allow for the payment of bills in the event of incapacitation or death; and
  • Choose who beneficiaries will be and how they will receive assets.

Fidelity adds that having a sound estate plan in place may help one avoid certain tax consequences. Without proper planning, an individual could end up unnecessarily paying certain Federal estate taxes, as well as, possibly, state estate and inheritance taxes. For retirement assets, a good estate plan may help an individual avoid accelerated withdrawals from an IRA—which would cause a spike to income taxes, as opposed to a required minimum distribution (RMD) over an heir’s life.

“The study also reveals that more than two-thirds of adult children and their parents disagree about the appropriate time to initiate conversations about the parents’ finances. When it comes to legacy planning, generally speaking, the sooner the better,” says Kevin Ruth, Head of Wealth Planning and Personal Trust at Fidelity Investments. “Failing to have an estate plan in place can lead to significant family confusion once a beloved family member passes. Too often, it may result in costly mistakes or the wishes of a loved one’s estate and legacy plans going unfulfilled.”